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

Deutsche Bank AG Health Care Conference Call

May 7, 2012 08:40 am ET

Executives

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

Paul V. Hoagland – Treasurer and Chief Financial Officer

Analysts

Darren Perkin Lehrich – Deutsche Bank Securities, Inc.

Darren Perkin Lehrich – Deutsche Bank Securities, Inc.

Okay, we’re going to get started. Good morning, everybody. I’m Darren Lehrich, leading the healthcare provider’s team here at Deutsche Bank. And I’m very happy to introduce Five Star Quality Care. They are joining us, they’re here from Boston, so it’s nice to have a local company kicking off the conference with us today.

Before we get started and I introduce our speaker. I just want to mention we are using a new technology at the conference this year, (inaudible).com, so if you prefer to submit questions at the end, we’re going to be doing the Q&A in the room here. And for those of you joining us in the web or (inaudible) and you can submit your questions, which I can facilitate here and answer for you.

So joining us from Five Star is Bruce Mackey, the President and CEO, and Paul Hoagland, the Treasurer and CFO, and we’re going to welcome them again, and we’ll get started. Thank you.

Bruce J. Mackey, Jr.

Thank you, Darren. And as Darren mentioned, we aren’t from the Boston, we’re actually headquartered in Newton, Massachusetts, so it’s nice to kind of start up presentation here at Boston, which is fun. I usually spend no time in this slide, but if anybody who is from Boston, the community in the middle lower section that’s in Winchester, Massachusetts, it’s called the Gallows and that’s about 10 miles from northwest, so if you want us to see kind of what we do, live and in person, feel free to head out there for great community and if you’ve got a mother or father that’s in the retirement age when we are going to see living and like to see as well.

A little bit about Five Star, we’re one of a largest publicly traded operators of senior living communities, actually one of the largest non-publicly traded as well. We’re the six largest operators of senior living communities based on units right now in the United States.

We operate almost 250 senior living communities, with about 27,500 units. We lease the majority of our properties from our formal parent Senior Living Properties Trust. We also own 31 of our own communities and then we got into the management business last year and I’ll explain a little bit about that in detail.

I think the pie charts here on the slide, really kind of help explain the Five Star’s story. The chart in the lower left shows our revenues by business unit. We are about 87% senior living and that’s broken down into independent and assisted living at 72% and skilled nursing at 15% and then our ancillary businesses, institutional pharmacies and inpatient rehabs make up about 13% of our total revenues.

The pie chart in the middle shows our revenue pay source, we are about 75% private pay, so majority of our funds are not coming from the government programs Medicaid and Medicare, they are coming from residents’ private recourses. And that’s really a hallmark of Five Star since we became public over 10 years ago. When we started off, we were about 80% government funded Medicaid and Medicare and we’ve really aggressively grown the company and the private pay side really switching that the characteristics of that slide completely around, the direction you’ll see us continue to move in as we move forward.

The pie chart on the right shows our geographic concentration by state. We operate in 30 states and no state makes up more than 10% of our total company revenues.

By many measures, Five Star makes a strong case as a solid investment opportunity. We’ve got a national platform of senior living communities like I mentioned we operate 247 properties in 30 states, over 27,000 units. We generate annual revenues in excess of $1.3 billion and we employee about 25,000 people, there are about 150 people headquartered here in Newton, Massachusetts., five miles west on the Pike.

Our community is predominantly private pay, as I mentioned the majority of our revenues come from residents’ private resources, not government funded Medicaid and Medicare.

Demographics, they are clearly in our favor, demand is going to be strong and new supply have been extremely limited over the last several years and we expect that will continue at least into the next several years.

We are a great operator, over the last four years it has been a very difficult time to operate. Five Star has done a great job of being profitable through that entire time through the recession and beyond. We’ve done that by pushing rate and maintaining a very tight control on our costs. Paul Hoagland, our Chief Financial Officer will get into our cost structure in a little bit and you can see that we do a pretty good job operating on those metrics.

