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Edited Transcript of DVCR earnings conference call or presentation 31-Oct-19 9:00pm GMT

Q3 2019 Diversicare Healthcare Services Inc Earnings Call

BRENTWOOD Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Diversicare Healthcare Services Inc earnings conference call or presentation Thursday, October 31, 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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* John Hartnett Lewis

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

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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 Third 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 provisions 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 in forward-looking statements 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 made by -- 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 & Director [2]

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Thank you, Chris. Good afternoon, and thank you for joining Diversicare's 2019 Third Quarter Earnings Call. As you saw in our release and filings today, we have no material update on our outstanding government investigation, other than to say we continue to work through the documentation process related to our agreement in principle.

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 relating to the preadmission evaluation forms required by Tenncare and the PASRR forms required by the Medicare program.

Our total accrual related to the government matter is still $9.5 million, and there have been no changes to the tentative settlement payment plan or other material terms. As a reminder, that plan calls for an initial payment of $500,000 to be made when the agreement is finalized and conditional payments over the 5 years thereafter. It's expected that we'll be subject to a corporate integrity agreement for the same 5-year period.

We ask that you please see our updated disclosures and risk factors in today's 10-Q and other filings with the SEC for further details, including the complete terms of the settlement and an explanation of the matters under investigation that will be resolved upon finalization of the settlement. As we shared before, we have had and continue to have a substantial exposure 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 direction.

We shared on our last call that we anticipated completing our exit from the state of Kentucky in the third quarter, which we did effective August 30. We expect our wind down cost to continue through this calendar year, but the majority of our costs have been recognized. We provided pro forma financial statements after our exit that reflect our book of business going forward and provide some insight into how the state of Kentucky was changing for us.

In addition, we filed a summary schedule on Form 8-K this afternoon that provides net income, EBITDA and EBITDAR for the 2018 and 2019 quarters. It separates continuing operations from discontinued operations.

Prior to our exit, we did not provide much details as to why we were working to exit the state but we've received numerous questions about it. Many of our Kentucky centers were with Diversicare all the way back to the company's beginning, and we've had the opportunity to add to that portfolio over time.

Our teams there were some of the best in the state with great local leadership and wonderful patients and residents. For us, the decision came down to risk management. Kentucky's legislature attempted to enact modest tort reform in 2017 with the passage of a medical review panel statute, but that law was struck down by the state supreme court in 2018. With little hope of tort reform and some of the highest professional liability costs per bed of any state in the country, we determined that our best course of action was to reduce our risk and exit the state.

Also at the end of August, we completed our transition from NASDAQ to the OTCQX exchange. We would like to thank the OTC team for making this transition a very smooth one for us. As we shared in our SEC filings and press releases, we worked through the appeals process with NASDAQ but were unsuccessful in our efforts to remain on their exchange. Our ticker symbol will remain the same and we will still follow the SEC reporting requirements as we've done in the past.

For the third quarter, we realized a net loss from continuing operations of $1.9 million compared to a net loss of $7.5 million for the year ago quarter. To better demonstrate continuing operations for prior periods, we've provided supplementary financial information under Form 8-K with the SEC today. Adjusted EBITDAR for the quarter was $14.4 million compared to a continuing operations amount for last year's third quarter of $15 million, as shown on Slide 3 of the supplementary information. EBITDAR is a valuation measure for us, and we're only making the year-over-year comparison to provide clarity to our continuing operations.

Our same-store revenue for the quarter was $118.6 million compared to $119 million for the year ago quarter. Revenue decreased primarily as a result of decreased occupancy and shortened length of stay for our skilled patients. Kerry will provide more details about the quarter's results in his comments. Year-over-year total occupancy for available beds was down from 83.4% to 81.6%, with skilled mix also down from 14% to 13.3%.

Our quarterly Medicare and Managed Care rates increased year-over-year by $6.61 and $5.82, respectively, while Medicaid rates decreased slightly by $0.54. The PDPM payment system for Medicare went into effect on October 1, and we're happy to report that our team was ready. There have been some early hiccups in the processing of test claims and CMS' rollout of implementation guides, but the long-term care industry did a good job of getting ready for the change. Like others in our space, we're cautiously optimistic about the new payment methodology and expect that our revenue will increase slightly because of this change and the coinciding market basket increase effective October 1. Our overall philosophy of delivering care to the needs of our patients and residents is very much in line with the PDPM methodology.

