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Diversicare Healthcare Services (NASDAQ:DVCR)

Q1 2013 Earnings Call

May 10, 2013 9:00 am ET

Executives

Kelly J. Gill - Chief Executive Officer, President and Director

James Reed McKnight - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Analysts

Dana Hambly - Stephens Inc., Research Division

Operator

Good morning, and welcome to the Diversicare Healthcare Services First 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 call 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 that may cause actual events, results and our performances 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, 2012, as well as in its other public filings with the Securities and Exchange Commission.

During today's conference, references may be made to non-GAAP financial measures. Investors are encouraged to review these 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 Kelly Gill, the President and Chief Executive Officer.

Kelly J. Gill

Good morning. Thank you, operator, and thanks to all of you for joining our call today. Also with me is our Chief Financial Officer, Jay McKnight, who will provide some financial details later in the call.

As I hope you've all seen, we have now changed our public name to Diversicare Healthcare Services, a name, which fully aligns us as a corporate entity with the branding of our nursing centers and operating subsidiaries. Diversicare has been a well-respected name in the industry for over 20 years and to me, it only made sense to align the public image of the company with this quality brand.

It also provides greater clarity of the company's identity, elevates the brand and reputation of our operating subsidiaries to a national level that provides greater cost efficiency of maintaining a unified branding message. I also believe it punctuates the number of strategic steps we have taken to transform Diversicare towards a more rapid growth-oriented company. Many of these tests were taken over 2 years ago and entail considerable investments in our operating systems. And as we've demonstrated over the past 12 months, we've clearly begun to capitalize on those investments as we successfully completed several transactions consistent with our portfolio expansion initiatives.

It's also important to note that we fortified our management team with the addition of Leslie Campbell as our Chief Operating Officer. With Jay and Leslie now at full stride in their respective roles, I believe we have the depth of experience necessary to oversee this growth.

Now for the balance of my opening comments, I'll give a brief review of the quarter. After Jay provides his financial report, I'll devote more time to discussing where we stand strategically both in terms of our growth plans and how we're addressing our professional liability costs, and more broadly, our risk profile as a company.

In terms of the quarter, we generated a nice acceleration and revenue growth to almost 5%, and in fact, have now consistently increased our top line over 4 sequential quarters.

Occupancy remains under pressure across our entire industry, but even though we saw a modest year-over-year decline, we retained the skill mix of 16.6% matching our highest level as a company and marking a significant rebound from the fourth quarter of last year.

Our facility operating profitability also increased by 150 basis points and this improvement demonstrates good operating leverage even as we have brought on newly-acquired and opened new centers.

Funds from operations for the quarter increased to $3.4 million from $2.1 million over the quarter a year ago.

As for our new center additions, our Highlands facility, which we acquired through the assumption of a lease last fall, has now fully completed its licensing and certification process associated with the change of ownership and is now likewise fully integrated onto our operating platform, including our EMR. Both Highlands and Rose Terrace were significantly profitable during the quarter, and, in fact, as you'll see in our earnings tables, our startup expenses are just a fraction of what they were a year ago.

We believe these accomplishments are fully representative of the scalable capabilities of our operating platform, and most impressively, resulted in improved leverage of our overhead as measured as a percent of revenue which has trended lower since embarking upon our strategic plans in 2010.

Our most recent news is also that we completed our acquisition of 5 facilities in Kansas just over a week ago. These facilities will contribute to our financial results for 2 months here in the second quarter, but from an integration standpoint, we are well underway implementing all of our operating systems in each of these centers, including EMR.

Not only are we extremely pleased to welcome these 5 new additions into the Diversicare family, we're also excited to expand into a new state, which we believe will provide a new footprint from which we can expand upon as part of our overall growth initiatives.

I also want to take this moment to publicly thank our new Kansas team members for all of their hard work, patience and dedication in helping to complete this transaction. I'm very proud and impressed with all of them and look forward to working to achieve great things together in the years ahead.

As we've been able to demonstrate with the addition of 8 new facilities since we began our strategic plan, we also have an active pipeline of potential quality acquisitions and I believe we can sustain this growth trajectory in the years ahead.