And last, my favorite point in the slide is the lower one, we’re aggressively growing our business. So Five Star is a consolidator in this fragmented market. 2011 was a very busy year for us. We took on almost 40 properties, about 5,000 units, the vast majority of them were private pay independent and assisted living units. And I think you will see us continue to be aggressive going forward into the future.

Five Star senior living, this is focusing on our independent assisted living communities as well as some of our skilled nursing. We operate 209 independent and assisted living communities and 38 standalone skilled nursing facilities.

Our communities range from large to small, and from high end to moderate. Average monthly rate was about $4,500, average units per property is a 110. And as I mentioned before the characteristics, 75% of our revenues come from residents’ private resources.

Those are the two charts they kind of show our property breakdown. Again, I start off mentioning the majority of our properties, 77% are leased, 13% are owned and about 10% are managed. And managed, we just got into in 2011 so a new business segment for us, came about [with a day after] 2009 and something that we’ve been aggressively growing over the last 18 months or so.

The chart in the right shows our breakdown on units by type, so about 50% assisted living, 30% independent living and 20% skilled nursing.

Independent living is essentially the high-end apartment building, it’s got a restaurant attached. We provide services such as housekeeping, security, activities, transportation, offer a flat fee.

Assisted living is similar, the units are generally a little bit smaller, and we provide those same services, but we also provide some medical assistance, generally starts off with medication management, mom does a pretty good job of taking care by herself, but she takes about 10 medications a day and have the tendency to screw those up every now and then, so we provide that service and then it moves on from there. We can help with dining and bathing and other activities that connect you to the daily life and we do that and we try to feed for them.

Skilled nursing is someone that need about three hours of direct skilled nursing care per day. Just a little bit more discussion on our unit type, about 2,500 of our assisted living units, we operate about 13,500 assisted living units somewhere in that ballpark about 2,500 of them are specific for all- time or [domestic] care living secured units usually within a larger community.

And looking at our skilled nursing, about 2,500 of our skilled nursing units what we call a continuing care retirement community and that’s the build has really all three segments had independent living, assisted living, and skilled nursing all in one campus. And again, this is our property in Winchester right there. So that has independent living and assisted living all in that one building, it does not have any skilled nursing.

So I’ll spend a little bit of time on our ancillary businesses. Like I said, we only represent about 13% of our total company revenues, the first is our rehabilitation hospitals. We got entered into the business in 2006. We operate two rehab hospitals right here in the Greater Boston Area, one is in Woburn, Massachusetts, which is about 10 miles north of the city, it’s actually very close to our Winchester location, and the other one is about 10 miles south Braintree rehab.

Two hospitals had annual revenues of about $100 million. I mentioned it represent about 8% of our total company revenues. And our strategy here as we are rehabbing hospitals that’s been going along, there were old entire we took over from another operator in 2006 and we’re about 75% of the [way down] rehabbing the hospital themselves putting CapEx and then we set about $10 million CapEx over the last three years. And we’ve got about probably $2 million to $3 million (inaudible) and we’re also repositioning some of our inpatient satellite units. Last week, we just moved one of our inpatient satellites with our third party host hospital in [Low] to a brand new location. That is going to be really nice win for us.

And then we also have about a 100 excess licensed capacity beds air beds, these are impossible to get in Newton, Massachusetts so there are no new air beds, they probably haven’t been any new airbeds in about 20 years. And so we’ve got the capacity to take some of our excess licensed beds and move them to third party host hospitals. It’s very difficult process in the state, so I am under no illusion of being get that done easily. But I’m hopeful that in next four to five years, we’ll be able to open at least three or four additional inpatient satellites throughout the greater Boston area that would be a nice win for us.

Our pharmacy business, we operate one of the top 10 long-term care pharmacies in the country albeit still a very small pharmacy when you compare to some of the two larger players, but our pharmacies themselves service about 12,700 customers, about 240 communities. They generate about $80 million of annual revenues. And our strategy with our pharmacies is we have been acquiring over the past several years, we haven’t acquired anything in the last five, small, mom-and-pop pharmacies really kind of blow the radar screen of some of the larger players and then we are moving our own communities over to those pharmacies generating additional revenues and our cash in some of that bottom line for ourselves.

