AdCare Health Systems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Adcare Health (ADK)

AdCare Health Systems, Inc (NYSEMKT:ADK)

Q4 2013 Earnings Conference Call

March 28, 2014 10:00 AM ET


Jeff Stanlis - Hayden IR

Boyd Gentry - CEO

Ron Fleming - CFO

David Rubenstein - COO


Jeffrey Cohen - Ladenburg Thalmann & Company

Steve Ryan - City Capital

Mike Petusky - Noble Financial


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AdCare Health Systems Inc. Fourth Quarter 2013 Earnings Call. During today’s presentation all participants will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) I would now like to turn the conference over to Jeff Stanlis of Hayden IR. Please go ahead.

Jeff Stanlis

Thank you and good day. With us today are Boyd Gentry, AdCare's Chief Executive Officer; and Ron Fleming, Chief Financial Officer; as well as David Rubenstein, Chief Operating Officer.

Following the remarks, we'll open up the call for questions. We'd like to remind everyone that this call will be available for replay through April 28, 2014, starting later today. A webcast replay will also be available via the link provided in the Company's press release as well as available on the Company's Web site at

I’d like to mention this call is being simulcast on the Web site along with a slide presentation. If you have not already done so, now would be a good time for you to go to the Web site and download the slide presentation. In addition, the presentation should be available on today's webcast. If you do not have a copy of the presentation, please email me at and I will gladly send you a copy.

For those of you with slides please turn to Slide 2. I would like to take a moment to read the Company's Safe Harbor statement that provides important cautions regarding forward-looking statements. Any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about AdCare's business and the environment in which the Company operates. These statements are subject to risks and uncertainties that could cause the AdCare's actual results to materially differ from those expressed or implied on this call.

Listener’s should not place undue reliance on forward-looking statements and are encouraged to review AdCare's SEC filings for a more complete discussions of factors that could impact AdCare's results. Except as required by federal securities laws, AdCare does not undertake to publicly update or revise any forward-looking statements, where changes arise as a result of new information, future events, changing circumstances or for any other reason.

In addition, any AdCare facility or business the Company may mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities, as well the use of terms like we, us, our, and similar verbiage are not meant to imply that AdCare Health Systems Incorporated has direct operating assets, employees or revenue or that any of the operations are operated by the same entity.

Also, AdCare supplements its GAAP reporting with non-GAAP metrics, such as adjusted EBITDA and EBITDAR. When reviewed together with AdCare's GAAP results, these measures can provide a more complete understanding of AdCare's businesses. This should not be relied upon to the exclusion of GAAP financial measures. A reconciliation of these measures to GAAP is available in today's press release.

After management concludes their remarks, they will entertain appropriate questions [indiscernible]. AdCare reserves the right to curtail any question or statements which are irrelevant to AdCare’s business related to pending or threatened litigation to regulatory or otherwise not appropriate unduly prolonged substantially repetitive questions or statements made by others or related to personal grievances.

Now I would like to turn the call over to Chief Executive Officer of AdCare, Mr. Boyd Gentry. Boyd, please go ahead.

Boyd Gentry

Thanks Jeff and good morning. Let’s go ahead and get started, please turn to Slide 3. First let me review the agenda for this morning’s call. I’ll begin with the strategic and operational update and then I’ll turn the call over to Ron for a more in depth review of our Q4 and full year 2013 financial results. Finally I’ll provide a business update and briefly discuss the few corporate governance matters and then we’ll open the call up for Q&A.

Please turn to Slide 4. This was an important transitional year for AdCare, I am proud of the progress we’ve made and we put several challenges behind us, reduce our operating expenses and we’ve begun to execute marketing initiatives which should result in revenue growth for this year and beyond. Momentum is building as we’re sharpening our focus on multiple channels for future growth and facility level improvements. Our objective is to be the provider of choice for healthcare related services for the elderly in the communities which we serve. We intend to grow our business both organically and through acquisitions.