Before I turn the call over to Jay, I want to comment that clearly, a lot of the strong progress in both our operating performance and growth strategy continues to be clouded by a meaningful increase in our professional liability reserves. After Jay complete his remarks, I will comment on this further to devote some time to that topic, and in the broader context, where I think we stand strategically.

So with that, I'll turn the call over to Jay.

James Reed McKnight

Thank you, Kelly. First, I want to walk through the drivers of our revenue comparison to the first quarter last year and then I'll discuss the adjustment items we reported for this year's first quarter to bridge our reported EBITDA, net income and earnings per share to our adjusted metrics.

You'll find in yesterday's press release, tables reconciling non-GAAP financial measures to their closest GAAP measurements. At the top line, reported revenue for the quarter was $79.3 million, an increase of $3.6 million or 4.7% from the first quarter of last year. The primary driver of this increase was the contribution of revenues from the 3 facilities we opened or acquired last year. Also contributing to the growth in the quarter were increases in our Medicare and Medicaid rates, somewhat offset by modestly lower occupancy and the shift to some of our skill mix from Medicare to Managed Care.

We made a minor change to our financial reporting in the press release we issued last night, such that you can now see more clearly our facility level operating profitability. Compared to the $3.6 million increase in revenue, our facility level operating expense increased by $1.7 million or 2.8% versus the first quarter of 2012, resulting in facility level operating profit of $17.2 million or an increase of 12.2%. This equated to a margin of 21.7% compared to 20.2% last year, an expansion of 150 basis points.

A look at the facility level, our G&A expense also declined on an absolute basis to $6.3 million from $6.8 million, although this was partially due to separation and related costs that didn't recur in 2013.

On an adjusted basis, which excludes startup cost related to our newly-opened facilities and severance expenses, our EBITDA for the quarter was $700,000 compared to $1.4 million in the first 1st quarter of 2012. As Kelly noted, the primary driver of this decline was an increase in our professional liability expense versus the first quarter of 2012 related to reserve adjustments for prior period cases.

For the quarter, net income attributable to shareholders was a negative $1.1 million or a loss of $0.18 per share compared to a negative $1.5 million or $0.27 per share in the year-ago period. On an adjusted basis, we reported a net loss of $1 million or $0.16 per share compared to a net loss of $834,000 or $0.14 per share in 2012.

Into the March quarter, our balance sheet reflected cash of $2.4 million compared to $5.9 million at the end of December and total working capital of $13.8 million compared to $15.7 million. We have a total debt of $29.1 million consisting of $22.2 million drawn under our mortgage facility, $1.3 million in capital lease obligations and a $5.6 million notes payable related to our newly-opened facility in West Virginia.

Subsequent to the end of the March quarter, we've completed the acquisition of 5 centers in Kansas for a total consideration of $15.5 million. These centers have generated annual revenue of approximately $24 million in the past. We financed the acquisition with a syndicate of banks led by The PrivateBank. The total debt facility is $65 million, comprised of a $20 million revolver and a $45 million term loan. We have no withdrawals in the revolver but we'll be able to use it to finance the CHOW process for the Kansas facilities as we go through the Medicare and Medicaid certifications.

At this time, I'll turn the call back to Kelly.

Kelly J. Gill

Thank you, Jay. As I've mentioned, I'd like to spend some time on our risk management strategies as they relate to our overall growth. As a backdrop to this perspective, if you look at our first quarter results, our top line growth is clearly accelerating, thanks to the increasing contribution from the facilities we added since 2012. Our 5 center acquisition in Kansas will help to continue this growth beginning here in the second quarter. Additionally, at the facility level, this growth is also creating significant operating leverage.

During Q1, our facility level operating profit increased by more than 12% year-over-year or more than twice as fast as revenue demonstrating solid cost management at the center level as we have opened or acquired new centers. Recall that this includes our Clinton facility, which remains in startup mode, selectively growing its occupancy and should move further towards profitability later this year.

Going one level further, even after taking into account our financing cost, our facility level contribution increased even faster versus last year.

Finally, as Jay mentioned, our G&A loads decreased as a percent of revenue year-over-year. But from a portfolio growth standpoint, we have been able to demonstrate the ability to accelerate our revenue growth, integrate newly-added facilities and do so in an accretive fashion versus the cost of financing and managing this growth.