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 Jay referenced earlier, we completed our exit from Kentucky on August 30 through an agreement with Omega to terminate the lease of our remaining 10 centers in Kentucky and transfer operations to an operator selected by Omega.

Shortly after closing the transaction, we filed pro forma financial statements as part of an 8-K. The pro forma financial statements presented in our operating results and balance sheets giving effect to the disposition of these 10 Kentucky centers in addition to the 3 Kentucky centers that we sold in December of 2018.

We concluded that these centers met the accounting criteria to be reported as discontinued operations during the third quarter. Accordingly, we presented our Q3 financial statements to reflect all Kentucky centers as discontinued operations for the current and prior periods. In future quarters, the financial results of our Kentucky centers will be classified as discontinued operations to conform to our updated presentation.

I'll now turn to the detailed quarterly results, with the discussion referencing our continuing operations. Our reported revenue for the quarter was $118.6 million, representing a decrease of $0.4 million from the prior year quarter. The revenue decrease resulted primarily from a decline in Medicare skilled census as we continued to experience compression on the average length of stay for those patients. A year-year-year increase in some of our rates helped mitigate this unfavorable impact.

Total operating expenses for the quarter were $95.6 million, representing $177,000 decrease from the prior year quarter. As a percentage of revenue, Q3 operating expenses were essentially flat, increasing to 80.6% from 80.5% for the prior year quarter.

While we have been successful at scaling our variable operating expenses to the level of patients that we serve, we have been challenged by increased health insurance costs for our team members, which led to the overall slight increase in the percentage quarter-over-quarter.

G&A expenses for Q3 of $6.9 million were flat to the prior year quarter and remained at 5.8% of revenue. Our professional liability expense for Q3 of $1.7 million or 1.5% of revenue was up just slightly from the prior year quarter of $1.6 million or 1.3% of revenue.

As referenced in the previous 2 quarters, we are 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 more than the actual cash rent that we pay. Our lease expense for the quarter of $13.3 million or 11.2% of revenue was $1.2 million higher than the prior year quarter of $12.1 million or 10.1% of revenue. This increase was driven primarily by $1.1 million quarter-over-quarter increase in noncash straight-line rent expense.

Our adjusted EBITDA for the quarter was $1.2 million compared to $2.9 million for the prior year quarter. The primary drivers of the year-over-year decrease in adjusted EBITDA were the decrease in skilled mix, the increase in health insurance cost and the impact of straight-line rent expense.

That concludes our discussion of the detailed Q3 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, Kerry. I'd like to do a quick review of our year-to-date performance compared to last year since we now have clarity around our continuing operations. Year-over-year revenue is down $3.3 million, with $400,000 of that decrease coming from the current quarter. We have slowed the decrease and will be working on improving our top line with our continued focus on improving skilled mix and total patients served. Operating expense year-over-year is up from 79.7% of revenues to 80.4%, which represents a small amount of improvement opportunity.

This decrease in contribution margin is more about the revenue mix than expense control does. Our G&A expense as a percentage of revenue is down from 6.4% of revenue to 6%, with the most recent quarter at 5.8% of revenue. We believe our cost savings efforts there will continue in the fourth quarter and into next year.

To recap the last year, we've definitely had a lot going on. We've renewed our agreement with Omega, exited the state of Kentucky, reached a handshake deal with the government, expanded our participation in the Texas QIPP revenue program and made major strides in improving our overall cost structure while maintaining operational excellence.

What's next for us is the continued effort to restore our financial footing under a new reimbursement system. As shared last quarter that it's not often that you have the opportunity to do a near-complete reset in a public company, and that's what we're continuing to work through. As is our custom, we'd like to conclude the call by reminding you of our mission statement: to improve every life we touch by providing exceptional health care and exceeding expectations. We'd 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'll be unable to discuss more than what's been shared in today's 10-Q filing related to the 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 the line of John Lewis with Osmium Partners.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [2]

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I guess -- so I was just kind of digesting everything. What was your adjusted for discontinued operations? Your cash from operations was around $4 million for the quarter, is that right?