First, organic growth, we intend to focus on improving our operating margins within all of our facilities. We will do this by increasing the proportion of higher margin services, filling our facilities with private pay skilled and managed care patients while deemphasizing Medicaid where we can. Under the direction of Barry Somervell our new Senior Vice President of Strategy & development we’re actively identifying and reaching out to hospitals in areas where we have an established presence, working closely to meet the changing needs of these acute care providers and strengthening partnerships to build a robust referral pipeline. We will also continue to renew and improve our facilities including adding experienced personnel to help us meet the needs of our referral partners.

Second we’ll continue to evaluate a variety of acquisition opportunities to increase our footprint and leverage AdCare’s expertise and current infrastructure. The acquisitions we made in 2012 began to take hold in the latter part of 2013 and contributed to both the top and bottom-line. Significant opportunity remains in our highly fragmented industry. We paused our M&A activity for 2013 as we took the necessary steps to improve our infrastructure, for the additional financial and operational controls in place and resolve the accounting restatement.

Recently we have begun reviewing our existing M&A pipeline and are in the process of generating specific target opportunities. Along these lines, going forward, we’ll move at a measured pace with our acquisition program to avoid the issues that we have experienced in the past. Finally, we remain focused on cutting cost and improving operational efficiency wherever we can. We have done a good job with this in the last few quarters. The fourth quarter represents the sixth conservative quarter of year-over-year improvement in our financial results. These ongoing efforts to solidify our base business along with improved operational and financial controls will position us well for the integration of future acquisitions.

Please turn to Slide 5. In order to better understand our financial results, I thought it would be helpful to look at a few of the key operating metrics that drive those results. Slide 5 includes an 8 quarter view of statistics, the management team employees to assess our business mix, utilization, and occupancy rate and track our Census.

Through our 2012 acquisitions, we have grown capacity in terms of the number of facilities in long-term care that increasing from just under 3,000 at the beginning of ’12, to approximately 3,700 at the end of that year. Our near-term focus is on optimizing this increased capacity and growing our occupancy rate back into the 80% plus range. It may seem counter-intuitive to have declining occupancy rates in the midst of improving financial results. However, critical to our growth strategy and ongoing improvement, is the mix of patients at each of these facilities.

We’re striving to change the mix of services, to include a greater number of skilled patients, which we define as Medicare and managed-care patients. In a difficult year for the Company where resources were focused on internal infrastructure and accounting issues, we improved this metric slightly from 14.7% to 14.9%, despite his modest improvement we controlled cost enabling us to increase profitability throughout the year.

As previously mentioned we revitalized our style of the marketing activities with the strategic recruitment of Barry Somervell late in the fourth quarter. Barry has launched several tactical initiatives which are already beginning to yield results, which we believe will continue through 2014.

Please turn to Slide 6, and let me speak about our path to profitability. As I mentioned when it comes to business metrics, we focus on two primary indicators which drive our financial performance. Facility occupancy and patient mix. These two metrics are the key drivers of both revenue and profitability. In the aggregate, facility occupancy is important as higher occupancy generally leads to higher revenues and increased leveraging of our fixed cost like rent, interest, property cost, and overheads.

However, within the occupancy numbers, it is crucial to also consider the patient mix, specifically the number of Medicare and managed-care covered admissions as these patients typically support higher rate per patient day, which increases revenues and drives operating profits.

Let me now take a minute and talk a bit about skilled mix. We remain focus on increasing the proportion of higher revenue sub-acute healthcare services delivered at our skilled nursing facilities. Skilled sub-acute patients are quite as profitable on per patient day as custodial residents. Over the last several years we have continued to increase the skilled mix of new facilities from approximately 10% at the time a facility is acquired to over 14% at the end of 2013.

Year-over-year, the proportion of Medicare patients in the mix picked up slightly. However most significant business movement is the increase we realized from recently acquired facilities. We expect further improvements in the mix will be achieved in the coming quarters as our revitalized sales and marketing strategy takes hold across the portfolio. Improving the skilled mix just 100 basis points, could increase operating profit to between $1.8 million and $2.2 million on an annualized basis.