Unfortunately, though, despite these many accomplishments, our professional liability cost continues to be a significant challenge to us. During the first quarter, we recognized an increase in PL expense related to reserves for prior period cases, which more than offset the growth and the operating profit we generated at the facility level.

While there are many aspects which drive the computations of these reserves, I want to point out the residency periods for many of these cases date back several years. As illustrated, there is a significant latency period in the evolution and adjudication of these cases, which we are working through.

In terms of our strategic initiatives to both address our risk profile and continue our growth, we have taken a multipronged approach.

First and foremost, we are being more aggressive in our mitigation activities and utilizing the many advantages afforded to us through the use of our EMR system, by our active support of tort and litigation reform initiatives in the states in which we do business and by our ongoing focus on the improvement of the quality of care and patient services.

Professional liability activity in our industry is, obviously, a complex area. I'm hopeful that the steps we have put in place will have a positive impact on our risk profile going forward.

To give you more color on EMR, recall that we embarked a few years ago on a fairly significant investment in our electronic medical record system, with the goal of using these modern systems to better capture more complete documentation of our patient care, not only to aid in the ongoing improvement of quality care, but also as a risk management tool. On this latter point, EMR allows us to significantly improve the quality of our documentation to an extent that is very difficult to achieve in a paper-based medical record.

From a practical standpoint, the benefits of EMR and the management of PL risk will likely take some time to manifest itself due to the latency aspects of case development. But we believe the investments we have made will have a positive long-term impact on the company.

As the second prong of our strategy, we also continue to focus on aggressively developing our pipeline of portfolio expansion opportunities. There are multiple benefits to this expansion. As we generate a larger revenue base, we expect to see improved leverage and efficiencies throughout the organization, which will enable a greater critical mass at the operating profit level.

We've been able to demonstrate this benefit already, as I pointed out earlier.

Broadening our geographic footprint and or deepening our presence in attractive markets also creates a more balanced risk profile for the company. Our entry into Kansas is a perfect case in point.

And as we put ourselves into the marketplace as acquirers, our pipeline has broadened significantly, and I believe we'll be able to capitalize on additional opportunities throughout this year and beyond.

Firstly and essentially, as a benefit from our ongoing growth, we have greater ability to contemplate targeted portfolio management. Due to our relative size, this has been a difficult proposition in the past. As we continue to grow through acquisitions, I believe we can begin to look more -- at more significant portfolio management strategies.

Looking into the remainder of this year, I'm hopeful that this overview gives you a better sense of where we stand from a strategic standpoint and I'm optimistic that we can execute on all of these prongs of our approach to risk and growth.

As I noted at the beginning of the call, we're beginning this year with a new name, new phase of our operating strategy, and what I believe, is greater alignment than ever before between our overlying strategic plan throughout the organization.

At Diversicare, our mission is to improve every life we touch by providing exceptional healthcare and exceeding expectations. The essence of that mission has been in place in our centers for decades. I hope you will see, as we do, that our broader operating strategy is yielding the intended benefits of generating growth for the company, enhancing our risk profile and ultimately, enabling a far more direct connection between the good work of our employees and caregivers are doing at our individual facilities and the results we bring to driving improved shareholder value.

With that, operator, we'd now like to open up the call to the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dana Hambly with Stephens.

Dana Hambly - Stephens Inc., Research Division

Kelly, talking about the pipeline, just could you go into a little more detail about maybe specifically where you're looking? I know new states are a possibility, existing footprint. Is there anything that you would prefer right now? Or is it kind of all options open?

Kelly J. Gill

First of all, good morning, Dana. It's great to have you on our call. And with that, if you look at the -- our map of operating states, we're currently in 9 states. And our growth was ideally, in a perfect world, we would love to be able to continue to grow within our footprint of the states that we see as favorable. And obviously, we have PL challenges in certain of those states. But also, if you look at our in-state growth initiatives, which makes obvious sense, but also we have a number of very favorable states that are contiguous to our current footprint. And with that, those are very obvious states from which we would continue to look to grow. I would go on to say that with the growth initiatives, with the success that we've had in growth so far, we've been able to demonstrate that we can execute on a multipronged approach to our growth. First, with our Highlands facility, we were able to take that facility over through assumption of a lease. Our Rose Terrace was a developed facility in West Virginia, leveraging the development capabilities of the developer where we leased the facility and where we have a right to purchase it. And now with Kansas, the multi-facility transaction that we purchased outright. And so not only where we would like to grow geographically, but also we've shown that we've been able to grow through a variety of means, which at least in my mind, gives me a sense that we have a very clear ability to grow moving forward.

