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Diversicare Healthcare Services (NASDAQ:DVCR)

Q4 2013 Earnings Call

March 07, 2014 8:00 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

Will Edwards Settle - Woodmont Investment Counsel, LLC

Operator

Good morning, and welcome to the Diversicare Healthcare Services fourth 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 call 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 statements disclosures the company has provided in its annual report on Form 10-K for the fiscal year ended December 31, 2013, as well as in 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 10-K -- sorry, 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.

Despite it being a challenging year, I'm pleased with how we ended the year on such an upbeat note and with significant momentum. After many quarters of transition, our fourth quarter reflects the impact of the various changes and shifts we've made to our facility portfolio in the past couple of years. My goal today is to give you a good sense of the status of the company and its positioning for profitable growth in the future.

Since beginning our acquisition and development phase in late 2011, we have added 14 new facilities to our portfolio while at the same time divesting of 12 challenging facilities in Arkansas. This combination of acquisitions and divestitures has significantly changed the profile of our portfolio, and we believe that our fourth quarter financial results provide a view of where the company is heading from both a financial and strategic point of view.

To put all these changes in perspective. We now operate 48 facilities, net of the divestiture of the 12 Arkansas facilities. Before we began our portfolio restructuring in late 2011, we operated 46 facilities, including the 12 in Arkansas. Not only have we replaced the revenues of the divested facilities, we have also improved our margins and profitability. We are understandably proud of this accomplishment and want to acknowledge the support of our strategic partners and the professionalism and dedication of the Diversicare management team. So as we move forward into 2014, geographically, we look quite a bit different having entered Indiana and Kansas while also increasing our presence within our current footprint, as seen by the additions in Ohio and most recently, in Alabama. From a risk mitigation standpoint, when we consider the additions of these favorable markets and the exit of Arkansas, our risk profile has improved.

As I have previously reported, we've made significant investments into developing a highly adaptable and scalable operating platform and believe we now have an industry-leading ability to efficiently and effectively integrate newly acquired facilities while controlling G&A expense. As demonstrated by our results to date, our acquisition pipeline continues to develop nicely, as do our relationships with existing and new strategic and financial partners. At the end of last year, we set a long-term goal to double the size of the revenues of the company over the next 5 years, and we believe we have the management team, corporate infrastructure and the financial support necessary to accomplish this goal. And as we move the company forward, we will maintain our focus on improving the provision of quality care to those we serve.

Now reflecting on our financial results, I think our fourth quarter demonstrates the improvements we've made and sets the stage for further improvements and growth in 2014. At the top line, we reported revenues of $81 million, an increase of 28% year-over-year. This revenue growth was realized despite the impact of sequestration, which reduced our Medicare rates by 2%, then the broader utilization and mix headwinds that have been working against the industry. I'm also pleased to note that, related to our acquisitions and new facility openings, we continue to make great progress with our integration activities, renovations and improvements in occupancy in newly acquired facilities.

In terms of operating expenses during the quarter, what I'm additionally proud of is that our facility-level operating cost as a percent of revenue essentially remained constant versus a year ago. This is a tremendous testament to our management team and the performance of our operating platform. Additionally, this demonstrates our ability to integrate a significant number of new facilities without compromising our focus on maintaining efficient ongoing operations of our existing facilities. I'll also point out that our fourth quarter facility-level margin was the best of the year.

Our G&A expenses also compared very favorably to 2012, declining by 40 basis points as a percent of revenue. The marginal increase in G&A associated with our revenue growth was 4.9%, which is significantly below our overall G&A load. This clearly demonstrates how new growth drives significant benefits of scale in this area.

So overall, the combination of our revenue growth and expense control have generated a meaningful year-over-year improvement in our profitability.

For the fourth quarter of 2013, our operating profit was $1.2 million versus a loss of $300,000 last year. Our adjusted EBITDA was $3.7 million, well more than double the $1.4 million we reported last year, and the highest level in my tenure as CEO. And our adjusted EPS improved to $0.02 compared to a loss of $0.16 in 2012.

As we enter 2014, we will build upon the success we've seen so far by the continued focus on the growth of our portfolio. Earlier this week, we announced the acquisition of a new facility in Huntsville, Alabama through the assumption of a lease. Big Springs is our third center in the city and has become a cluster market for us in Huntsville. The new facility has 135 beds and is favorably located near an acute care hospital in the heart of Huntsville. We expect it to generate in excess of $10 million in annual revenues and roughly $1 million in annual EBITDA once integration is complete. As a result, we expect this acquisition to be accretive to earnings this year.