Second is the average occupancy level at our skilled nursing facilities. Average occupancy for the year across all of our facilities was approximately 77%, down from 79% in 2012. Within these numbers, it is crucial to look at the impact from existing facilities versus our recently acquired facilities. And the aggregate, average occupancy at our recently acquired facilities improved more than 6% while our existing facilities average occupancy declined 2%. Some of these decreases during 2013 were self engineered with tighter controls over non-paying Medicaid pending patients, which inflated the late 2012 and early 2013 occupancy figures. Our better control of these Medicaid pending residents reduced bad debt expense throughout the year.

Continuing to increase the occupancy, continually enroll non-medicals in our markets, provides a key leverage point in our operating model. Increasing total occupancy just 100 basis points without changing mix could increase operating profit $750,000 to $1.3 million on an annualized basis.

Please turn to Slide 7. Bolstering our internal growth strategy is ongoing M&A activity, which includes not only strategically targeting acquisitions, but the selective review and disposition of unprofitable facilities. During 2013 we anchored two skilled nursing facilities and as of year-end held our remaining variable interest entity for sale. Apparently, we’re reviewing two of these facilities and one own facility for possible divestiture. These facilities were acquired early in our growth phase and contributed approximately $1.8 million in operating losses in 2013, exiting these facilities will not only bolster our financial results going forward but will also provide additional capacity to finance potential acquisition targets.

In addition, as recently disclosed in the Form 8-K, we made the decision to end our third-party management of eight facilities in Oklahoma. We have been receiving an industry standard management fee of 5% of revenues, which amounted to approximately $1 million in annual management fees. Our total direct cost associated with this management contract was approximately $700,000. However, cash flow issues at the underlying facilities had resulted in delinquent management fees owed to AdCare. We’ve entered into a repayment plan with the owner of the facilities to collect this full amount.

In addition, key AdCare personnel including our COO, our CFO and our Chief Clinical Officer, were required to spend a disproportionate amount of time on these facilities. We made the strategic decision that the nominal profit of managing the facilities was not worth the distraction and our organization would be better served focusing on AdCare own facilities, which leads me to a discussion of our acquisition strategy. As we’ve discussed our growth strategy includes acquisitions of skilled nursing facilities and contiguous to our existing geographic market.

As an industry, senior living is highly fragmented with a large number of small private operators with limited access to capital. These small entities are prime candidates for consolidation. We’re looking at targets that will allow us to leverage our existing infrastructure and purchasing power to increase operating profits by providing more cost effective supplies and ancillary services without compromising quality care for our patients and residents. Our current corporate overhead run rate excluding the one-time cost in project is approximately 8.5% of revenues while the largest companies in our industry average corporate overhead of approximately 5% of revenues.

As we scale we expect to lower our expense as a percent of revenue increasing our efficiency. Additionally, we will be looking at opportunities to further reduce general and administrative cost throughout 2014. We expect to make measurable progress in this regard later in the year and certain contractual arrangements expire. As noted on the slide, newly acquired facilities within our existing geographic market can be brought online at a modest incremental overhead cost of 2% to 3% of incremental revenue. Obviously this will assist in further reducing our overhead cost as a percentage of total revenues.

Moving ahead, please turn to Slide 8. An additional initiative that will strengthen the balance sheet and reduce interest cost is the selective refinancing of facility mortgage debt with lower cost HUD financing, reducing our interest expense can have a material impact on our bottom-line while strengthening our balance sheet and providing additional capacity to support our strategy of growth through acquisitions. We currently have 24 separate facility mortgages totaling approximately 136 million at an average interest rate of 6.6%.

Of the 24 mortgages, 10 are currently in various stages of the HUD refinancing process. The pace at which each of these facilities can be refinanced is influenced by the performance of the facility underlying the loan, the overall queue of financing request at HUD as well as prepayment terms and conditions in the existing mortgages. As each of these refinancing requests are processed and executed, we expect significant GAAP interest savings. Current HUD refinancing terms include interest rates that are approximately 150 basis points lower than the average of our existing portfolio.

Turning to Slide 9, our financial results are already showing the operational progress that we’ve made. We delivered revenue of $56 million a 4.6% increase year-over-year and also note a modest uptick in the sequential revenue on a flat business. The fourth quarter of each year is a seasonally slower quarter in our industry as the electric surgeries and occupancy decisions are often deferred until rest of the holidays. So by all count, the increase in revenue albeit modest demonstrates our progress in integrating acquisition and growing the top-line.