Dana Hambly - Stephens Inc., Research Division

Okay, that's helpful. How would you characterize the competitiveness right now, Kelly for these portfolios? And are you seeing portfolios transactions like Kansas? Or is it more one-off stuff that you're looking at?

Kelly J. Gill

It's both, actually. And I would say that it is competitive, although we also, to the nature of the transactions we've done so far, we do believe that we've been able to consummate these transactions at very favorable rates. But yes, I would say that it is competitive. I would go on to say though that clearly, and I've mentioned this in prior calls, that with the -- this business is becoming much more complex than it ever has before. And even though there are very talented operators of single facilities, the complexity now in the business makes it very difficult for even the best of operators to operate in that kind of an environment. And I believe that with that, we will begin -- we're seeing now and we'll continue to see an increase of offering of those individual facilities, both of which, multi-facility as we saw in Kansas and individually as we saw with Highlands, both of those are attractive to us.

Dana Hambly - Stephens Inc., Research Division

Okay, that's a good point. And then Jay, could you just help me out with the balance sheet? How does it look for future acquisitions? And I mean, do you prefer to own or lease or it doesn't really matter to you?

James Reed McKnight

That's a lot of questions in one, Dana. I'll start with the balance sheet side. Cash was down a little bit at the end of the quarter. We were still financing the change of ownership buildup in receivables as it related to the Clinton facility in Kentucky and the Highlands facility in Kentucky. Remember, Clinton was in staff-up -- ramp-up, excuse me, not staff -up, ramp-up mode through last year. Highlands, we just took over in September. So we had to build an AR, which is the use of operating cash. We managed to self-finance that CHOW without having to go to the line. We expanded the revolver in conjunction with our refinance to give us a little bit more room, candidly. We now have a larger revolver that we'll be able to use to get through CHOW processes. So when it comes to the leased versus buy, I mean, that's always a great question that as we're looking at that, certain of the leased certain facilities that we'll see and they'll be -- they'll make sense like the Kansas facilities that we'll want to own those outright from a portfolio perspective. There'll be others, where we have some really good REIT partners. The [indiscernible] relationship which started the Highlands in the fall where it may not be something that we can finance ourselves on the buy side and we'll partner with them to look at that opportunity. So it's kind of when you see one deal, you've seen one deal. They are all a little bit different.

Dana Hambly - Stephens Inc., Research Division

Okay, that makes sense. On Kansas, did you say you need to wait for Medicare and Medicaid certification there?

James Reed McKnight

Yes. There's a process. We're able to start accruing receivables immediately and it's a good receivable. There's not any real worry about collection. But we have to go through the change of ownership process which the state comes out and does a survey and we go through a certain paperwork process that we're accruing those receivables for a couple 3, 4 months, just depending on the state's backlog, and then we will bill the entire slew of it at one time to Medicaid and to Medicare. The Medicare process is a little faster than Medicaid. Medicaid has to wait on Medicare. And then once the Medicare process finishes, we can begin billing Medicare for certain portions and then we wait on a lot of the rest of it until Medicaid is done. And then we bill it all and we'll collect over a couple of months pretty quickly. We've actually just completed that process with the Highlands facility and have seen some definite quick improvement there in Kentucky.

Dana Hambly - Stephens Inc., Research Division

Okay. And how does that Kansas portfolio look from an occupancy standpoint or from a skilled mix?

Kelly J. Gill

From an occupancy standpoint, they're well within state average levels. Their skilled mix is in the lower teens right now. During the transition process, we've -- I've had the opportunity to conduct market assessments in each of those individual markets. And so we feel like we're hitting the ground running with the sales and marketing initiative, but obviously, we can't project where we think occupancy and skilled mix will go from there. But we have our processes in place and we're hopeful we can make a positive effect.

Dana Hambly - Stephens Inc., Research Division

Okay, that's great. Last one for me just on the Medicare proposed rule. You think any material impact to you from proposed change to the MDS?