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

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I'm turning to Kerry, where he's flipping to the right schedule. Give us just a second.

Total cash provided by operating activities year-to-date is $3.6 million.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [4]

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So year-to-date, and I think in the first 2 quarters, it was minus $400,000 -- or positive $400,000 and minus [1 1], right for Q2?

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

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Yes.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [6]

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So around $4 million in positive cash flow. I guess just from a very high level without getting in the weeds, going -- now that you've got Kentucky off your books, just kind of eyeballing it, is this a -- I get there's a lot of working capital, a lot of blocking and tackling, but given the changes you've made, I mean do you see that -- that this is not an unreasonable level of cash to throw off per quarter?

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

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I mean look, you've got to factor in the working capital pieces, and I'll let Kerry weigh in with some specifics. You've got to factor in the working capital pieces. Directionally, we're headed to a better spot as far as looking at our operating -- what's going to come out of continued operations.

You can't forget though that there's going to be some continued impact on cash flow from discontinued operations as we have liabilities in Kentucky related to professional liability that we're going to have to work through over time.

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Kerry D. Massey, Diversicare Healthcare Services, Inc. - Executive VP & CFO [8]

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Yes. We have certainly improved. I mean on the continuing ops basis, there's favorable cash flow. As Jay mentioned, there will be the drag as we wind those obligations in the upcoming period, but we are seeing some improvement on continuing ops from the efforts that -- where we're focused on really our operational cost savings initiatives, really watching and scaling labor as we need to to fit the level of patients that we serve.

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

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Got it. And given your -- when you look at CapEx, I get that you get help on I think on a per bed basis it's around, I went through your filing, I want to say $500 a bed, I think it's the Golden Living and then I forget what the other partner reimburses per bed in CapEx, but...

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

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No. They don't reimburse us for that. That is our minimum required spend under the leases. So under our 2 master leases with Omega and Golden Living, we have per bed measures that we have to meet where we have to spend CapEx in their centers that they own.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [11]

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Got it. So when you aggregate that all up, is that approximately $6 million, $7 million a year on CapEx?

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

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Yes. I mean historically, we've been somewhere between $6 million and $8 million in CapEx. We've always surpassed those requirements under the master leases with that level of spend. We have continued CapEx needs not just for the centers that we lease but also for the ones that we own and then for continuing ongoing platform around IT equipment, the whole nine yards.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [13]

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Got it. So when I go to your -- I went to your website and I don't know if -- I noticed that there's a number of areas where you focus now on, you have, at least on our website, hospice care, assisted living, long-term care, complex care and memory care. Are those new initiatives or have those always been there or was there more -- I didn't remember seeing it so prominently on your website, are these -- what are these initiatives?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [14]

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I'd say, some of it's formalization of initiatives in clarifying what we provide. For instance, you mentioned hospice, we're not a hospice provider, but we do have very really good hospice relationships in some of our markets and some of our networks. What we're seeing it's a good place to partner with them where if someone is in our center and they're on hospice care, we have really good resources where we can work with the hospice provider for them to come in and actually provide that hospice care.

As far as memory care, I mean Diversicare has a long history of providing care for patients who have dementia, Alzheimer's and need some memory care type. So that particular item is one where we're formalizing and talking in more modern terms about the care that our team members do a great job providing every day.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO and Co-Founder [15]

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Got it. Are you somewhat in a holding period until you formalize the settlement in terms of M&A or is that -- can you look at deals now as well?

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [16]

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No. We're -- we need to get the government settlement formalized, done and predictable, before we have any conversation about other strategic initiatives.

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Operator [17]

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And this concludes today's question-and-answer session. I would now like to turn the call back to Jay McKnight for any further remarks.

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James Reed McKnight, Diversicare Healthcare Services, Inc. - President, CEO & Director [18]

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Thank you, Chris, and thank you, everyone, for joining our call. We appreciate your interest in Diversicare, and look forward to sharing our results with you in future quarters.

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Operator [19]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.