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Five Star Quality Care, Inc. (NYSE:FVE)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

Timothy A. Bonang – Vice President, Investor Relations

Bruce J. Mackey Jr. – President and Chief Executive Officer

Paul V. Hoagland – Chief Financial Officer and Treasurer

Analysts

Paxton Scott – Jefferies & Co.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Good day and welcome to the Five Star Quality Care Third Quarter 2011 Financial Results Conference Call. This call is being recorded.

At this time for opening remarks and introductions, I’d like to turn the call over to the Vice President of Investor Relations, Tim Bonang. Please go ahead, sir.

Timothy A. 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 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, October 27, 2011.

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 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 upon any forward-looking statements.

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

Bruce J. Mackey Jr.

Great. Thank you, Tim, and thank you everyone for joining us today. For the three months ended September 30, 2011, we reported our 10th consecutive quarter of profitability from net income from continuing operations of $0.08 per basic and diluted share.

Results for the quarter were positively impacted by $0.01 per share from a gain on available for sale of securities offset by acquisition costs. Taking that into account, our adjusted income from continuing operations was $0.07 per basic and diluted share. This compares with $0.17 per basic and $0.16 per diluted share that we reported for the same period a year ago.

I would note that we haven’t had a full quarter’s worth of activity included in our results from recent acquisition, some of which closed on the last day of the third quarter. And we also experience increases in certain operating expenses, mainly in health insurance, marketing and other costs associated with bringing new properties online. All of which Paul will discuss later on the call.

Five Star is continuing to be profitable despite the turmoil in the healthcare industry in overall market. Over the trailing four quarters, our diluted net income from continuing operations was $0.57 per share.

2011 has been a year of significant growth for Five Star and we expect that to continue in the fourth quarter. Since the beginning of the year, we have announced the addition of 37 primarily private pay communities with over 5,000 units. In total, as of September 30, Five Star owns, leases or manages 236 communities with over 25,000 units.

According to the American Senior Housing Association, Five Star is now the sixth largest operator of Senior Housing in the United States. Take into account the 31 communities in almost 3,000 units we own, Five Star is now one of the top 50 senior housing owners as well.

Let me now update you the status of our recent acquisitions, leasing agreements and management contracts. First, the acquisition in six private pay senior living communities we agree to purchase in Indiana from Basic American for $123 million is now complete.

On July 1, we acquired one community and on September 29, we acquired three communities with a total of 541 units for $82.4 million. We assumed $90 million of mortgage debt along with this acquisition.

To remind you, these are relatively new high-end properties with all private pay residents. So we have no government related reimbursement issues. About half of these communities have land available for expansion. We will begin to explore possible expansion opportunities at these communities in 2012.

Of one of the six properties, Five Star acquired a private duty home health agency in Indiana and we expect the licensing to be completed in the fourth quarter. We see this as a potential growth opportunity for Five Star.

Next, in mid-July we began to lease from Senior Housing Properties Trust, a senior living community in Florida with 96 units, and also begin to manage four communities. These five communities are all part of the 20 community portfolio located in the Southeast, we have a 2,000 units that Senior Housing is purchasing from Bell Living, which was announced back in March.

To remind you, of the 20 communities Five Star expects to be managing 15 communities and leasing five. As of September 30, 2011 we operated 19 of the 20 communities and we expect to begin managing the remaining community sometime in 2011, or the first half of 2012. Under the management contract with Senior Housing, Five Star has paid 3% of revenues and will also have the opportunity to earn a 35% incentive fee based on the net cash flows generated after Senior Housing has reached a prior year return.

Last, in September, Senior Housing announced that it agree to purchase nine large senior living rental communities currently operated by Vi Classic Residence, with 2,226 units located across six states. Five Star expect to manage these nine communities under management contracts similar to the ones that I just mentioned. This group of properties adds nicely to Five Star’s existing portfolio. They are all high-end, private pay communities containing over 2,200 independent living and assisted living units with a portion dedicated to Alzheimer's care.

The communities are located in regions where Five Star already has operations, making any potential increase to our regional corporate structure minimal. The portfolio is currently 87% occupied. We expect to begin managing eight of these communities by the end of the 2011 and one potentially late in 2012.

As you are all aware, the finance for Medicare and Medicaid services announced a major 11.1% cut in Medicare rates for skilled nursing operators starting October 1, 2011. While this is clearly not a good news for the skilled nursing industry, it does reiterate that Five Star’s strategy of growing our business in the private pay senior area has been and will continue to be beneficial.