For the year revenues were 223 million, an increase of 14.8% over 2012. Cost of services was down in the quarter to 83.1% of patient care revenue on a year-over-year basis compared to 87.6% of revenue in the year ago period. This improvement illustrates that our cost containment and leveraging of our fixed cost and infrastructure is beginning to take hold. Without a doubt, our operating results continue to improve as momentum builds and we make adjustments to our portfolio and focus on operational improvements. However the results for the year were impacted by the overhang of non-operational non-recurring expenses specifically expenses related to the audit committee’s inquiry along with goodwill impairment charges and expenses related to the Company’s reincorporation in Georgia.

Additionally, the accounting restatement consumed our accounting and financing for half of the year which impacted the timeliness and utility of internal financial reports used to actively manage the business. Going forward we expect our financial results will not be clouded with such significant one-time non-recurring items.

Turning to Slide 10, as you can see, we made significant improvement on a year-over-year basis in adjusted EBITDAR increasing from 2.6 million in the fourth quarter of 2012 to approximately 5.3 million in the fourth quarter of 2013, a more than two-fold increase. We use the adjusted EBITDAR as a key metric to evaluate operational performance. For the year adjusted EBITDAR also increased by approximately $2 million from 17.4 million to 19.4 million for 2013. You can find a reconciliation table of this metric in the press release we issued yesterday afternoon. The results for the quarter and the year reflect the progress we are making in core operations as well as assuring our non-operational issues. The management team is turning our full attention, energies and resources on strategic and operational growth for 2014 and beyond.

I’d now like to turn the call over to Ron Fleming to step us through a summary of financial results for the quarter and full year. Ron?

Ron Fleming

Thanks, Boyd and good morning everyone. Please turn to Slide 11. I will review our financial results for the fourth quarter and full year 2013.

In the fourth quarter of 2013, our revenues increased to 55.6 million, which is up 4.6% from 53.1 million in the fourth quarter of 2012. For the fourth quarter, cost of services decreased, as a percentage of patient care revenue to 83.1% from 87.6% in the prior year fourth quarter, driven by private integration from the recently acquired facilities. As a result, our gross profit for the fourth quarter increased to 9.9 million or 17.8% gross margin compared to $7 million of gross profit or 13.2% gross margin in the year ago period.

Operating income in the fourth quarter of 2013 was approximately 469,000 a significant improvement compared to an operating loss of approximately 1.5 million in the fourth quarter of 2012. Fourth quarter 2013 includes an increase in depreciation and amortization of approximately 583,000 due primarily to the impairment of intangible leasehold rights at one facility. 102,000 non-recurring expenses related to the Audit Committee investigation expense and increased G&A expense.

Within our operating expenses, I’d like to dive a little deeper in to our general and administrative expenses. While flat as a percentage of revenue compared to the year ago quarter G&A increased sequentially from 8.3% of total revenue in the third quarter of 2013 to 9% in the fourth quarter of 2013. This was primarily due to 202,000 expenses related to our annual shareholder meeting and 91,000 in non-recurring expenses related to the reincorporation in Georgia. For the full year of 2014, we expect general administrative expenses excluding non-recurring charges to be approximately 8.5% of total revenues.

The net loss attributable to our common shareholder was 3.7 million for the quarter and included one-time charges of 799,000 of goodwill impairment related to the facility acquired in 2012 and 321,000 of other expenses primarily related to the settlement of a consulting agreement. These expenses were partially offset by non-cash revenue gains of 829,000.

On a per share basis diluted EPS to common shareholders was a loss of $0.24 compared to a loss of $0.01 in the fourth quarter of 2012. Boyd has already mentioned our adjusted EBITDAR results as a key metric for management to evaluate performance and manage the Company. The adjusted EBITDAR margin for the fourth quarter of 2013 was 9.6% compared to 4.9% in the fourth quarter 2012 and a more than two-fold increase. Again, a full reconciliation of this metric to GAAP net income or loss is available in our press release we distributed yesterday.