As an aside, we will integrate Big Springs into our existing operations without any increase in our G&A load. This is just one clear example of how we are driving efficient operating leverage into the company without any compromise on the performance of our systems or our focus on the provision of quality care. There is no question that the challenges of the current market environment are becoming increasingly difficult for smaller operators to cope with. As a result, this creates an opportunity for consolidation, and we intend to take advantage of the opportunities to drive growth.

I also want to emphasize that while we're very happy with our fourth quarter results in terms of the progress we've made, we are, by no means, done. I believe we've placed ourselves firmly on a path towards greater profitability and continued growth, but we will continue to focus aggressively on all aspects of these pursuits both internally and externally.

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

James Reed McKnight

Thank you, Kelly.

Our fourth quarter results were fairly straightforward from a financial perspective. We did make 2 adjustments to our GAAP results in the EBITDA and EPS that Kelly discussed. One was to exclude the restructuring expenses in discontinued operations that reflect our Arkansas disposition. These amounts can be seen clearly in our financial tables. The other was to exclude expenses related to CHP acquisition of about $100,000, which you'll see in our reconciliation tables for adjusted EBITDA, adjusted net income and earnings per share.

At the top line, our reported revenue increased by $17.9 million or 28.2% to $81.4 million. Of this increase, our recently acquired CHP facilities in Indiana and Ohio contributed $9.2 million in the quarter. Our Kansas facilities acquired early in -- earlier in 2013 contributed $5.7 million, and Seneca Place in Louisville contributed $2.2 million in our first full quarter of operating that facility. The 3 facilities we opened -- or acquired in 2012 at Highlands, Clinton and Rose Terrace also contributed $1.6 million in incremental revenue over last year's fourth quarter.

Due to the changes in our portfolio over the past several quarters, our same-store metrics aren't as relevant since they reflect only a portion of our overall portfolio. That said, we did see a modest decline in same-store revenues of about $800,000 versus the last quarter of 2012. This decline is primarily driven by decreased Medicare and Medicaid census, a reflection of the broader environment headwinds that Kelly mentioned. We also saw a reduction in our Medicare rate as a result of sequestration, but rate improvements from Managed Care and Medicaid helped to offset a significant amount of the census and Medicare pressure we saw on a year-over-year basis.

At the operating expense line, our overall expense increased by $14.4 million or 28.6% compared to last year. This increase was commensurate with our overall revenue growth.

Our professional liability expense for the quarter was $1.7 million, down $800,000 from 2012. I'll caution that, as many of you are likely aware, this has been a volatile expense number for us in the past, but I'll also point out that we believe our facility portfolio has an improved risk profile as a result of our repositioning.

G&A expense increased by $884,000 on a $17.9 million revenue improvement to $5.2 million from last year. As a percentage of our revenues, however, G&A expense decreased from 6.8% to 6.4%, demonstrating the continued operating leverage we're generating against our corporate infrastructure.

Finally, lease expense increased 24% to $6.2 million, reflecting the additional lease costs associated with the newly added facilities in Kentucky, both Highlands and Seneca Place, and the CHP facilities. Interest expense also increased by roughly $300,000 to $1 million, reflecting the refinancing and expansion of our credit facility associated with the Kansas acquisition earlier this year.

On an adjusted basis, which excludes the items I mentioned earlier, our EBITDA for the quarter was $3.7 million compared to $1.4 million in the fourth quarter of 2012.

For the quarter, net loss attributable to shareholders was $678,000 or $0.11 per share compared to a loss of $1.2 million or $0.21 per share last year. On an adjusted basis, we reported net income attributable to shareholders of $146,000 or $0.02 per share for the fourth quarter of 2013.

I'd like to make a couple of brief comments on our balance sheet before Kelly's closing remarks.