We expect the financial impact of Five Star from this ruling will be a revenue cut of between $16 million and $17 million annually, most of which will fall through our bottom line. However, as we’ve been very active in growing the company in the private pay space, the EBITDA we expect to receive from our 2011 acquisitions will help to offset majority of the Medicare rate cut.

Currently, Medicare makes up 14.7% of our senior living revenues, and will continue to decline as we keep growing our private pay portfolio.

Now, I’ll review some highlights from the quarter; occupancy during the third quarter trended positively. Senior living occupancy was 86.0%, an 80 basis point increase from last quarter. Senior living occupancy was 86.2% a year ago. Looking at this by portfolio, independent and assisted living occupancy increased to 86.7% from 86.4% a year ago. This is also up 90 basis points from last quarter. Our stand-alone skilled nursing occupancy was 81.7%, down from 85.1% last year, and 82.0% last quarter.

Well, about half of our 38 skilled nursing facilities did experience a drop in their occupancy, the reduction can really be attributed to about five facilities. One facility alone accounts for about 25% of our total drop from last year, and that is primarily due to sharing of that unit by that facility.

We are in the process of putting in a high-end Medicare rehab to home recovery unit in that facility and expect it to turn around in 2012. We also plan to address the other decreases we saw as well.

Same-store senior living occupancy was 85.6% compared to 86.2% a year ago. Occupancy as of yesterday was 86.4%. On a same-store basis, in our independent and assisted living units, we had 181 move-ins during the third quarter 2011, compared to the third quarter of 2010. Compared to the second quarter of 2011, we had 121 move-ins during the third quarter of 2011.

We did see decreases in our move-ins from our prior skilled nursing units during both periods. The majority of the decreases in move-ins at our skilled nursing units can be attributed to those same five skilled nursing facilities I discussed a minute ago.

We’re also focusing more marketing efforts primarily on training to address this issues as well. Senior living average daily rates continues to grow, our average daily rate increased 0.6% in the third quarter, compared to last year.

More importantly though, on a same store basis, average daily rate increased 2.8 compared to last year. Over the trailing four quarters, Five Star has increased its private pay rates by an average of 3.6% on a same-store basis. Looking forward, we expect our overall private pay rates to increase on average, 3% to 4% in 2012.

Moving on to other metrics, senior living wages and benefits as a percent of senior living revenues were 49.4% during the quarter, down compared to both last year and last quarter. G&A as a percentage of revenues was an outdated goal at 4.4%, which is down slightly from last year and last quarter as well. Five Star has the leanest operations in the industry.

Five Star’s core senior living business continue to be profitable. 84% of total company revenues come from this business. 73% of these revenues derive from our residence private pay sources.

In the third quarter, our senior living business produced $70.8 million of EBITDAM, what we refer to as EBITDA excluding rent and G&A expenses. This is up from the $68.2 million of EBITDAM reported last year. Same-store senior living EBITDAM is down $1.3 million for the quarter, from $68 million last year to $66.7 million this year. This decrease is primarily related to a drop in our standalone skilled nursing portfolio as well as increases on health and other operating expenses.

Paul will discuss these expense increases in a few minutes. The two rehabilitation hospitals that we operate which account for only 8% of total revenues made $3 million of EBITDAM during the third quarter, which is relatively flat with last quarter, but up 36% compared to $2.2 million last year. Our (inaudible) unit continues to perform well and is in the process of accreditation. Our low and patient satellite unit we’ll be moving with brand new location in a few short months is relatively on schedule.

The institutional pharmacy operations, which make up only 6% of total revenues made $422,000 on a EBITDAM basis during the third quarter. This is down $121,000 from last year and down $489,000 from last quarter. The decrease in the second quarter of 2011 is primarily related to a positive inventory adjustment that was booked during the quarter. Currently, we have about 12,250 customers, and expect to add over 1000 additional customers during the next several quarters.

Our balance sheet remains strong. We ended the quarter with $42 million in cash and we had in excess of $350 million of book value, they’re not fair market value in net property and equipment. This includes 31 of the properties we own, 27 of which are unencumbered with debt.

The third quarter was a transitional quarter for the company. We completed a majority of the acquisitions announced so far this year, and we will begin to realize the full benefit of them over the next several quarters. And although, we’ve experienced diminished growth, our balance sheet remains strong even in the wake of a CMS Medicare cuts.

