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Edited Transcript of DVCR earnings conference call or presentation 28-Feb-19 10:00pm GMT

Q4 2018 Diversicare Healthcare Services Inc Earnings Call

BRENTWOOD Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Diversicare Healthcare Services Inc earnings conference call or presentation Thursday, February 28, 2019 at 10:00:00pm 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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* 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 Fourth Quarter Conference Call.

Today's call is being recorded.

I'd 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 provide -- 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 statements disclosures the company has provided in its annual report on Form 10-K for the fiscal year ended December 31, 2018, as well as its other public filings with the Securities and Exchange Commission.

During today's call, references may be made on 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 Mr. 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 2018 Fourth 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'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. We also continue to have a substantial presence in certain jurisdictions that have some of the highest professional liability cost per bed in the country. These factors and other challenging -- challenges facing our industry have been taken into consideration in developing our operating and strategic direction.

In the third quarter, we announced that we were under contract to sell 3 centers in Kentucky which we had previously classified as assets held for sale. We closed the sale on December 1 at a sales price of $18.7 million, realizing a $4.8 million net gain on the sale. The proceeds from the sale were applied against debt, as required by our loan agreements.

For the fourth quarter, we recognized net income of $400,000 compared to a net loss of $5.9 million for the year-ago quarter. EBITDAR for the quarter was $20.6 million compared to $18.3 million for the year-ago quarter. Adjusted EBITDAR for the quarter of $16 million compares to $17.4 million from the fourth quarter of 2017.

I mentioned last quarter that we'll continue to provide clarity around the changes in lease accounting. We adopted the new lease accounting standard effective January 1, 2019. As a result, we will begin, in the first quarter of 2019, recognizing all leases on the balance sheet as right-of-use assets and corresponding lease liability. Under lease accounting guidance, we recognize the cost of our operating leases on a straight-line basis over the lease term. This requires us to recognize more expense than cash rent paid in the early portion of a lease. As we announced last quarter, we executed a new 12-year master lease with Omega Healthcare Investors REIT to lease 34 nursing centers. We also leased 20 nursing centers from Golden Living, under a 10-year master lease that commenced November 2016. Under these 2 large operating leases, 54 of our 57 leased nursing centers are in the early portion of their lease terms. As a result, we expect to recognize $4.7 million more GAAP rent expense than cash rent payments during 2019. Our CFO, Kerry Massey, will provide more details about the impact of lease accounting guidance in his comments.

Diving into the quarter's results.

Our revenue under common GAAP for the quarter was $143.6 million, which was $800,000 less than last year's quarter of $144.4 million. The revenue decrease was primarily related to the sale of the 3 Kentucky centers, which was offset by same-store revenue increase.

Year-over-year, total occupancy was down from 79.7% to 78.6%, with skilled mix also down from 14.7% to 14.1%. Our quarterly Medicare rates decreased slightly year-over-year by $1.29, while Medicaid and Managed Care rates increased by $2.43 and $24.14, respectively.

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 in all of our measured outcomes. The overall QM score of the quarter -- of our portfolio continues to lead our for-profit peer group at 4.0 for the current quarter compared to 3.95 for the year-ago quarter.

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 previous calls, the new revenue recognition accounting standard became effective for us at the beginning of 2018. In adopting this new accounting standard, we used the modified retrospective method, which is a common methodology used by health care service providers. Consistent with this method, we provide a comparison of our current-year revenue as conformed to the previous common GAAP presentation to our prior year revenue that is presented on that same basis. Please remember that the impact on our bottom line from this accounting change is minimal. The accounting standard primarily results in bad debt expense being recorded as a reduction of revenue rather than being presented as a component of operating expenses. We have discussed this change in detail in our previous filings and have updated those disclosures in our 2018 10-K.

Our reported revenue for the quarter was $139.7 million. Under common GAAP, the revenue would have been $143.6 million, which compares unfavorably to the prior year quarter of $144.4 million. As Jay mentioned, the primary driver of the decrease was the sale of the 3 Kentucky centers, which resulted in $1.5 million less revenue for the quarter. The decrease was offset by a $0.8 million increase in same-store revenue. Year-over-year increases in reimbursement rates for Medicaid and Managed Care helped to mitigate the impact of lower occupancy and skilled mix. The equivalent revenue per day figure on a common accounting basis for Q4 was $1.6 million, which was consistent with Q4 of last year.

Total operating expenses for the quarter were $113.2 million, representing a decrease of $3 million or 2.6% from the fourth quarter of 2017. As a percentage of revenue, Q4 operating expenses increased slightly to 81% from 80.5% for the prior year quarter. G&A expenses decreased by $0.2 million compared to the fourth quarter of 2017. As a percentage of revenue, G&A expenses remained consistent quarter-over-quarter at 5.6%. Our professional liability expense for Q4 of $2.9 million or 2.1% of revenue increased slightly from the prior year quarter of $2.7 million or 1.9% of revenue.