Kelly J. Gill

Well, every time we have a change in those processes, there is an effect. And the merits of that sometime appear to be mixed in the short-term or long-term. Obviously, any process that goes to a greater extent to capture patient acuity, I think over the long-term, is a very good thing. We can always go back and comment that during the migration from the old MDS to the new MDS. It clearly took probably, for all intents and purposes, double the labor time per patient assessment to conduct, which is a -- which drove a tremendous increase in the associated labor cost without the direct association and reimbursement after once the RUGs IV rule was implemented. So I'll take that as a positive, generally. But there are other viewpoints that could go with that as well, which is understandable.

Operator

Our next question comes from the line of Brian Wagner [ph] with Courtside [ph] Capital.

Unknown Analyst

So I see you guys own about 25% of your facilities currently, what level of ownership are you targeting as you move forward through your acquisition pipeline? You want a higher percentage of ownership?

Kelly J. Gill

Well, we think that there are advantages to increased ownership and so we will continue to place an emphasis on that. But also, I'll come back to a clear example of our Highlands facility where we assumed the lease with essentially 0 acquisition capital associated with that. That facility has been terrific. It's been a terrific deal for us. It has been accretive from the first day of operation, and it now contributes significantly. And so for us, if you look at our organization more broadly, particularly with the professional liability profile of this company, we clearly need to grow. To continue to grow in a manner that diversifies our risk profile, by greater operating leverage into the company through sharing of broader base of our G&A's load at the corporate level to drive better margins. And where we can see contributions to that regard, we think that, both from these simple deals and lease deals, we think that ultimately, that is going to drive shareholder value very significantly. And so what I would come back again and say if you look at the deals that we've done with Highlands, Rose Terrace, our small facility in Clinton, Kentucky and now with the 5 Kansas facilities, each and every one of those is representative of all the deal structure types available to us to be able to grow. And so then it comes more down to a matter of opportunistically, at any point in time, looking at the quality of deals that come to us and then determining how it fits into our broader strategic growth plans.

Unknown Analyst

I got it. Looking at your Kansas acquisition, congratulations, that looks a nice portfolio. You had mentioned the integration of your EMR. What does that entail? Do they currently run any EMR? Is it the same platform? Do you have to replace what they have?

Kelly J. Gill

So no, they did not have any EMR at all and like many facilities across the country, they operated with a paper-based medical record environment. And so for us, and really the qualitative reasons why we keep mentioning Electronic Medical Records consistently in all of these calls is, number one and first and foremost, we believe that those modern systems help us provide better quality care than ever before and we're always looking to improving upon anything we can do to enhance the care experience for our residents. Number two, is now that with that system, not only do the nurses and caregivers of the facility have better tools, but now, we can help support them better from a remote standpoint. And so better oversight, better monitoring and benchmarking performance in a way that we feel like we can provide value to help support them. Number three, and this is sort of a universal qualitative aspect, we think, is hugely important. More and more we're seeing in states where there are post-payment reviews to match the reimbursement that's been provided for the center and the quality of documentation that's been noted in the facility. And we think that these systems provide a better direct connection to the documented quality of care and the reimbursement that ultimately provides more comfort and security through the various post-payment review processes. And that doesn't mean to say that it's perfect and absolute, but these modern systems are powerful, and we believe that it's an amazing enablement tool for us on a variety of fronts that helps us believe that we are taking advantage of all the modern technology available to us. And from that, hopeful that our shareholders see that we're making the right investments for the long-term growth and prosperity of the company.

Unknown Analyst

I totally agree with your EMR strategy. Just on the timeline, how long do you think it will take to get implemented? And that's my last question.

Kelly J. Gill

Yes, well, just the same way with Highlands, we have that system fully -- we have the facility fully integrated with staff trained and the system implemented with roughly all done in about 4 months. And we would hope to do the same thing in Kansas.

Operator

Our next question comes from the line of Will Saddle [ph] from Woodmont.[ph]

Unknown Analyst

Few specific questions for you and then maybe one bigger picture. First, on the Kansas acquisition, I noticed you filed for the closing, but didn't file any financial statements, will you file those later at some point? Or some reason why you wouldn't -- it's a big transaction, is there some reason you wouldn't provide that information?