We brought the company at the speed to support managed communities, and we have are prepared to take on all but one of the additional managed communities by year end, which is said fully contributing beginning in 2012.

The acquisition outlook remains strong as we continue to see opportunities for expansion. We are confident in our ability to grow the company, increase revenues of our communities and grow the company’s earnings over time. Our current valuation and with the solid balance sheet and consistent positive earnings Five Star has a compelling story among the senior living space.

At this point, I will turn the call over to Paul Hoagland, our Chief Financial Officer.

Paul V. Hoagland

Thank you, Bruce, and good morning everyone. For the third quarter senior living revenues increased $15.8 million or 6.1% to $275.6 million compared to last year. This increase was due to primarily the revenues from 13 communities we acquired early since last year that contributed $10.6 million.

At the communities we have operated continuously since July 1, 2010, the DM charges to residents increased to 0.8%. In addition, increase in occupancy have favorably impacted our third quarter revenues.

Our income from continuing operations for the third quarter was positively impacted by $0.01 per share basic and diluted due to a $529,000 gain on the sale of available for sale securities offset by acquisition costs of $226,000. Senior living wages and benefit expenses increased $7.1 million or 5.5% to $136.1 million compared to last year, although this was a 30 basis point decline from the previous year. $3.8 million of the increase was due to the 13 communities we acquired or leased since last year. And $1.9 million was from increases in health insurance expense.

With had unusually high increase in large claims during the first two quarters of 2011. However, we are experiencing some moderation in Q3 as health insurance cost decreased 20 basis points when compared with Q2, but they are still 50 basis points higher than Q3 of 2010.

Improvements in direct labor expenses, which decreased 90 basis points from 38.4% of revenues to 37.5% of revenues more than offset the increase in health insurance. Other senior living operating expenses increased $6.2 million or 9.9% compared to last year.

Senior living operating expenses as a percentage of revenues increased to 80 basis points to 24.9% compared to 24.1% during the prior year. These increases are due to primarily to the 13 communities we acquired or leased since the third quarter of 2010, which had expenses of $2.9 million, an increase of $700,000 or 20 basis points of expense associated with room turnover in the related preparation and marketing costs that we are starting to see increased occupancy from. An increase of $7000,000 or 20 basis point of insurance costs and an increase of $600,000 from a standpoint of increase of bed provider, most of which have been offset by increases in Medicaid reimbursement.

Lastly, an increase of $300,000 or 10 basis points of one time acquisition related operating expense.

Turning to our ancillary business, third quarter EBITDAM at our rehabilitation hospitals was $3 million. Hospital revenues were up $1.5 million or 6.1% compared to last year primarily due to higher quality patient case mix. Overall, EBITDAM margins improved 250 basis points as variable spending expenses decreased and revenues increased since last year.

Occupancy was down lightly from last year and finished the quarter at 54.5%. Our pharmacy operations achieved a $442,000 margin in the quarter, while pharmacy revenues and pharmacy expenses were down compared to last year. Revenues were down 6.7%, and expenses were down 6.3% due to fewer customers and lower occupancies at the communities serviced by the pharmacies and lower generic drug costs.

We expect to start servicing 226 beds in the fourth quarter as a result of the acquired and managed communities. During the quarter, general and administrative expenses increased $667,000 or 4.9% from last year, but as a percentage of revenues decreased 10 basis points to 4.4%. We remain very efficient as we acquire, lease and manage additional communities. Rent expense increased $3 million or 6.3% compared to last year, mainly due to a $1.9 million increase associated with acquisitions of new communities.

Income tax expense was $186,000 for the quarter, and interest expense increased $460,000 due to the additional indebtedness we took on from recent acquisitions. Depreciation and amortization increased by $1.8 million, mostly due to acquisitions.

Now, let me review our liquidity, cash flow and selected balance sheet items. Cash flow provided by operating activities during the third quarter was $17.7 million. During the quarter we invested $60.9 million to complete the acquisition of the Indiana communities and $14.9 million was invested in capital within our existing communities.

We sold $10.6 million of long-term capital improvements to Senior Housing. At September 30, 2011, we had cash and cash equivalents of $41.9 million and a $35 million revolving credit facility was undrawn and remain so today.

Consolidated EBITDA, excluding certain items was $10 million compared to $10.1 million last year. Our accounts receivable management remains strong as the number of days sales outstanding for the consolidated operations was 18.4 days as of September 30, 2011.