Please turn to Slide 12 for a review of our full year financial results. Revenues for the full year increased by 14.8% to 222.8 million up from 194.1 million in 2012. Gross profit for the full year increased by 11.4% to 37.2 million up from 33.4 million in 2012. Income from operations for the full year of 2013 was 695,000 compared to income from operations of 2.7 million for the same period in 2012.

The year-over-year decrease in income from operations was due to the Audit Committee investigation expense of approximately 2.4 million. At this point, let me remind everyone about the non-cash derivative that has appeared on the income statement as either a gain or a loss on a quarterly basis effective from 2010 and impacts the bottom-line.

A GAAP derivative gain or loss is always a non-cash item and is related to an anti-dilution provision in our subordinated convertible promissory notes that were placed in 2010, referred to as a rapid provision. According to the terms of those notes, if AdCare issued common equity at prices less than the current conversion price of $3.73 per share, we would then be required to modify the conversion price through issuance so that the holders of those notes would not bear that dilution impact of issuing that new common stock. Even though those notes, which had an original maturity date of October 26, 2013, were extended to August 29, 2014, the anti-dilution provision was eliminated, so there no longer be a derivative gain or loss reported in our financial statements after Q4 ’13. We’ll continue to see and discuss it in the year-over-year comparison but there will be no future impact to results.

The net loss attributable to our common shareholders of 14.1 million for the year and included a derivative gain of approximately 3 million which is partially offset by acquisition cost of 562,000 and one-time charges of 799,000 for goodwill impairment and 306,000 for other expense primarily related to a settlement of a consulting agreement. On a per share basis diluted EPS to common shareholders for the year was a loss $0.94 compared to a loss $0.50 in 2012. Adjusted EBITDAR from continuing operations for the full year 2013 was 19.4 million compared to 17.4 million in the same period last year.

Moving to Slide 13 our balance sheet, cash and cash equivalents at December 31, 2013, totaled 19.4 million as compared to 15.9 million on December 31, 2012. Total debt at December 31, 2013, was 160.3 million compared to 171.9 million at December 31, 2012. 4.7 million aggregate principal amount of the 2010 subordinated convertible promissory notes were converted into shares for the Company's common stock during 2013. We believe we have sufficient funds for our current operations, debt service, and capital expenditures.

The Board of Directors declared a quarterly cash dividend of $0.68 per share on the Company's 10.875% Series A Cumulative Redeemable Preferred Stock, which was paid on December 31, 2013, to holders of record at the close of business on December 20, 2013. The Series A preferred stock is listed on the NYSE market and trades under the symbol ADK.PA.

And lastly, during the fourth quarter, we closed a public offering of 500,000 shares of our 10.875% Series A Cumulative Redeemable Preferred Stock. The net proceeds to the Company from the offering were approximately 11.3 million, which the Company intends to use for general corporate purposes. This further strengthened our balance sheet and liquidity position provided incremental capital from which as you hear our stated strategies of growth and operational improvement.

This completes my summary report and I will stop. For a more detailed analysis, including a reconciliation of non-GAAP measurement, please refer to the press release we issued yesterday.

Now I'll turn the call back to Boyd.

Boyd Gentry

Thanks, Ron. Turning to Slide 14 for an update on the business, as we’ve discussed in the past much of our growth can be attributed to acquiring underperforming facilities and transforming them into market leaders. We now operate and manage through our subsidiaries of total of 38 facilities across eight phase comprise of 35 skilled nursing centers, two assisted living residences, and one independent living housing facility with a total of approximately 4,100 beds and units in service. Of these 38 facilities 26 are owned, nine are leased, and three are managed for third parties.

The facilities are located in Georgia, Arkansas, Alabama, Oklahoma, South Carolina, North Carolina, and Missouri. We expect to grow our revenue and earnings by continuing to acquire additional facilities in new and existing markets. Our criteria for an acquisition includes among other things identifying facilities that are not operating at optimized Medicare centers for reimbursement rate.