So if you kind of look at that 12,700 customer base about a third of that is Five Star customers, from Five Star communities and about two thirds that are external. But as we’re buying additional communities or managing additional communities we’ve been moving into our pharmacy platform, really growing that. So we’ve grown that pharmacy business from about 6,000 customers to about 12,700 customers, all through Five Star additions over the last five years.

This slide shows our concentration across the country. We operate in 30 states. We’re broken down in the three divisions east, west and central, and each division has about five regions. We also have our standalone skilled nursing facilities all in one specific division as well. And I think the nice thing about Five Star being such as large diverse operator across the country, we can take on management of additional communities without really adding additional resources. So in 2011, we took on about 40 properties like I said and we’ve really added minimal personnel, so Paul will explain our G&A cost structure in a few minutes. And I think you will see one of the most efficient operators in the senior living business.

This slide summaries our activity from 2011 on our acquisitions. It was a pretty aggressive year for us, it’s not a most aggressive year in terms of the number of total communities taken on, but in terms of the dollar that went on it certainly was. We added 38 communities predominantly private pay independent and assisted living. We acquired seven of these communities on our own balance sheet, the seven we acquired, we spent about a $156 million of 950 units, ballpark. All of them independent assisted living, there was no skilled nursing that we took on ourselves.

100% of the revenues, the properties that we bought came from. The one on the top right is one of them Granite Gate, Prescott, Arizona. 100% community, about a 120 units ballpark, it was about 90% of the occupied when we took over, beautiful community.

The properties that we took over on our balance sheet, we assumed about $48 million of debt and then we paid the balance off of cash on hand and equity proceeds from an offering that we did in 2011. We also took on the lease of six communities and those are long-term leases with no test going forward and then we got into the management business like I mentioned the day after 2009 gave us the ability to manage communities on behalf of third parties, and so we’re managing a number of communities on behalf of a Senior Housing Properties Trust.

So we are paid a top line basement management fee of revenues and then we have an opportunity to earn in incentive management fee of cash flow.

So the way I structure that we’ve set of works, as we get paid a management fee of 3% which is up a little bit better than the cost to take us to operate this. We generally can take on properties about 1.5% of revenues for making about 1.5% of the revenues taking out [costing] effect. And that is to be a little bit below market management fee, but our incentive management fee is well above market. We’ve really made about 35% of cash flow, at an 8% prior to return to the owner. So then when you look at those metrics right there, over the long-term actually give us the management fee, probably well north of 6.5%, 7% which is well above market.

This is one other portfolio we took over in 2011, it was called a company Bell Senior Living, its 20 communities in total predominantly located in the southeastern part of the United States, a little over 2,000 units. Almost all of them were independent and assisted living. We did take on about 60 or 70 units of the skilled nursing and again those all within the (inaudible) continuing care retirement communities so we don’t do any standalone skilled nursing and definitely not something that you’ll see us going forward.

We leased five of these communities and then we took on management of 15 of these communities under those metrics as I’ve just discussed. Many of the nice things about this deal, it was predominantly all in the areas that we operate and so we took over 20 communities or probably had a hire about five people to help over see them. And that was really it, on the corporate side, Paul will discuss we didn’t really hire anybody in our corporate office.

Again the nice thing about this deal is it really started to give us some Boston areas where we already operate. So for example, in North Carolina, we now have about 20 communities and almost 1,600 units in the state of North Carolina. I don’t have any pictures here in Florida, but we took on the few in Florida and again we get close to 220 communities in Florida and we have about 3000 units, so again a good strength of operations. What that helped us to do is operate that more efficiently with labor in the area, we also bring our third party services to bear such as the pharmacy just I had mentioned and we also have an outpatient rehab business that we can bring to bare as well and then makes it nice as well.

This is the second portfolio that we took over in 2011, it was called Vi senior living. It was formerly known as a Classic Residence by Hyatt, and we consummated this deal in December of 2011. We told one community that left to manage located in New York. New York is a very difficult state to get a license, and I don’t anticipate any problems very time consuming process.