Five Star keeps its figure low and well controlled. At the end of the quarter, we had $353.6 million of net property in equipment, which includes the 31 property directly owned by Five Star, 27 of which are unencumbered by debt. We had $37.3 million of convertible senior notes, $39 million of mortgage notes payable and $48 million outstanding on our bridge loan from Senior Housing. There is currently no more borrowing capacity available under this bridge loan. We believe we’re in compliance with all material terms of our credit, notes mortgage and bridge loan agreements.

In closing, we remain focused on increasing our occupancy and controlling our expenses as we continue to grow and transition the company to a more private pay model. We are well positioned to capture strong margins, and flow through as we do increase our occupancy and make profitable acquisitions.

We’re entering a period of more volatility and our balance sheet is strong and we’re confident in our ability to grow the company and remain profitable. With that, we’d like to take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Paxton Scott from Jefferies. Please go ahead.

Paxton Scott – Jefferies & Co.

Hey, good morning. My first question is on the skilled nursing portfolio, Bruce, I think you said it was a $16 million to $17 million hit. Is that I guess, as we look at some of the other providers who are out there, that are talking about mitigation, are you doing anything to try to mitigate that or is that a net mitigated number that you’re providing there?

Bruce J. Mackey Jr.

No, that’s the growth of our pack. And I think the biggest difference between us and the other providers is that skilled nursing is a much smaller percentage of our mix. And there is some mitigation that we can do in terms of G&A, things like that, but does not allow. We are a pretty efficient operator. Our best course of the mitigation are continue to diversify in the private pay space, but still grow our rates in that private pay space between 3% and 4% in 2012 as I said in the prepared remarks, and increasing occupancy, we saw that in the third quarter.

As of yesterday, like I said, it goes to continue to travel in the right direction that will more than offset or mitigate the majority of that part. And I also said in the prepared remarks, and I did say, like I heard a one, by continuing in the private pay space, most of the activities we’ve taken place is here in terms of our acquisition of Bell, the community that we just closed at the end of the third quarter. We’ll offset the majority of cap?

Paxton Scott – Jefferies & Co.

Okay, any plans, I mean I know you’ve reached an agreement with SNH to divest a number of skilled nursing portfolios over the last few quarters, anything on the near-term horizon there to divest additional properties?

Bruce J. Mackey Jr.

We have three properties right now in discontinued operations, two skilled nursing facilities that we directly own, and one is a closed facility that is owned by Senior Housing. Other than that we’ve had no significant plans right now, but we do look at the portfolio from time to time, if a property is not working out and meeting expectations, we do what’s that a – (inaudible) continue to improve that property or if not let’s dispose it off.

Paul V. Hoagland

And in the second quarter, we saw three skilled nursing facilities and again to the extent of taking on 5,000 rooms, we have approximately 1.5% of those rooms skilled nursing which would reside within CCLC, so again we’re obviously moving away from that model.

Paxton Scott – Jefferies & Co.

Okay, and then moving to the institutional pharmacy, Bruce you made a comment about a positive inventory adjustment there, can you elaborate maybe Paul just about the financial impact in Q3 for that adjustment?

Bruce J. Mackey Jr.

Well, that was really the inventory adjustments in the second quarter, Pat, it’s not the third quarter. So probably our third quarter results, I’d say that is what it is. But the second quarter we had ballpark 355, but I don’t know exact number, but it’s in that range, the inventory adjustment that came through that positively impacted our results.

Paxton Scott – Jefferies & Co.

Okay, so the Q3 number is a better run rate than where you are in Q2?

Bruce J. Mackey Jr.

That’s exactly right.

Paxton Scott – Jefferies & Co.

Okay, and then just going back to some of your comments, I just want to make sure I got this correct, you’ve got in addition to the managed properties from SNH, I think you’ve got one more to go either late Q4 or early Q1. And then you’ve got nine more that you’ve agreed to manage and did you say that eight of those are going to be coming on late in 2011, and then one more in late 2012?

Paul V. Hoagland

That’s exactly right, yes.

Paxton Scott – Jefferies & Co.

Okay. And then one last one here, did you give a cash flow from ops number for the quarter?

Paul V. Hoagland

Yeah, it was $17.7 million from operations.

Paxton Scott – Jefferies & Co.

$17.7 million, and then your CapEx was $14.9 million, and then what was the number you sold back to SNH?

