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Edited Transcript of DVCR earnings conference call or presentation 1-Nov-18 9:00pm GMT

Q3 2018 Diversicare Healthcare Services Inc Earnings Call

BRENTWOOD Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Diversicare Healthcare Services Inc earnings conference call or presentation Thursday, November 1, 2018 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

* Kerry D. Massey

Diversicare Healthcare Services, Inc. - Executive VP & CFO

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Conference Call Participants

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* John Hartnett Lewis

Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder

* Patrick Retzer

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Diversicare Healthcare Services 2018 third quarter conference call. Today's call is being recorded. (Operator Instructions)

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 provisions of the Private Securities Litigation Reform Act of 1995, and these statements involve risks and uncertainties that 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, 2017, 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 the 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 [2]

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Thank you, Joelle. Good afternoon, and thank you for joining Diversicare's 2018 Third Quarter Earnings Call. Before we begin the 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're subject to unresolved governmental investigations into our therapy practices, our practices related 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 others challenge -- other challenges facing our industry have been taken into consideration in developing our operating and strategic direction.

I'd like to begin our prepared remarks by welcoming Kerry Massey to the call. As you know, Kerrie joined our COO, Leslie Campbell, and me on our executive team in September. His experience in the post-acute healthcare space, coupled with his technical expertise, have made him an immediate value-add to our company. Obviously, we have a lot going on in our company and industry, and to have someone jump in with both feet means a lot to us.

Our major update this quarter has been movement related to our civil investigative demand with the U.S. Attorney's Office for the middle district of Tennessee. As you might have seen from our earnings release -- or 10-Q this afternoon, we recorded a contingent liability expense in the quarter of $6.4 million, which resulted in a net loss of $7.4 million for the quarter.

The company, through our legal counsel, has engaged in preliminary settlement discussions with the U.S. Attorney's Office. The ultimate timing or amount of a potential settlement, or even our ability to negotiate a final settlement, are unknown at this time. As such, we will not be able to engage in discussion of this matter in more detail than we've shared today via our 10-Q.

As for the accrual for the CIB, our net loss for the quarter of $997,000 compares to $580,000 for the year-ago quarter. Adjusted EBITDA of $3.4 million compares to $3.9 million for the year-ago quarter. Adjust EBITDAR for the quarter of $17.2 million compares to $17.6 million for the third quarter of 2017.

In early October, we reported the execution of a new master lease with Omega Healthcare Investors. We are very appreciative of Omega's support and leadership in the long-term care space. Their understanding of the challenges faced by operators has been very helpful in structuring our relationship for the future. The lease has a fixed annual escalator of 2.15%, provides for enhanced portfolio management via a handful of strategic exits, and contemplates a CapEx program for renovations. In conjunction with the execution of this new master lease, we also exited a standalone assisted living facility in Ohio.

I mentioned last quarter that we will continue to provide clarity around the changes in lease accounting. For this new lease, as it currently stands, we expect to recognize $33 million of expense for the first 12 months of the lease, compared to cash payments of $29.2 million. We will be required to straight-line the expense for all leases beginning in 2019, but due to the fixed escalator for this lease, we will begin to straight -- we will begin straight-line treatment at inception like we do for the Golden Living master lease.

In 2019, we will also begin recording all lease obligations on the balance sheet, with offsetting assets that will be components of fixed assets or right-of-use assets. Much more information related to those matters will come after the first of the year, including detailed explanations of cash paid versus gap expense for our facility leases.

We also announced this afternoon that the 3 centers we have classified as held for sale for the past few quarters are under contract to be sold for $18.7 million, with the expectation that that transaction will close in the fourth quarter. The proceeds from the sale will be applied against debt, as required by our loan agreements.

Diving into the quarter's results, which Kerry will cover with more specificity, our revenue under common GAAP for the quarter was $145.1 million, which compares favorably to last year's quarter of $144.6 million on a same-store basis. If you remember, we disposed of a center in Carthage, Mississippi, in 2017 that contributed $1.8 million of revenue in the year-ago quarter.

Total occupancy was down, from 80.1% to 79.3% year-over-year, with skilled mix down from 14.5% in the year-ago quarter compared to 14%. Our Medicare rates decreased slightly year-over-year by $3.76 due to timing, while Medicaid and managed care rates increased by $4.43 and $8.96, respectively.

We customarily discuss our quality measures on the earnings call, and those continue to be impressive, but we also want to highlight our desire to continue improving in all of our measured outcomes. The overall QM score for our portfolio has improved from 3.78 to 4.08 since the year-ago quarter and continues to lead our for-profit peer group.

With that, I will 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, James. As shared with you on our last few calls, an accounting change related to revenue recognition became effective for us on January 1, 2018. In adopting this new accounting standard, we used the modified retrospective method, which is a common methodology used by healthcare service providers.