Again, these are beautiful communities, 100% private pay, all of these we took under the management, that community in the upper left Chevy Chase, Maryland, it’s probably a four miles from the White House right in Connecticut, it’s surrounded by three golf courses, one of being one of the congressional golf courses. The property on the lower left brokerage on Florida it’s probably about two, three miles away from an existing Five Star location, it’s probably nice to see another community type of event (Inaudible) is nice a nice area to begin with, that are really most beautiful.

Let’s spend a few minutes on the fundamentals of senior living, the fundamental of the strong, and they’re getting better. The first ballpoint here the industry plays a consolidation. What you’ve really seen us over the last several years, several of the companies rise the top in terms of consolidation of Five Star certainly had been one of those companies.

25% of the units right now are owned by the largest 10 companies and Five Star has been one of them. So there is still a lot of consolidations taking place, but there is still a lot more to key take place in the next several years. And in the supply and demand, you can see the supply is on the lower left, and it was fairly busy in 2006, 2007, and then when the recession really kind of shrink off, it actually fell by more than 90%. This is what shown in our new units every quarter. It’s come back a little bit, but it’s a still fraction of where it was and then demand on the chart in the right is really going to get aggressive.

So we really look at that 85 and above in the red line on the graph, that’s what the average age of revenue, but I want to move into a Five Star community. It’s the second fastest growing demographic right now in the U.S. going by about 3% per year. Between 2015 and 2020, it does drop down to about 1.5% per year, but still an aggressive growth rate, and then after 2020 you can see that the hockey stick effect, it really starts to pick up and ramp up significantly. And it is just really an ocean wave coming at us, and some of thing that we are very excited for.

With this point, I want to turn it over to Paul Hoagland, our Chief Financial Officer who will talk more about financials and some of our operating metrics. Paul?

Paul V. Hoagland

Thank you, Bruce and good morning everyone. Thank you for your interest in our company. Five Star as you hear Bruce talk about it, has a number of moving parts. But having said that the business philosophy is pretty straightforward and pretty, we try to keep it pretty simple.

The biggest metric in our business is revenue and occupancy, again no big surprise there, but that is the piece of the business that is result of the recent recession affecting both housing values and unemployment, where the company is seeing its biggest headwinds.

The company did run occupancy at 92% back in 2006, 2007 and currently as we finished Q1 were at 85.9%. Now on the occupancy front that 85.9%, which is the first quarter of 2012 is down slightly from Q4. So on a sequential basis down slightly a little bit of seasonality, a little bit of noise in there with a Norwalk virus situation that affected 35 out of 250, but that number is up over the previous year, and we have seen the occupancy within the industry stabilize.

One [point to 100 basis] points of occupancy to Five Star is worth just slightly over $10 million in revenue. And we are a company is that from a standpoint of financial operating leverage that $10 million is somewhere in the vicinity of 70% to 75% flow through.

So, again as the company has remained profitable throughout this downturn, we are poised to capture occupancy growth as it goes forward. Again, our IL and AL occupancy is 86.7% get some improvement over the previous year. And again, we are optimistic that as the year goes on, we’ll continue to see marginal upticks in that IL/AL piece of the business, which is the company’s focus.

Our rate that we charge to our residents, we’ve been averaging between 3% and 4% a year on the private pay. We expect that to continue and one other things that is important to Five Star and allows us to capture that type of rate and you’ve seen it, the types of buildings and communities we operate are good, well kept assets, we invest between $55 million and $60 million a year in capital and have throughout the recession and our facilities look good. We also operate good facilities as well, but again, we invest in our properties and it gets us the rate.

We are an efficient operator, I’ll show you some metrics on that. But throughout our operating P&L, we look for opportunities and certainly we benchmark well comparing to the industry. And then lastly, our platform is to continue to grow to long-term leases, primarily through real estate investment trust ownership and we would lease the properties.