Paul V. Hoagland

We sold $10.6 million back in Senior Housing.

Paxton Scott – Jefferies & Co.

Okay. So about a net $4 million CapEx number?

Paul V. Hoagland

Correct.

Paxton Scott – Jefferies & Co.

Okay. I believe that’s all I had. Thank you very much.

Bruce J. Mackey Jr.

All right. Thank you, Paxton. I appreciate it.

Operator

(Operator Instructions) Our next question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Hi, good morning.

Bruce J. Mackey Jr.

Good morning, Doc.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Just a couple of things, I mean, I think you went through all these numbers, Bruce, but there were sort of a lot of different numbers all jumbled together. So I wanted to just kind of step back, if we think of just the private pay senior housing on kind of a same-store basis, kind of Q-over-Q, can you kind of just go back and sort of talk about what kind of happened in terms of rate to occupancy on those assets?

Bruce J. Mackey Jr.

I think starting most importantly on the occupancy side, we did see some positive occupancy both year-over-year and quarter-over-quarter. On the expense side, I think Paul talked a lot of about that, but I think the biggest driver we saw increase in owner operating expenses. And mostly what I was trying to rooms hire cost – giving room probably to rent as we move it on through the door. We also saw seasonality, a significant bump in the utilities quarter-over-quarter as well.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And just on, I think quarter-over-quarter, because I think you gave the year-over-year, the numbers are in the press release, but quarter-over-quarter occupancy and rate same-store do you ever just dispense where those number where?

Bruce J. Mackey Jr.

Well, I mean in the second quarter, our comp senior living was 85.1%, that increased to 85.6% in Q3, and rate in the second quarter, was I believe either 2.9% or 3% versus 2.8% in Q3.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And that was your year-over-year or q-over-q?

Bruce J. Mackey Jr.

Those are year-over-year numbers, Q3 to Q3, Q2 to Q2.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay. And do you have a feel for how big the movement was quarter-over-quarter, it’s not something you’ve got?

Bruce J. Mackey Jr.

We saw our occupancy, I mean it can’t be – I think we’re up about 50 basis points, rates by quarter-over-quarter on the senior living side were flat, I should say, yeah, roughly flat even flat a little bit down. We did see and we continue to see positive growth in our pure private ILAL. But on the skilled side, as you about 2,500 roughly of our skilled nursing units are in CTFC, we did see a little shift in mix and we saw a decrease and that impacted our rates. We haven’t yet had our business breakout, we hope to start breaking that out in the fourth quarter or perhaps the first quarter of 2012.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Thanks. I guess I’m really (inaudible) in the pure private pay side, so let me shift gears, so just my sense of the portfolio now, Bruce, is you are in a number of kind of concentrate markets you got a big junk here in the mid Atlantic, the Carolina stuff now that the Bell stuff is done. Florida particularly, if we started thinking post B. So just give me a little more color on sort of where the big markets are again, just for the pure private pay, and maybe what some of the underlying dynamics are on some of your major ones?

Bruce J. Mackey Jr.

I think you’ve hit it. We’re very large in mid-Atlantic, the Carolinas, Florida is a major market for us now. Texas continues to be, we didn’t have anything significantly there recently that we’ll be adding one of the Vi properties is in Texas, California is a major market for us, and I think those are the major markets for us right now.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay. And any, I guess everybody has asked Florida and California, you mean most of all, just in terms of dynamics within those markets anymore challenging or more upside than some of the others?

Bruce J. Mackey Jr.

They both have upsides, perhaps California right now a little bit more than

Florida, we’ve actually had a pretty good year-over-year in Florida. Florida assets have performed well, our occupancy in Florida as a buyback company average we’re probably 89% and 90% occupied in Florida, and that’s up probably about 100 basis points in Florida alone.

So our Florida assets are doing fairly well. California we have struggled a little bit in Southern California on the independent living side, and even in Northern California a little bit as well.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay. Let’s see, I just wanted to hear more from you if I could, home health hospice you’ve added I think a home health or adding the home health in Indiana, I think you said along with those other properties, how big are those businesses for you, and any issues there on the reimbursement side we should be thinking about?

Bruce J. Mackey Jr.