James Reed McKnight

Will, it's something -- if you look at the organization that they were a part of and the way their financial statements work, it's not a clean audited set of financials for the smaller piece. The SEC has defined rules as to when we'll have to do that, so it kind of depends on what other type of transactions we make during the course of the year. So at this time, we don't have anything to file. But that doesn't mean that we won't be filing financials on them at some point in the future.

Unknown Analyst

Can you give us, I know you mentioned the revenue number, I think it was around $24 million, $25 million. Would you give us some sense for the profitability of the assets?

Kelly J. Gill

Will, this is way too early. We've only been operating these facilities now just for just under 2 weeks. And so it's too early to comment on that. But obviously, I would say that from the due diligence process, we had a chance to take a look at those financials, look at opportunities that we see per synergies, et cetera. And we felt that those facilities would be positive contributors to the company in an accretive fashion moving forward.

Unknown Analyst

Well, it's just -- it's such a large transaction and obviously, a lot's been discussed on the call about the importance of growing, et cetera. I think it would be helpful for shareholders, the more information and visibility you can give us on that transaction, the better. Another quick one for you, the G&A in the first quarter, the $6.3 million improvement year-over-year, the fourth quarter I think it was around $5.5 million, what was the big step-up sequentially? Or does it have to do with accruals, or...

James Reed McKnight

Some of it was the change in the payroll taxes, the restart in payroll taxes and a couple of change in rates there that restarted. We also had some acquisition-related expenses related to the Kansas deal. Acquisition costs -- unlike financing costs, acquisition costs, we have to expense upon when they're incurred. We incurred a lot of expense related to Kansas in the first quarter, so you'd see some of that there. The rest of them are just small timing items. So as were your 2 larger items.

Unknown Analyst

So is that -- I guess, you had $100,000 or so that you disclosed of acquisition cost. So is the run rate around [indiscernible]?

James Reed McKnight

I'd say the run rate is probably between the fourth quarter and the first quarter.

Unknown Analyst

Okay. So you may see improvement on that line item?

James Reed McKnight

We'll have some continued acquisition cost in the second quarter and then it kind of depends on the company's activity as far as what we have going on. That number has definitely trended down since the implementation of the Final Rule in the fourth quarter of 2011. There's a nice solid trend line where G&A has come down as a percentage of revenue.

Unknown Analyst

Right. But the actual G&A for getting any potential acquisition-related cost, is the $6.3 million kind of the base rate or is it the $5.5 million in the fourth quarter or somewhere in between?

James Reed McKnight

I'd say it's somewhere in between, Will.

Unknown Analyst

Okay. West Virginia, you opened that December of 2011, right at the end of the year. Do you still have that kind -- still breaking that out? I mean, at what point you just kind of say, "Hey, it is what it is." And I know it's in your consolidated numbers, but why do you continue to break that one out given we've had it for a while?

James Reed McKnight

Yes. That's a great question. The facility is north of breakeven. It's making money. The reason we have held it out is it hasn't reached an occupancy that we think is commensurate with the rest of the state with the building we'd be able to do. It's running a percentage less than our average across our company, the average in the state, if it's still growing its census. So while it is profitable, we think it's important, from an occupancy perspective, to let everybody know, hey, it's not there yet.

Unknown Analyst

And then I noticed in your Q, you mentioned some debt related to that facility and complicated transaction, all those variable interest or whatever it is. But you said that you're in compliance with all such covenants at 12/31. Are you in compliance at March 31?

James Reed McKnight

Yes. So the way that works -- that's another good question. The way that works, that's a variable interest entity. We do not guarantee the debt, but the way the quirky accounting rules work, we have to consolidate that entity in its entirety. We are basically required to ask the owner if they're in compliance with all their debt covenants so that we can disclose it. That's an annual assertion that we have to make in our 10-K so that's the time we update that. To our knowledge, there's not any change and they were very easily in compliance with all their covenants.

Unknown Analyst

If you look at your breakout in your press release of the upstart facility, subsidiary level are making money. I think it's a little -- $1 million in the quarter. Are they after rent? Are they making money?

James Reed McKnight

Yes.

