Mr. David Tenwick
Chairman of the Board
AdCare Health Systems, Inc
5057 Troy Road
Springfield, Ohio 45502
Park City Capital, LLC is a private investment firm based in Dallas, TX. As you know from prior conversations and our recent 13D filing, investment funds that we manage have acquired a 5.2%1 interest in AdCare Health Systems, Inc. (“AdCare” or the “Company”) bringing our position to 750,000 shares of common stock. Based on conversations with management and publicly available data, it is our understanding that we are AdCare’s third largest overall shareholder and the largest outside shareholder. We began acquiring common stock in AdCare in December 2010 and we have consistently added to our position, as we think the shares are significantly undervalued.
We would like to congratulate you for continuing to foster an environment where patient care is at the forefront of everything AdCare does. We would also like to applaud your foresight in adding Chris Brogdon to the Board of Directors in December 2009, as we think the growth strategy he is leading will drive significant value for shareholders. In addition, we commend Chris Brogdon for proposing a potential tender and we are anxiously awaiting more details.
For the most part, we think the strategy that the Company is pursuing should drive significant shareholder value. However, the market has not recognized the expected value, at least partially owing to several self-induced issues that probably could have been avoided or at least handled better. In addition, we believe the Company’s assets are not earning what they should be earning, and as a result, the market is not recognizing the value. In addition, we are very disappointed that in light of the subpar stock performance, the Board of Directors has not been more active in its efforts to maximize shareholder value by exploring all strategic alternatives. So while Park City Capital supports the Company’s strategic vision, we believe
the market is not giving the Company credit and we offer our plan to maximize shareholder value.
In this letter we describe how our analysis shows that the Company is worth at least $13 per share. We believe the Company’s owned real estate could be sold to a REIT and the Company could pay off its debt and have approximately $4 per share in cash to distribute to shareholders. In addition, we believe that the remaining operating company would be debt free and worth $9 per share.
We believe the Company’s real estate portfolio is worth $4 per share. According to Levin Associates, in 2012 REITs paid an average of $89,300 per bed for skilled nursing facilities. Table 1 shows that if the Company’s owned facilities were sold for $90,000 per bed, these assets would generate approximately $239 million. At December 31, 2012, the Company had total debt of approximately $172 million. If the Company were to use the proceeds to pay back all of its debt, it would have approximately $90 million ($3.60 per share) to distribute to shareholders in a special one-time dividend.
Table 1: Real Estate Should Generate Net Cash of $3.60 per Share
Owned Beds 2,654
Sales Price Per Bed $90,000
Net Cash 89,966,245
Net Cash Per Share $3.60
Source: Company filings and Park City Capital estimates.
Note: This analysis assumes conversion of convertible notes.
We recognize that the Company does not feel that it has too much debt because the debt is backed by real estate. However, the market is not giving the Company credit for owning its real estate and is punishing the Company for the amount of debt on its balance sheet. We believe that selling its real estate to a REIT would allow the Company to generate significant cash and achieve a pristine balance sheet. In addition, management would have more time to focus on operations as opposed to its debt and debt covenants.