Managing properties again, it’s a new form of art structure that took place in the middle of 2011, so we are now managing properties on accountable week and as we end the year, we’re managing 23 properties, as we end first quarter, we’re managing 25 properties, so that piece of the business is going pretty quickly and efficiently. And then lastly, purchasing properties with our own balance sheet, last year, we did purchase seven communities. We currently own 31 communities little bit more than 10% of our properties, and on those 31, we just recently in April entered into a credit facility and we’ve got 15 of those 31 properties encumbered into the facility. We raised $150 million with it. The appraised value on those 15 properties was $230 million. We have four other properties that have come with assumed mortgages from transactions we did in 2011 and we own outright 12 on encumbered properties.

Looking at the recent quarter, that we just ended revenues of $346 million up from $307 million; one of the things as you see our revenue growth which obviously that is pretty powerful number year-on-year, one of the things in that $346 million and there is $23 million of GAAP revenues associated with the managed communities. It’s the way of the world, so that $23 million of revenues in the $346 million is also pulled out in expense. So, comparable revenues one might look at that and see it being something less than that, but we ended up at $343 million. You can see the operating expenses also increased pretty dramatically again a combination of our growth as well as the reimbursed communities going through there.

EBITDA is an important metric for any company certainly very important for Five Star; we finished Q1 slightly less than $9 million down from last year’s $10.8 million. Now there is bunch of moving parts in that number, one of the big moving parts is that in the fourth quarter of 2011, CMS Medicare promulgated an 11% rate cut to the industry. So, we weren’t alone in experiencing that, but to Five Star that meant somewhere between little bit about $4 million a quarter or $16 million or $17 million on an annual basis. And that unfortunately is almost all flow through, because there is really not much you can do with that just pure revenue rate cut. But as you can see with a $4 million delta or decrease out of last year, we have been able to offset a good piece of it. We also, as we brought our new communities in the last half of 2011 as a result of the acquisition, it usually take three to six months after ownership to get them ramped up.

We also had a little bit of noise in that first quarter, again with a virus that did affect some of our abilities to keep occupancy in and also had an adverse impact on a little bit of labor and a little bit of noise there in leading home.

Income from continuing operations again is showing a pretty big increase or decrease rather, but a lot of noise in that number, you’ve got non-cash impact of depreciation in there. You also have non-cash impact to the fact that, we had a tax valuation allowance that when you look at first quarter of 2011, our taxes were nil, just because of the accounting world. It was determined at end the 2011 that the company will definitely stay in the block, so now as you look at first quarter results with tax position and that wasn’t in there for last year.

And at $0.02, which obviously is not a gigantic number of consensus on the street was $0.03, and we had roughly about $0.01 of noise and there was some legal expenses that were one-time non-recurring. We’ll also see here that we did have a secondary offering in June of 2011 whereby we’ve raised about a 11 million share.

Assets as we finished the first quarter and this by the way put a little bit of performance to this to contemplate the banks refinancing. So we finished the first quarter with $23.7 million again the company is very considerably run $65 million of receivables large number, but we run less than 19 days sales outstanding, again, it’s a very tightly controlled number of PP&A of $350 million.

And if you were to look at the previous year, our PP&A was $200 million, so again, we actually had a lot of activity last year. The $150 million revolving line of credit that I mentioned, our two things happened in April and again, this balance sheet is May 31st, but we’ve embedded that April transaction. We’ve repaid a $38 million bridge loan. We had outstanding at the end of the first quarter and we bought back $12 million of convertible senior notes. We actually, at the end of first quarter [instead] of $24.8 million you see here we have $37 million outstanding. So, we are able to take back another $12 million of those notes in April and then $39 million worth of mortgage debt associated with four communities that we acquired.

Again, when you look at the company, pretty conservative from a standpoint of our debt as a percentage of assets and again we are at a point now with the incremental borrowings that we just accomplished where we will be looking for acquisitions throughout 2012 and to continue to modestly and with conservative growth, continue to grow the company.

Interesting chart if you look on the left, you can see, this is the senior housing industry in total. You can see what happened with occupancy, starting with the levels, the industry saw in 2006, which were in the low 90s to where they are now, which is in the upper to high 80s. And you can also see in there, the independent and assisted and skilled nursing piece and the reason we broken that out is the IL/AL piece of the business to which is the core focus of Five Star, which call it 75% to 80% of our asset that really is a piece of business that we feel has the most future. And ultimately even if you look at occupancy, it’s been the best piece of the business, the [weather].