Cash at the end of the quarter was $3.8 million compared to $5.9 million at the end of 2012. The decrease is largely a result of timing of cash payments and the results of the change of ownership process for Seneca Place and the 4 CHP facilities we assumed in late 2013. At the end of year, we were not yet able to bill either Medicare or Medicaid to these 5 facilities. Since the end of the year, we've received some of our approvals, but due to the slowness of the CHOW process, we are likely not to be able to begin billing for all of these services until next month. We had $3 million outstanding on our revolver at year end compared to $5.1 million of outstanding CHOW receivables. Both the outstanding revolver amount and CHOW AR will have grown by the end of the first quarter.

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

Kelly J. Gill

Thanks, Jay.

As our current quarter results indicate, we have reached a significant milestone and inflection point of performance and profitability which, I believe, serves as a solid foundation from which we can continue to grow. And of course, none of this evolution would be possible without the dedication and hard work of our Diversicare professionals and, most importantly, the loving and compassionate care they provide to those we have the honor to serve.

So with that, I want to thank you for your time, and we'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is with Will Settle with Woodmont.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Just a few questions. On -- in the press release, you mentioned the wages and the improvement there, 300 basis points year-over-year and 100 basis points from the third quarter. Can you tell us what's behind that? And just trying to understand if that's a sustainable level that we could expect to see.

James Reed McKnight

Yes. It's Jay. Thanks for participating this morning. As far as the sustainability of it, look, there's some seasonality to our business. A lot of what we saw in the fourth quarter, you're talking about operating expense there. A lot of what we saw is just the timing of when we have patients and residents in our facilities. We did see an improvement in the fourth quarter. We repositioned the company some, which we've been pretty vocal about, and that was a -- one of the large results of the portfolio management we've done and the changes of what we've done in some of our field infrastructure.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Yes. I think one thing you mentioned in the K was outsourcing services that historically you haven't outsourced. I mean, how much of a contributor has that been?

James Reed McKnight

I'll apologize. I don't have the exact number in front of me, but there's a -- some of the housekeeping and laundry positions that have been outsourced to a company that specializes in that. And we've been able to leverage a very good company there and do well by that.

Kelly J. Gill

Yes. And Will, I will add to that, that on a net basis -- between from outsourcing those positions to a third-party contractor, we believe that, on a net-net basis, that's still an efficient -- and there's no unwarranted additional costs there. So you can do that as an efficient transfer of those responsibilities without unwarranted additional costs.

Will Edwards Settle - Woodmont Investment Counsel, LLC

And then G&A line, $5.1 million. That's, I think, as low as it's been in some time. Again, was there anything unusual in the fourth quarter, days, reverse -- like, bonus accrual reversal or anything, that pushed that number down? Or is that kind of a level we could expect to see?

James Reed McKnight

See, I knew you'd ask that question because you asked me the same question in the fourth quarter last year. Look, there wasn't anything unusual that affected the fourth quarter. We were able to bring on $18 million of revenue with a very small incremental percentage -- or G&A, I think it's 4.9% is the number Kelly threw out there on that. It is a good basis point. There will be fluctuations through this coming year from time to time, but there weren't any unusual hiccups in the fourth quarter that artificially decreased that number, if that's what you're asking.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Yes. No, I'm just, for modeling purposes, trying to think through what G&A looks like. I mean, I think in the third quarter, it was as high as 6 -- I'll say, $6.1 million; before that, $6.4 million; before that, $6.2 million. And now we're at $5.17 million. So -- yes.

James Reed McKnight

Yes. You have to remember that there was a little bit of change related to Arkansas. Also we did disclose that there have been some items that have been shifted slightly from operating to G&A as we reposition those. So -- but yes, it's a good starting point for you this year.

Will Edwards Settle - Woodmont Investment Counsel, LLC

And then you talked about transitioning some of these newly acquired facilities and just AR accumulation there. Is something unusual going on? I mean it seems like, I guess, some of these facilities we've had now for almost 6 months. And if you can talk about your comfort level? And in what way may we have gotten kind of -- since the end of the quarter that would help the working capital there?

