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Edited Transcript of DVCR earnings conference call or presentation 2-May-19 9:00pm GMT

Q1 2019 Diversicare Healthcare Services Inc Earnings Call

BRENTWOOD May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Diversicare Healthcare Services Inc earnings conference call or presentation Thursday, May 2, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Reed McKnight

Diversicare Healthcare Services, Inc. - President, CEO & Director

* Kerry D. Massey

Diversicare Healthcare Services, Inc. - Executive VP & CFO

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Conference Call Participants

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* Tony Cardona

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Diversicare Healthcare Services 2019 First Quarter Conference Call. Today's call is being recorded.

I would like to remind everyone that in addition to historical information, certain comments made during this conference will be forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. And these statements involve -- risks and uncertainties may cause actual events, results and/or performance to differ materially from those indicated by such statements. You are encouraged to review the risk factors and forward-looking statement disclosures the company has provided in its annual report on Form 10-K for the fiscal year ended December 31, 2018, and today's Form 10-Q as well as its other public filings with the Securities and Exchange Commission.

During today's call, references may be made to non-GAAP financial measures. Investors are encouraged to review those non-GAAP financial measures and a reconciliation of those measures to the comparable GAAP results in our press release furnished under Form 8-K.

I would now like to turn the call over to Jay McKnight, the President and Chief Executive Officer.

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [2]

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Thank you, Sydney. Good afternoon, and thank you for joining Diversicare's 2019 First Quarter Earnings Call. Before we begin a discussion of our activities this quarter, I want to encourage our investors to review our disclosures and risk factors in our SEC filings.

As we've noted before and as is the case with others in our industry, we are subject to unresolved governmental investigations into our therapy practices, our practices relating to the preadmission evaluation forms required by TennCare and the PASRR forms required by the Medicare program. We also continue to have a substantial presence in certain jurisdictions that have some of the highest professional liability costs per bed in the country. These factors and other challenges facing our industry have been taken into consideration in developing our operating and strategic plan.

For the first quarter, we realized a net loss of $3.3 million compared to a net loss of $100,000 for the year ago quarter. Adjusted EBITDAR for the quarter was $15.5 million compared to $18.2 million for the year ago quarter. Sequentially, adjusted EBITDAR for the quarter of $15.5 million compares to $16 million from the fourth quarter of 2018. Our CFO, Kerry Massey, will provide more details about the quarter's results and the impact of lease accounting guidance in his comments.

Diving into the quarter's results. Our revenue for the quarter was $134.4 million compared to $141.3 million for the year ago quarter. The revenue decrease was primarily related to the sale of the 3 Kentucky centers and the decrease in total patients served at our same-store centers.

Year-over-year, total occupancy for available beds was down from 84.6% to 82.1% with skilled mix also down from 16.1% to 14.9%. It's worth noting that our Q1 skilled mix was the highest we've had since the first quarter of 2018. Our quarterly Medicare rates increased year-over-year by $1.38, while Medicaid and Managed Care rates increased by $4.35 and $2.59, respectively.

We've got a lot of fluctuation expected in our space in the coming months. The new Medicare payment system, PDPM, takes effect 10/1 of 2019. We've completed our analysis for the new payment method and believe it'll be neutral to our revenue reimbursement. There is a potential for efficiency gains in our operating structure after the implementation of PDPM. We will know more as we get closer to October and as the implementation guides are released, but the positive for Diversicare is that the new methodology, the patient-driven payment model, is very much in line with our current philosophy on the provision of care: delivering care consistent with the needs of our patients.

In addition, 2 weeks ago, CMS proposed a net 2.5% market basket increase for skilled nursing providers, which would be the largest increase our industry has seen in several years. Our actual increase will be calculated using value-based purchasing and geographic influences. Our Medicare rates -- our Medicare increases have historically been materially less than the market basket adjustments.

We customarily discuss our quality measures on the earnings call. While our quality measures continue to be impressive, we also want to highlight our desire to continue improving all of our measured outcomes. Effective April 1, CMS released a major update to the 5 Star rating system that will effectively rerate all skilled nursing facilities and make comparisons to our prior ratings moot. The update impacted all domains: survey, staffing and quality measures.

As we've shared in the past, the survey domain has been frozen since 2017 and will now be in effect according to the methodology in place prior to the freeze. The changes to the staffing portion from the update include more severe rating reductions for lack of RN coverage. It's predicted that as many as 1/3 of SNFs will lose stars for the staffing domain.

As for the Quality Measures domain, where we've historically been a leader, there will be a new bifurcation between quality measures for long-stay and short-stay patients and residents. As we see for the staffing domain, it's predicted that many SNFs will lose star ratings from the changes to QMs. We will work quickly to align our reporting systems with the new measurements and are confident that our team will remain the leader in quality care.

With that, I'll turn the call over to Kerry for some specific remarks on our financial statements.

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Kerry D. Massey, Diversicare Healthcare Services, Inc. - Executive VP & CFO [3]

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Thank you, Jay. As shared with you on our previous call, the new lease accounting standard became effective for us at the beginning of 2019. In adopting this new accounting standard, we used the modified retrospective method and elected several practical expedients, which are common across our industry.

Upon adoption on January 1, the standard required us to record on the balance sheet right-of-use lease assets and lease liabilities of $384 million and $389 million, respectively. The standard did have a material impact on our financial statements. However, it did not have an impact on our bottom line nor our financial covenants.