As Jay previously mentioned, 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 has begun to significantly outpace the actual cash rent that we pay. Our lease expense for the quarter of $15.9 million or 11.4% of revenue increased $2.2 million from the prior year quarter of $13.7 million or 9.5% of revenue. This increase was driven primarily by a $1.7 million quarter-over-quarter increase in noncash straight-line rent expense. The impact of noncash straight-line rent expense will become even more significant for us in 2019. We expect to recognize $4.7 million more GAAP rent expense than cash rent payments during 2019. That amounts to approximately $1.2 million of unfavorable impact each quarter.

Given the impact of noncash straight-line rent on our period-to-period operating results, we will use EBITDAR as a benchmark measurement of performance. EBITDAR illustrates our operating results excluding the impact of rent expense. EBITDAR for the fourth quarter was $20.6 million compared to $18.3 million for Q4 of '17. Q4 EBITDAR as adjusted for the $4.8 million gain on the sale of the Kentucky centers was $16 million compared to $17.4 million for Q4 of '17.

For the quarter, net income attributed to shareholders was $0.4 million.

That concludes our discussion of the Q4 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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Thanks, Kerry.

Before moving to questions, I'd like to summarize the year-over-year results from 2017 to 2018.

Our annual revenue on a common GAAP basis increased by $2.8 million from $575 million to approximately $578 million. While our annual year-over-year rates were up, our combined average length of stay for all of our patients and residents decreased by almost 18 days. As I mentioned on the last call, we have initiatives under evaluation that we're looking at as a means to offset this industry pressure, but primary focus for us is evaluating our operating platform and cost structure. Our adjusted EBITDAR for these periods, which normalizes some of the noise, was $69.7 million for 2018 versus $72.8 million in 2017, a decrease of $3.1 million.

Our G&A as a percentage of revenue dropped from 6% to 5.6% year-over-year, excluding the executive severance recorded in 2018. As a similar measure, our annual operating expense as a percentage of revenue increased from 79.2% to 80%.

In late 2017, we recorded a significant noncash tax expense related to the required revaluation of our deferred tax assets as a result of the tax plan approval late in that year. During the third quarter of 2018, we recorded a litigation contingency expense of $6.4 million related to our ongoing DOJ matter. Those 2 events, combined with recent operating performance and the changes in lease accounting, have put us into a negative shareholders' equity position on our balance sheet. With the expectation around straight-line lease accounting that we've shared, it's expected that we will be in a negative shareholders' equity position for the next several years. In the first quarter of 2019, we'll be grossing up our balance sheet to include the lease-related right-of-use assets and liabilities in excess of $400 million.

Given all the accounting changes, we believe that EBITDAR will be the most transparent metric to use to communicate operating results, and we'll be focusing on that measure moving forward. As always, we will answer any technical questions we can about our financial statements as we move through this major accounting transition.

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-K 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 the line of Patrick Retzer with Retzer Capital Management.

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Patrick Retzer, [2]

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So for several years, the industry as well as your company have talked about the favorable demographics; the cost advantages of skilled nursing facilities, especially those that offer rehab services versus hospitals; and other reasons for people to think the wind is certainly at the back of the industry, yet the industry has faced challenges here. How do you reconcile those? And what do you see, if anything, improving those conditions?

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

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There is, there are a lot of different opinions out there. Some come from our national organization. Others come from publicly traded companies who have been putting out their results and giving their thoughts and opinions. We have been in a trough. And it's well known, well documented that our -- the census across -- SNFs across the country has been in a trough. There is an expectation that we'll begin to see a lift whenever the baby boomers come -- of normal age you would expect to go into skilled nursing, but that's not going to be just one wave. It's going to be an increase. It's going to increase over time to what a new norm looks like. Conventional wisdom, a lot of folks are saying that we're in the trough. We think we've seen the bottom of the trough, and looking forwards, we'll start to see an increase in 2021. In our markets, we've seen a little bit of a stabilization, but there is no question that, over the past couple years since this pressure, particularly that around the skilled patients as Managed Care has become a bigger provider, a bigger payer in that space -- has been really, really pressured.

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Patrick Retzer, [4]

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Okay. And you talked about negative shareholders' equity for the next several years perhaps. Does that have any legal or lender ramifications for the company?

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

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I'm obviously not a lawyer. I come from the accounting world, so I can't speak to any of the -- any legal matter there. It's something we will definitely make sure that we're staying close to our counsel and ask some smart questions about. As far as our lenders, you have to -- our bank syndicate and the REITs who are effectively lenders to us both have an understanding about this. They understand how this works. And from a covenant perspective, they tend to look at the cash flow on the fixed-charge coverage, as opposed to [booked rent, book]. And so they thoroughly understand this. We've been very close to them and talking about the changes in the lease accounting and what the asset and liabilities and how it's going to change our balance sheet. So I think they have a good understanding, so I'm not expecting anything major on the lender side. Legally, I'm not aware of anything.

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Operator [6]

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Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Mr. Jay McKnight, President and Chief Executive Officer, for any further remarks.

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

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Thank you, Chris. And thank you all for joining our call today. We appreciate your interest in Diversicare Healthcare Services and look forward to sharing our results with you in the future.

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Operator [8]

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