James Reed McKnight

So the way it works is we go through a process, it's about a 4- or 5-step process. And I won't bore you with the details, but basically each regulatory body has, call it, 45 business days to do their piece of it. And whenever we have these facilities that were going through the CHOW process through both the Thanksgiving and Christmas holidays, there's a little bit of a delay that happens there. In the past, when we had the 5 facilities in Kansas, candidly, Kansas was a little bit faster state to get that done, and that was on a much smaller revenue basis. We've said publicly that we expected Kansas to be about $24 million of revenue versus the Seneca and CHP facilities that are in the CHOW process now. We said in the last quarter that they would be greater than $40 million of revenue. And if you do the math real quick, they were $11.4 million total this time, so that's closer to a $45 million run rate. So it's a function of the number of facilities we have go in, a little bit of the holidays. We have seen some good movement in that. And now we're just waiting on our billing numbers. So we're -- we don't feel anything crazy. We don't think -- again, we don't believe that we will be able to begin billing all of that by the end of March. We think we will begin billing it in April, just based on when they're telling us we're going to get our actual numbers. So we will see an increase in that CHOW number by the end of the quarter.

Will Edwards Settle - Woodmont Investment Counsel, LLC

And you're comfortable from a working capital balance sheet standpoint kind of carrying that load another quarter...

James Reed McKnight

Well, it won't be another full quarter. It will carry into the next quarter, but yes, we're comfortable.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Okay. What -- one thing that really struck me between the third quarter and the fourth quarter is just the size of the improvement. Obviously, the big change, I guess, was from a facility portfolio standpoint -- or the -- the Ohio facilities, were they just that positive? Or did you see some improvement in Kansas, which it sounded like it was a bit of a struggle in the third quarter for you? Just thinking about the acquisition, recent acquisitions you made, and how they may or may not be contributing.

James Reed McKnight

Well, the CHP and Seneca facilities, CHP came on at 10/1. We feel really good about that. The Seneca facility had come on in the third quarter, but this was the first full quarter that they've been on. We saw improvement there. And additionally, the Kansas facilities did improve. Candidly, they did improve. I don't remember exactly what the revenue number was in the third quarter of the year, but there was improvement into the fourth quarter.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Right. So I think it was $5.8 million and $5.7 million, but maybe the profitability is...

James Reed McKnight

Yes, the profitability was an area of improvement, I believe.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Okay. And then Kelly, maybe a strategic question for you. You made the comment again, a goal of doubling the company in 5 years. Is that doubling after you divested the Arkansas facilities? Or is that doubling kind of at the time post you brought on the Catholic? Because Kansas was maybe done or, I guess, Ohio was announced maybe when you announced the divestiture of Arkansas. I guess, what facility number are -- do you plan to double off of?

Kelly J. Gill

Yes, that's a great question, Will. And good morning. The kind of the timing on that is it is after we divested Arkansas, but the growth of Kansas and everything that's come since then would be part of that what we would consider to be the part of our growth in -- towards that metric.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Sure, sure, no, that makes sense. Okay, just wanted to clarify that.

Operator

[Operator Instructions] Our next question is from Al Chapman [ph] with -- he's a private investor.

Unknown Attendee

Let me ask you a question -- a couple of questions. You say you're going to double -- hope to double of revenue or size of the company. How much of that will come organically? Or is it mostly from acquisitions?

Kelly J. Gill

It is for -- obviously for that level of growth, we always look for organic improvements in our business, but we see that as to -- ultimately [ph] all in acquisition. And so with that, I would just kind of like to highlight and say that we really see that our focus is we'll -- for we -- to the degree that we're able to and we have good opportunities, we're looking forward to piece [ph] simple transactions. But also our ability to lease properties then, as we've demonstrated with many of the facilities we've had so far, that we see that as another highly viable means to support our growth. And then if you look at what we've done with the additions of Rose Terrace, which was a de novo property, we -- Clinton was a closed facility that we reopened. Kansas was all of these simple transactions. And everything else that we've added has all been lease -- step-into leases, which didn't require any growth capital for those transactions. And so having accomplished all of those, not only in completing those transactions but the integration of those properties, that gives us a strong sense and reason to believe that we can accomplish those goals.

Unknown Attendee

To take that a step further, I know it might be hard to do this question [ph] since there's are no longer an apples-to-apples comparison. What would be your -- if you can do that, so where was your occupancy, and how would you grow, where it was last year relative and where it might be this year. And I know it's hard to compare versus a different property.

James Reed McKnight

Yes, it really is hard to compare, Al [ph]. And occupancy, Kelly has mentioned a couple of times, it's been a challenge nationwide. And we've see that with a lot of our peer group. Just to give you just kind of a quick refresher. What we disclosed, 81.1% was the occupancy at the end of the fourth quarter of last year versus 80.3% at the fourth quarter of this year. As we grow these new facilities we've added, we'll learn more about what we can expect from those local markets. And we'll obviously continue to do the best we can to keep serving as many patients as possible.