Please turn to Slide 15 for a discussion of corporate governance matters. As you can see the Board has taken very specific measured action to strengthen our corporate governance and accountability to our shareholders. First as I discussed in our last conference call, we’ve made changes in the compensation structure for our Board and certain executives. Beginning in 2014, independent directors as well as the chairman, the CEO and certain key executives will substitute options for a portion of their cash compensation specifically Board members will be receiving half of their paying options. Myself and our chairman will take $50,000 worth of our paying options and three of the top executives will substitute a portion of their salaries with option. The net result is a $300,000 reduction in cash expenses. Additionally effective January 1st, we reduced the size of the Board and accepted the resignation of three legacy Board members whose combined Board expense for 2012 was an excess of $200,000.

Second, we strengthened our corporate governance through the recruitment of a new Board member as well as a non-voting Board observer. As many of you know, last fall we added Michael Fox a significant shareholder whose fund Park City Capital own 750,000 AdCare shares. In late 2013, the Board added Brent Morrison as a non-voting observer. Brent brings to the Board a deep understanding of corporate valuation as well as being a shareholder applicant. Both of these gentlemen’s familiarity with AdCare combined with their financial investment expertise will service well.

Finally, turning to Slide 16, let me discuss our outlook for fiscal 2014. As we mentioned in the last call, we believe the time is appropriate for us to start providing guidance. I cautioned listeners that this guidance is based on our best estimates and may change overtime. There were several variables which could impact our results including revenue mix and selective divestitures. This guidance only anticipates our organic results and does not assume any acquisitions. With that said, we currently expect full year 2014 revenue of between 225 million and 250 million representing up to 12% growth compared to fiscal 2013. We also expect year-over-year improvement in gross profit, operating income, and EBITDAR in actual dollars and as a percent of sales.

We believe that these improvements will increase as the year progresses and we begin to benefit from our focus on sales and marketing strategies aimed at our hospital partners. As we scale and as our organic revenue growth strategy takes hold, we should have increased visibility and we hope to provide more specifics in the future about our projected results. For now, we believe our range of revenue and directional guidance on profitability makes the most sense.

At this time, I would ask our Operator to open the call for your questions.

Question-and-Answer Session


Thank you, sir. (Operator Instructions) Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen - Ladenburg Thalmann & Company

Hi, thanks for taking my questions and thank you for the detailed commentary. So, I guess the question for Ron firstly on the G&A, so fourth quarter was high relative to one of those mix with about $0.5 million and that was just a result of, you said $91,000 from what was paid and also the Shareholder Meeting, can you break that out please?

Boyd Gentry

Sure, Jeff. That was 91,000 for the reincorporation cost at Georgia that’s a non-recurring cost and 202,000 for the Annual Shareholder Meeting which occurred in Q4.

Jeffrey Cohen - Ladenburg Thalmann & Company

Okay. The Annual Shareholder Meeting from Q4, okay and you said for 2014 approximately 8.5% would probably be a good number?

Boyd Gentry


Jeffrey Cohen - Ladenburg Thalmann & Company

Okay. On the preferred stock dividend I thought that that was approximately $310,000 for the quarter, so fourth quarter is double and why is that payment from December 31st?

Boyd Gentry

The quarterly dividend on the preferred is the 646,000, $0.58 per share. What you might have missed Jeff was, there was a preferred issue. We increased our preferred stock in the fourth quarter, so number of shares went up.

Jeffrey Cohen - Ladenburg Thalmann & Company

I got it, okay, because it was 310,000 for the first three quarters?

Boyd Gentry

Correct. But we ended up increasing our preferred in October, so there is that out there and press releases out there.

Jeffrey Cohen - Ladenburg Thalmann & Company

Okay. So, we should expect that $646,000 per quarter for 2014?

Boyd Gentry


Jeffrey Cohen - Ladenburg Thalmann & Company

Got it, okay. And then lastly if you could discuss a little bit the mix as far as the patient day mix which is a bit concerning to me on the skilled mix percentages as I look into the past right quarters that that’s continuing to trend sale with 13.8 for Q4. Could you talk about that a little bit and any ramification to that and plans to increase that rate going forward?