Skilled nursing and as Bruce mentioned that was really the legacy of Five Star back in call it 2000, 2001 is becoming lesser and lesser important to us. And you can also see that skilled nursing for any number of reasons be it discretionally spending people are taking on less surgery and any number of things is a declining piece of the industry.

On the right and I think that this is probably one of the more telling if not the most telling story for us. On the right, you can see Five Star and you can see the solid bar is our EBITDA by quarter and you can also see the dark line, which is our IL/AL Occupancy, and then the red line, which is our skilled nursing.

If you go back to call it your 2009, our occupancy was 86.5% and our average quarterly EBITDA was $6.5 million. If you were to 2010, even though occupancy in total still declined by 25, 35 basis points, our EBITDA improved to $10 million a quarter. And that was not done with the acquisition that was really done by continuing to focus on cost controls, I’ll show you some really quick metrics on that.

And then that pretty much have continued to 2011. Although, 2011 in the beginning of the year, we were continuing to see very moderate declines in occupancy, our EBITDA has held and then as we ended the year, we are seeing increases in improvements in IL/AL Occupancy, which certainly gives us promise that we think we took the bottom and are moving forward.

EPS and EBITDA by quarter, Five Star is perhaps one of only public companies in senior living that has remained profitable throughout the recent years. And when you look at our cost structure, our biggest cost of doing business is wages and benefits.

You can see where the company has moderated, we are at a solid 50% line, again, very competitive in the industry, and another operating expenses which is roughly a quarter of our expenses. Again, we’ve made some nice improvements in recent years, and continue to look for any and all opportunities. One of the other areas that perhaps even maybe one of the more efficient of the statistics is our G&A. First quarter, we ended at 4.5% of revenues, which is 33% lower than the public competitive set. And then in that 4.5%, if you really factor in the true revenues with those managed communities is close to 4.3%. So again we are very efficient. We are poised to capture the upside of occupancy as it does return and it will. There is really no question of will it? It’s really a question of when does it return and we feel that we are in the early stages of seeing that.

Some specifics here just from a standpoint of, where our stock fits in the market? Again, we think that we are undervalued and we think that we present a good opportunity and again what will be the judge of that.

And with that, I would like to open up for any questions that you have for Bruce and I.

Question-and-Answer Session

Bruce J. Mackey, Jr.

Yes.

Unidentified Analyst

[Question Inaudible]

Bruce J. Mackey, Jr.

Legal fees are in there.

Unidentified Analyst

[Question Inaudible]

Bruce J. Mackey, Jr.

It’s usually, it will be gain or losses (inaudible)

Paul V. Hoagland

Short sale perhaps…

Bruce J. Mackey, Jr.

But in the first quarter it was working….

Paul V. Hoagland

Yeah. And even last year’s first quarter we start to renew

Darren Perkin Lehrich - Deutsche Bank Securities, Inc.

The another question from the audience. The last one I guess, the first quarter you’ve described is having some unusual impacts from the Norwalk virus and I remember your communities I guess if you could just maybe update us on, where we stand with regard to that outbreak and has it had any lingering impact on your ability to market your communities and those (inaudible) where that outbreak occurred

Bruce J. Mackey, Jr.

Sure maybe I’ll start off and Paul if you want to. Yeah. I think January is the highest hit month. I think we gave some specifics on our quarterly call. We had about 35 communities that were impacted and it was about, when we took a look at the date that we could not retort or new (inaudible) that occur like that it was wrote at about 430 total days in the first quarter. January was definitely the worse month, it got better in February, it got better in March to which they are I’d says, it’s almost non-existent. And we saw that in our financial result as well. January was a very tough month for us, we were actually underwater in January, got progressively better in February, and again progressively better in March. So I think it’s mostly beyond us, it’s kind of the [add] industry had seen before so it’s not like this is an unknown occurrence and so I can’t, if there are any lingering effects from it. Anything you want to add, Paul.

Paul V. Hoagland

No, you’ve said it all.