Unknown Analyst

Okay, good. And I was looking at your -- I guess you've done 15 facilities for $26 million, and for some reason I was just thinking it was more than that. And I went back 2011 Investor Presentation found on your website that I guess around August of '11, you've done 15 for $22 million, you had 4 for $4.6 million underway, then you were scheduled to start the end of '11 and beginning of '12, 8 more for $12.4 million. I was trying to reconcile that almost $40 million investment, or at least in planned investment, with the 15 for $26 million?

James Reed McKnight

With the change in the Final Rule, some of that was put on hold through 2012. The number that we reported in the first quarter is the most up-to-date number as far as completed renovations and the investments in those facilities.

Unknown Analyst

Okay. And then just last one for me and this is maybe a little bit bigger picture question. In your proxy, it'd be nice to share with us kind of the operating income goals for which the Board is evaluating management and basing their bonus. I think in 2011, it was $11.6 million, '12, $9.3 million and for this year, $8.2 million, and obviously, we've had struggles and are far from hitting any of those numbers. But I guess, that's my question. Can you just tell us where the biggest gap is between what the Board has expected and kind of where we've come in and why that number continues to go down instead of up as we've made all of these investments from the renovations, from the additional accretive facilities, et cetera? I mean, I would think, if anything, expectations should be going up though. That's the last one for me, if you could just elaborate on that I'd appreciate it.

James Reed McKnight

Well, I'm not sure that I would -- I'm not sure what you mean by gap. If you look at what we have reported on the Q and clearly, the numerous performance metrics that we're reporting on here, we are clearly moving the company forward in a variety of areas across multiple major areas of performance. So we're near -- for the quarter, we were near record high for our skilled mix. Our facility contribution, margins are improving. We're executing on multiple fronts to grow the organization. And so if you look at that, there are a number of areas where the facilities, profitability and growth trajectory are moving in very favorable areas. Professional liability has been and is a challenge for the organization. And we see that with, again, with multiple other organizations that probably have had even more profound effect than we have and so we know that, that issue is not just localized to us. So I won't comment further than that, but we feel like that we are moving the company forward to drive long-term shareholder value.

Unknown Analyst

Certainly, some improvements, and I'm not arguing with that, I mean, and this is not my metric. I'm just reading the proxy. And I think, this year, 60% of your bonus is based on the $8.2 million operating income, but that's down from $11.6 million in '11 and the $9.3 million in '12. And first quarter run rate adding back the noncash or the cash -- noncash professional liability, I think you're at $0.5 million. So you're not necessarily tracking to that $8.2 million. I'm just -- that's what I'm trying to understand. I understand there's some things you could point to your progress, but I'm just trying to reconcile what the Board set out there in where we are. And one nice thing about what the Board has set out there, they obviously, think the company has significant potential to generate earnings. I mean, you go through the numbers and you add back D&A and you hit the EBITDA run rate and your interest expense, et cetera, I mean it's very attractive -- potentially very attractive, but just trying to reconcile that bar that's been set out there, your bonus by the Board and where we are today and how we reconcile that?

Kelly J. Gill

Well, Will, that's probably the longest and largest question that I have ever heard offered on an earnings call. And so with that, we stand by what's being reported in the proxy. There are -- there is, given the trends of RUGs IV and everything else over a multiyear sequence here we see in our industry, that we've been very much in a period of flux [ph]...

Unknown Analyst

I appreciate that, but I'm looking at every other public nursing home company, their '12 operating income is better than their '10. And obviously, you have to follow up from '11, '12 with the RUGs IV. But here we are, the Board was saying, "Hey, I want to measure you on '11, $11.6 million. In the '13, we're down to $8.2 million. And oh, by the way we've invested all this capital and we're investing significant capital in these Kansas facilities, all of which I hope would be accretive." So if anything, I would like to think that, that yardstick's going up and not down.

Kelly J. Gill

Well, we appreciate your commentary and comments as always. And we reiterate that we have a long-term view for our growth plans for the company. And clearly, looking back from what we said we were intending to do from 2010 and 2011 and '12 and moving forward, we feel like that we've largely executed on all of those plans and we appreciate your comments.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Kelly Gill for any closing remarks.

Kelly J. Gill

Well go ahead and conclude the call now operator. And I want to thank all of our participants for joining in the call today. Thank you and have a good day.

Operator

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

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Source: Diversicare Healthcare Services Management Discusses Q1 2013 Results - Earnings Call Transcript

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