Boyd Gentry

Sure and Jeff, good question. The fourth quarter is a lower quarter, the seasonal impact that hits the quarter in the fourth quarter does impact the skilled mix because elective surgeries are deferred, so we do have that seasonal trend that’s going on there. Our investment to bring on Barry Somervell really got started late in the fourth quarter but the right person to answer that question is really David Rubenstein and he is with us this morning. David talk just a little about Barry and that piece of our strategy.

David Rubenstein

Sure, sure. So, during 2013 as Boyd and I were looking at our progress and some of the changes that were happening around us in the industry, we made a determination that we did need somebody with a different skill set than typically we have had in our business versus our strategy and development. And this is with the development of these partnerships that are starting to pop-up with hospitals all over the country and ACL arrangements. So, we went out, and we tried to find somebody that, and this was pretty much new for the entire industry, so we tried to find somebody that understood how strategy and development worked from a nursing home perspective but also from a hospital perspective. And we were lucky to find Barry Somervell. Barry has spent a significant amount of time running on the long-term care side, a very large sales team for one of the larger publicly traded nursing home companies and during that time had started developing some of these types of relationships. He then left that organization and was doing almost the same exact job on the other side of the table for hospitals.

And in addition to working for those two, he spent a significant amount of time working in hospitals, home health, in some of the other ancillary groups. So, he really had just a skill set that we typically don’t see in the business. So, we brought Barry in and asked him to assess where we were and to rather than, we have a group of people right now that are out there pushing as hard as they can. And so what we typically would see is, if the hospital census, of the neighborhood hospital drop then our census drops and that is part of the business. What Barry is bringing to the table are strategies to go out and get the business that we typically don’t get the referral flows that we don’t see. And so what he has done and this is new to most of, if you remember a lot of the facilities we acquire, independent operators that don’t use really any kind of data or information to make their decision.

Barry makes most of the decisions based on data and based on referral information that’s publicly available. So he spends the first couple of months he was here training our teams on how to mine this data and how to strategically pin point exactly where they are going to after referrals and not just make sure we’re getting every referral from the hospital that we have the relationship with but how to walk in and strategically have a conversation with a high level person from hospital that we don’t have a relationship with to find out what their clinical needs are based on their discharge information the information that we can gather prior to coming in and then go back operationally, sit down with myself and our clinical team and figure out how do we get good at what this hospital needs. So it’s not just, this is what we’ve always done but anticipating what the needs of some of these other hospitals are.

And that’s a long process, that’s not something that we can go out and all of a sudden turn on the flood gates and be able to take a whole different type of patient. And there were some things that we were able to utilize immediately and if you look just to give you a sense and as Boyd said typically our fourth quarter in our industry is usually a soft quarter with holidays and folks focusing on other things. If you look at where we were as a Company in December just to give you a snapshot, December 31st, we had 392 skilled residents which would be the Medicare or the managed care to pay at the skilled rate. We averaged in February 440. So we increased that number pretty significantly over the first couple of months that Barry was here, some of it was making sure we’re executing on a low hanging fruit and some of it is what we’re seeing now are some of these relationships that Barry has established with the team.

We’ve really been able to get some traction and see some growth. So we’re very, very excited about it, we’ve seen it in our Little Rock cluster which is strategically one of our most important parts of the Company. Barry has been able to effectuate a huge increase, since December they have increased their skilled census by over 30. And that was the part of the Company that we were really focusing on towards the middle part end of last year our newer cluster. So we’re very excited about what he’s brought to the table and the traction that we’ve been able to get. So Jeff kind of long winded answer there, so some of that makes sense?

Jeffrey Cohen - Ladenburg Thalmann & Company

No that’s perfect David, thanks for the commentary. I look forward to the scope next being affected in the first quarter and beyond, and that does it for me. Thank you very much.

David Rubenstein

Thank you, sir.


Thank you. Our next question comes from the line of Steve Ryan with City Capital. Please go ahead.

Steve Ryan - City Capital

Good morning everyone. A couple of quick questions, what are the drivers behind the guidance that you out there 225 to 250, what are the embedded assumptions that you’re making in occupancy and mix to hit both the low end and the top end with that range.