Darren Perkin Lehrich – Deutsche Bank Securities, Inc.

Question in the back here.

Unidentified Analyst

What’s the average length of stay for your residents?

Bruce J. Mackey, Jr.

Sure, if you look independent living resident is probably in three to four year range. Assisted living is probably closer to two years and it’s kind of an interesting question. If you go back probably five years ago, the average age of a resident when he moved to was about 85, five plus years of it, that was 83. So I think the recession has really pushed people out a little bit longer into their decision-making process in terms of selling a home or consolidating expenses with a family member on. It’s probably the two biggest things that have impacted our occupancy.

So people are coming in later in life, they are staying with us for a shorter period of time, but they are also generally coming with more needs, sort of activities of daily life. So we are getting a little bit more revenue associated with that. On the skilled nursing side, you’re probably looking at about 12 months for a long-term skilled nursing resident. Medicare – we have the home recovery type patient, you’re probably looking at about 20 odd days, something in that range.

Unidentified Analyst

And does that increasing lengths of stay improve (inaudible)

Bruce J. Mackey, Jr.

It generally improves in almost all metrics.

Unidentified Analyst

(inaudible)

Bruce J. Mackey, Jr.

There were some, two of the biggest things we’ve done over the years is we’ve introduced outpatient rehab and wellness, so Five Star has a third-party business that we own is the Five Star Rehabilitation and Wellness. We own about 50 of our communities right now, but as soon as outpatient, Medicare, Part B clinics in our independent and assisted living communities, so they can rehab [hips] and things like that in their own communities.

The other thing that we are doing on the more of the independent living side is we’ve got a lot of home health business right now. That’s done by true third parties outside of Five Star. We did acquire a private duty home health company in 2011, and right now it is placed in Indiana and we’re kind of slowly moving that out to the rest of our Indiana Communities, and then we will look to see if that it does makes sense to expand that nationwide to the rest of our communities. So it is a good question.

Darren Perkin Lehrich - Deutsche Bank Securities, Inc.

A good question that came in (inaudible) on the internet here. The question is, why do you feel you’ve underperformed the industry from a total return perspective. What will change and if I could maybe editorialize the question a little bit, maybe could you just help us understand at this juncture given the cuts in the nursing home, Medicare nursing home, what the EBITDA exposure is to that? So if you just sort of put sniff in a box perhaps and you’re answering part of the question, but so the real question that came in is what do you feel you’ve underperformed?

Bruce J. Mackey, Jr.

Sure, it is a pretty good question. I let Paul to give our metrics on our skilled nursing EBITDA, but I think the biggest reason we have underperformed the industry sector is our exposure to skilled nursing while we have done a good job shirking that from 80% to 25% over the years. 25% is still a big number for us and we will overcome. So I think that’s probably the biggest reason.

I think the second reason prior to that the point of you measure or raised is we do have ancillary businesses and did they have impacted us a little bit negatively the institutional pharmacy business and the inpatient rehab business does make us a little more complicated story it’s something like IL/AL provider.

From the skilled nursing side, our 38 standalone skilled nursing facilities generate about $200 million of revenues sell in that range and there, your average EBITDA margin is probably for our communities, the industry is probably around 12% to 15% either a little bit lower there, because there are more roller communities from the most part of – some of our larger constructions are in Nebraska and Iowa. So we’ve got a little bit more of a Medicaid concentration than a private pay or a Medicare concentration. We’re probably in the 10% to 11% range, that was probably a year ago within that 12%, 13% range.

So you’re probably looking at just on the EBITDA percentage on our standalone skilled nursing, it’s somewhere in the $20 plus million, I think it’s a fair point. The other piece that we do have, we still have 2,500 units of skilled nursing in our CCIC that are consolidated with the other senior living communities, I don’t have that breakout right now. Hopefully, I think that answers a little bit of the question.

Darren Perkin Lehrich – Deutsche Bank Securities, Inc.

It looks like we’re running out of time here. So thank you again for joining us. And everybody have a great conference.

Bruce J. Mackey, Jr.

Thank you all, we appreciate it.

Paul V. Hoagland

Thank you.

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