Right now, that business is pretty small, and if that we’re really not in a state of licensing it. Our strategy there is to expand that to our Indiana portfolio and then expand it company wide. What we’re trying to really do is capture our independent living residents that right now use third party private duty home health aids, there really isn’t any government related reimbursement that’s associated with that to bring those into the Five Star, probably we got more control over who is providing those home health services, and also capture some of the revenue. And as our occupancy kind of just increased, again I think that will be more of a market over all.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

But right now, neither home health, hospice, rehab therapy none of those could be material, we should be worried about reimbursement issues there?

Bruce J. Mackey Jr.

No, the biggest business of those three lines is rehab. We do have where we pry, I think we’re in about 40 or so independent assisted-living facilities right now. On the Five Star we don’t do any direct hospice or home health.

Paul V. Hoagland

Also government related home health.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay. Great. Thanks. And I guess just last thing for me, I’m trying to think through end model kind of fourth quarter maybe even the first quarter obviously there is just a lot of moving parts because of the acquisitions and new types of acquisitions, and that sort of stuff. So if we are thinking – and I think Paul or maybe you’ve mentioned that some of the stuff would start kicking and maybe more in sort of first quarter. So even ignoring transaction costs are there other things that I should be thinking about as I model, sort of fourth, first quarter in terms of how some of these moving pieces sort of affect you?

Bruce J. Mackey Jr.

Let me start, and then I’ll pass to Paul. Just looking at same-store, again taking the acquisition north out of the first, like I think the biggest drivers in Q3 and Q4, you’ve got utilities will moderate into Q4, that would be somewhat offset but nowhere near fully offset from holiday costs we usually see, might improve the cost et cetera related with the Christmas and Thanksgiving holidays.

I’d say, those are probably the two biggest as I mentioned, our hospice is going up a little bit, so already a 6.4%, and like I said, right now still pointing in the right direction, so that, that something to take into consideration as well.

Anything else Paul you can think of would be a big driver, that you want to point out?

Paul V. Hoagland

Well not a big driver, but I tend to think that when you look at what’s happened in third quarter and how the quarter is ending, I think there is more potential to pick up a 10th year and a 10th year going into Q4, maybe again we saw a moderation in health benefit. As we ended third quarter, some of the expenses in the third quarter were room turnover, could continue because not at the same rate.

Bruce J. Mackey Jr.

And that’s only going to be a positive, I mean our occupancy is going up.

Paul V. Hoagland

And another line which we did see true impact, a big impact in Q3 was, our workers’ compensation risk is moderating, we could see again a little bit of pick up. So I think as we enter the fourth quarter, also keeping in mind that from a standpoint of the full impact of acquisition of Granite Gate and Basic America was at best 50% in Q3 because of the timing of closing for Basic.

So again, I think we’ve got some nice tailwind bringing us into the quarter to help ameliorate the rate cuts.

Bruce J. Mackey Jr.

I think the only thing I want to point out to, and Jerry, I know you follow us for a long time, you’ve said this now and before, but transitions and acquisitions can be a little bit like a related. When two guys are running on the track and they’ve got to pack up at a time, and there is a lot of strain that goes along, it’s building that’s running our Five Star systems.

So you can see a drop off between hand off at times, I think we’ve done a pretty good job reducing that hit if you will, but to some extent this don’t impact just a little bit, but right now we’ve putting all the Five Star systems into those buildings and that will have a positive impact as well.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

And again in terms of the acquisitions from here, the next big chunk is the rest of B stuff which is late fourth quarter, right.

Bruce J. Mackey Jr.

That’s correct, yes. I do want to point out, I wanted to thank to, just with the acquisitions, we’re slowly ramping up our rehab in pharmacy line, I did mention in the prepared remarks. There was about a spin-off in additional customers that we’ll be adding over the next several quarters. Most of those related to the Bell acquisition that we just did. We will also be increasing our outpatient rehab clinics in IRL space, again, mostly in connection with the Bell portfolio and then as we bring the Vi properties on as well. I don’t think there is a huge play for our pharmacy business, but there will be for our rehab business.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay.

Bruce J. Mackey Jr.

Most of those probably in our rehab footprint.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.

Okay. All right. That’s helpful. Thanks.

Bruce J. Mackey Jr.

Great. Thank you.

Operator

(Operator Instructions) There are no further questions at this time. I’d like to turn the call back over to Mr. Bruce Mackey.

Bruce J. Mackey Jr.

Great. Well, thank you, and thank you all for joining us in today’s call. We look forward to updating you in our fourth quarter results early next year.

Operator

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

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