Unknown Attendee

So if you're down in the low 80s, isn't really the leverage is to really increase the occupancy in the ones you have already under management? Is it -- is that...

Kelly J. Gill

Yes, and first of all, just want to -- this is Kelly. I want to just point out that I believe -- correct me if I'm wrong, Jay, but I believe we report our occupancy on all licensed beds.

James Reed McKnight

On all available beds.

Kelly J. Gill

Yes, on available beds. That's not necessarily -- I don't -- I'm not sure that's universally applied across all reporting entities, but yes, it -- to the degree that we have excess capacity, we obviously look to fill those beds as best we can.

Unknown Attendee

And when you gave up or -- got out of Arkansas, obviously there were some professional liability cases or legacy cases that followed you. How much of today's $1.7 million, I think was the number, are still relative to Arkansas? And are the new facilities -- that going forward, are these states less litigious than Arkansas, which was off-the-charts litigious?

Kelly J. Gill

Off the charts, I like that one. Thanks for characterizing it that way. The $1.7 million is related to our continuing portfolio. Anything that's related to Arkansas, for any of its line items, actually is down in the discontinued operation section -- segment, which we won't -- nobody dived into everything that's within that. So the $1.7 million is on our base of business right now. We've said publicly we believe -- it's caution, it's an ever-changing number, but we do believe that we've improved the risk profile of the company.

Unknown Attendee

And finally, I think it's not a secret that you guys have not been too friendly every -- to your stockholders. How are you going to improve that?

Kelly J. Gill

No. We certainly don't believe that premise at all. And I would take obviously the opposite position. I think we've been extremely friendly and open to our investors. We have been transparent all the way start from an -- from the start of -- well, at least when I joined the company, for sure, in early of 2010, when we developed our first strategic plan. We have been articulating that plan through these calls and other means from the very beginning. I think now, to make the most specific point, that clearly if you look back and you were to track the comments that we've made all the way from that period today, we have made substantial traction and followed -- with our stated goals and we've followed a -- the plan virtually to-script that we've communicated. So my premise is that now we can look back over 4 years. And my belief is that investors can look at us and say, "You know what, they said here's what they were going to do. They've accomplished those goals, they haven't deviated from their script. And now they're reaping the fruits of all of those plans that they've laid to date." So that would be our point of view.

Operator

And we do have a follow-up question with Will Settle with Woodmont.

Will Edwards Settle - Woodmont Investment Counsel, LLC

Yes. Can you give us any color? We're 2 months into the first quarter. Obviously, a public forum here. Just how are things progressing? It's the first time we've seen this level of profitability in a while. I'm just very interested in kind of the outlook for 2014 and how we're starting off on the year.

Kelly J. Gill

Well, obviously, Will, we don't offer any form of guidance, and so we're hesitant to do that. I'm pleased with what I'm seeing industry-wide. And so with that, we're guardedly optimistic and we're excited about where we're headed through the year.

Will Edwards Settle - Woodmont Investment Counsel, LLC

But did -- I guess there's been a lot of discussion around weather and how it's impacted different businesses. How did it impact you all in January and February?

James Reed McKnight

Yes, no, well, I mean it's -- Will, look, we ended the fourth quarter on a positive note. We're focused on that. We're focused on carrying it forward the best we can despite some industry headwinds.

Will Edwards Settle - Woodmont Investment Counsel, LLC

And then just finally, I will say just in some response to the maybe comment the other caller made, that I agree that transparency in filings and press releases and responsiveness has been very good and I appreciate that. And just kind along those lines, kind of where we are, maybe the next phase, maybe it's time to revisit this poison pill that we have in place just to kind of take that shareholder friendliness to another level. So anyway, I'll leave it there, and congrats on the progress.

Kelly J. Gill

Okay, thanks, Will. I -- we appreciate it.

James Reed McKnight

Thanks.

Operator

I'm not showing any further questions at this time. You may proceed with any closing remarks.

Kelly J. Gill

Okay, operator, thank you. Let me thank all of you for joining our call today. We appreciate your time. And with that, we'll go ahead and close the call.

Operator

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

Kelly J. Gill

Thank you. Bye-bye.

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