Consistent with this method, we provide a comparison of our current year revenue as conformed to the previous common GAAP presentation methodology to our prior year revenue that is presented on that same basis. Please remember that the impact on the bottom line from this accounting change is minimal and results in bad debt expense being recorded as a reduction of revenue rather than being presented as a component of operating expenses. We discussed this change in our 2017 10-K and have updated those disclosures in our third quarter 10-Q.

Our reported revenue for the quarter was $141.4 million. The revenue would have been $145.1 million under common GAAP, which is down slightly from the prior-year quarter of $146.4 million. The decrease was due primarily to the timing of our exit from the center in Carthage, Mississippi, as Jay previously mentioned. The equivalent revenue-per-day figure on a common accounting basis is up slightly, from $1.58 million in Q3 of last year to $1.59 million per day in Q3 of this year.

Total operating expenses decreased by $4.3 million, or 3.6%, compared to the third quarter of 2017. As a percentage of revenue, Q3 operating expenses decreased to 80.5%, from 80.7% for the prior-year quarter. General and administrative expenses decreased by a little more than $500,000 compared to the third quarter of 2017. Q3 G&A expenses as a percentage of revenue also decreased, to 5.3% from 5.5% for the prior-year quarter.

Our professional liability expense for Q3 of $2.9 million, or 2.1% of revenue, increased slightly from the prior-year quarter of $2.6 million, or 1.8% of revenue. Our lease expense for the quarter of $13.8 million, or 9.7% of revenue, was flat year-over-year. Exclusive of the contingent liability that we booked during Q3, as Jay discussed earlier on this call, adjusted EBITDA was $3.4 million, as compared to $3.9 million for the third quarter of 2017. For the quarter, net loss attributable to shareholders was $7.4 million.

That concludes our detailed discussion of the quarter's financial results. I will now turn the call back to Jay for some concluding remarks.

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

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We have a couple of quick updates regarding our expectations of reimbursement rates to share with you. The Medicare market basket increase effective October 1 has been implemented, and as we shared on our last call, the industry received a maximum increase of 2.4%. Our increase, as calculated based on our specific service geographies, mix of patient acuity and offsetting adjustments, was closer to 1%. This effective rate for us is comparable to past treatment of the market basket increases.

As far as the outlook for Medicare increase in October 2019, the PDPM methodology has been widely discussed in our industry, and opinions still vary. We expect the actual increase for Diversicare to be comparable to some of our most recent increases. Our close partnerships with other health care providers in our local markets will continue to be of utmost importance to us as reimbursement and delivery of care evolve.

One thing we are excited about is the enhanced focus on the specific care needs of each patient, which incentivizes us to get each patient to the next level of care. This mindset is prevalent in our team already, as we as a company have and continue to be focused on having the patient at the center of everything we do.

As is our customer, we'd like to conclude the call by reminding you of our mission statement, to improve every life we touch by providing exceptional healthcare 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 will now open the call for questions. Please remember we'll be unable to discuss more than what has 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) Our first question comes from Patrick Retzer with Retzer Capital.

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Patrick Retzer, [2]

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So I believe in your opening comments, you had said something to the effect of the state of the industry is considered in outlining your operating strategy.

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

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No, sir. What we said is that the factors and challenges that we as a company face and those that are common to our industry are taken into consideration in developing our operating and strategic direction.

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Patrick Retzer, [4]

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So could you encapsulate your strategic direction at this time?

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

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Yes, and consistent with what we've been saying, the patient is at the center of everything we do. We've been focused on being a high-quality skilled nursing facility operator, and to date, we have done a very good job with that, as demonstrated by our quality measures. It is a challenged industry. It is a tough spot to be in. We continue to push forward with that goal.

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Patrick Retzer, [6]

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So in the past, you've grown the portfolio of properties pretty substantially. Would you say that's on pause for now and you're just going to continue to improve the quality of care to the degree you can and perhaps pile up cash, or are you still looking at -- in the current environment, to grow the portfolio of properties?

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

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Now, that's a really good question. I appreciate you asking it. We've talked over the past, I'll say, 6 to 8 quarters about how hot the industry has been from a valuation as it looks to -- as we look at acquiring facilities and acquisitions. We continue to evaluate opportunities as they come across. With this update that we shared today related to our government investigation, we have to be mindful of that as we consider what portfolio growth can look like.

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Operator [8]

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(Operator Instructions) Our next question comes from John Lewis with Osmium Partners.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [9]

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I could look this up, but I was just curious. After the paydown of, it looks like, around $18.5 million for the sale of the 3 properties, what kind of access to capital would you have from your bank lines?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President & CEO [10]

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I don't have it in front of me. We'll have to get back with you specifically. The final allocation between acquisition line, revolver and mortgage debt has not been finalized with the bank. It's still open.

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Operator [11]

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(Operator Instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Jay McKnight for any closing remarks.

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President & CEO [12]

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Thank you for joining our call today. We appreciate your interest in Diversicare Healthcare Services and look forward to sharing with you in future quarters.

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Operator [13]

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