Our reported revenue for the quarter was $134.4 million, which compares unfavorably to the prior year quarter of $141.3 million. As Jay mentioned, the primary driver of decreased revenue was the sale of the 3 Kentucky centers during the fourth quarter of 2018, which resulted in $4.7 million less revenue for the current quarter. The remaining decrease was due to a same-store revenue miss of $2.2 million, which was driven primarily by lower occupancy and skilled mix. Year-over-year increases in reimbursement rates per Medicaid and Managed Care helped mitigate those unfavorable impacts.

Total operating expenses for the quarter were $108.1 million, representing a decrease of $4.2 million or 3.7% compared to the first quarter of 2018. As a percentage of revenue, Q1 operating expenses increased to 80.5% from 79.5% for the prior year quarter.

General and administrative expenses decreased by approximately $600,000 compared to the first quarter of 2018. Q1 G&A expenses as a percentage of revenue also decreased from 5.8% to 5.6% quarter-over-quarter, which was primarily due to a reduction in salaries and related taxes.

Our professional liability expense for Q1 of $3.4 million or 2.5% of revenue increased in comparison to the prior year quarter of $2.8 million or 2% of revenue. Professional liability expense has been higher in recent quarters as we continue to experience an increased trend in claims development.

We're in the early years of our master lease agreements with Omega and Golden Living. As a result, our GAAP rent expense for these operating leases is significantly outpacing the actual cash rent that we pay. Our lease expense for the quarter of $15.8 million or 11.8% of revenue, increased $2.1 million from the prior year quarter. This increase was driven primarily by a $1.7 million quarter-over-quarter increase in noncash straight-line rent expense. The impacted noncash straight-line rent expense will continue to be significant for us throughout 2019. For the year, we expect to recognize $4.7 million more GAAP rent expense than actual cash rent payments.

Given the impact of noncash straight-line rent on our period-to-period operating results, we will continue to use EBITDAR as a benchmark measurement of performance. EBITDAR illustrates our operating results exclusive of the impact of rent expense. EBITDAR for the first quarter was $15.5 million compared to $18.1 million for Q1 of 2018. For the quarter, net loss attributable to shareholders was $3.3 million.

That concludes our discussion of the Q1 financial results. I will now turn the call back over to Jay for some closing remarks.

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [4]

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Thank you. Before moving to questions, I'd like to talk about some initiatives that we have going at Diversicare. The first is the entry into the Texas Quality Incentive Payment Program, or QIPP, with the majority of our centers in Texas. This program rewards high-quality providers with the opportunity to earn additional reimbursement that could be meaningful for the company. We're encouraged by this opportunity to improve our financial results in Texas.

The next initiative has been an in-depth look at our operating infrastructure. We've begun efforts to drive efficiency in certain processes within the organization and to redefine our overhead structure in light of industry headwinds. We've removed approximately 10% of our nonfacility-based physicians and have streamlined certain processes to reduce our operating cost. We expect to see the benefits of these efforts in the future quarters.

As you're aware, in December of 2018, we received a notice from NASDAQ that our market capitalization did not meet their minimum threshold, and as such, we would be removed from their exchange if we do not meet the $35 million minimum for 10 consecutive trading days before June 17. At this time, we have no update on the delisting, but we continue to work with NASDAQ on the matter. If we do not meet the minimum requirement, our trading will likely transition to the over-the-counter exchange.

As is our custom, we'd like to conclude this call by reminding you of our mission statement: to improve every life we touch by providing exceptional health care and exceeding expectations. We would also like to recognize all of our Diversicare Healthcare team members for their passion and relentless pursuit of our mission and achievement of our goal to be a recognized industry leader.

This concludes our prepared remarks today. We'll now open the call for questions. Please remember we will be unable to discuss more than what's been shared in today's 10-Q filing related to the open government investigation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Tony Cardona with ERS of Texas.

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Tony Cardona, [2]

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Can you talk about how you think the new CMS RN staffing change could impact your star ratings? And then also as a follow-up, can you discuss your views on the likelihood that the Texas Senate bill named the quality provider participation program will pass? And if it passes, what type of financial benefit do you expect to accrue in the near term?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [3]

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On the second part, I don't have a comment. I can't -- I don't have any predictive data as to whether or not a bill will pass.

The first question you asked about the change in the CMS and the RN portion is a very good one. If you followed it closely, in the past, there's been a certain amount of days a center can have in a quarter and not have RN coverage. I believe it was 7 days that they could have a shift that didn't have RN coverage before being penalized. That number is now 4 shifts per quarter. We seek to have 100% RN coverage at all of our centers. So there's the potential there, but we're working to make sure that we're staffing appropriately to move past it.

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Tony Cardona, [4]

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And then do you -- how much of a financial impact would the staffing changes be on your current operations?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [5]

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I don't have an estimate on that at this time. And Tony, we already schedule to the best of our ability to have 24-hour RN coverage at our centers.

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Tony Cardona, [6]

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Got it. And then just on the Senate bill, just theoretically, if it does pass, have you guys done an analysis to see what type of financial benefit you would accrue?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [7]

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Nothing that we could disclose, no.

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Operator [8]

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Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Jay McKnight.

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [9]

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Thank you. Thank you, operator. Thank you for joining our call today. And we appreciate your interest in Diversicare Healthcare Services and look forward to sharing our results with you in future quarters.

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Operator [10]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.