Boyd Gentry

Yes it’s a good question, let me tell you what really impacts may be the low end right? And because it’s improving obviously it is improving mix and it is improving occupancy but for the low end to happen frankly it’s may be we get lucky in our divestiture activity and we move revenues off sooner from divesting facilities. And if we did that the run rate losses there that we would eliminate the run rate of those losses would actually bring significant profit to the bottom-line. So I don’t while we say it’s a pretty wide range, the reason it’s a wide range is there is over $10 million worth of revenue embedded in those divestitures candidates.

Steve Ryan - City Capital

Got it, okay so if you were to rapidly close on a deal for those three facilities, right the two leased and one owned that you are looking to exit. If that happens sooner than later that would be a $10 million swing and if it happens later it could be de minimis?

Boyd Gentry

Correct, and so we might have lower revenues but higher profits. That makes sense.

Steve Ryan - City Capital

Yes I am a big fan of addition by subtraction. So speaking for those three facilities what is the roadmap to get out of the two leased ones and are you currently marketing the one owned facility?

Boyd Gentry

That’s a great question, we didn’t noticed on one of the lease facilities has a natural lease term expiration that, help me around, I think it’s August, correct. So we’ve given notice on the August facility and frankly we’re in maintenance both there. So trying to the losses there and I would also tell you that that’s a big enough facility is actually a facility that the team likes, it just has too higher rents. So there is always the possibility that the landlord will see his inappropriate rent ways and comes back. So that facility notice is given, we’re in a maintenance mode till August it goes away.

The second leased facility is with a landlord here in Georgia who is needful to allowing us to exit the facility, however this landlord personally is in bankruptcy having nothing to do with our leasehold that we have with them. And so his ability to say yes and go has been an essence and essence, you know, I guess curtailed by the by its personal bankruptcy, we are hopeful, it really got some impact, but we found someone who will be his tenant, pay him the same rent. That makes more sense for this smaller rule facility doesn’t fit our model. But we are hopeful that we can exit that one and I am hopeful we can do that before August. But it doesn’t -- it truly is controlled by this author activity. The owned facility, we are evaluating brokerage proposals right this nano second and I would expect that we would have that facility listed within the next, let’s call it a week. It could take a short amount of time. It could take a long amount of time, to exit that facility. It really depends on what those activities are. But it is still, if the larger piece of the runway losses amongst that million aide, but we are also going into a maintenance mode there to control that lost while we have got it up for sale.

Steve Ryan - City Capital

Okay, it sounds good. And last question is; in bringing back some guidance that you’d discussed in earlier about the 10% EBITDA margins. And what is the road map to get to that don’t want to put you on the spot, but I will. Is that a number that you think is still achievable on a run rate basis at the end of this year? Is it more of a early 2015 target now? Where do you think that -- where do you think you hope that we achieve that, if that’s still on objective?

Boyd Gentry

It’s -- I mean it’s essentially a fair question. When we gave the guidance previously the mix, our mix of the facilities was different. Like we were still at the assisted living business which has smaller revenues and much higher margins than we have today, so there is you know at least 100 basis point swings there. But the -- let me answer it directionally. We expect the profitability will increase throughout the year. And that really is driven by the mix discussions that we have talked. And frankly if to the extent that we turn the acquisitions back on, that will dilute it. But the profitability will increase. I think it would be appropriate for me to tell you it is probably not a ’14 event. But we will make progress towards that end as we move through the year.

Steve Ryan - City Capital

Okay alright thanks so much for the color.

Boyd Gentry

You bet.


Thank you. Our next question comes from the line of Mike Petusky with Noble Financial; please go ahead.

Mike Petusky - Noble Financial

Yes, good morning. I guess I want to follow-up on from the earlier questioning, what does success look like, if you can quantify it at all in terms of skilled mix, in terms of skill beds, I mean anything that’s like -- as we look over ’14 and then ’15, I mean what I think five to six you have kind of -- you’ll rather use to get 100 basis points improvement in occupancy or skilled mix if you have, kind of what could flow through to the operating line. I mean what does success look like say in ’14 and ’15 relative to those metrics?

Boyd Gentry

Let me give you, once again, it’ll be a bit directional, but hopefully it’ll be more color that you can grasp Mike. Once again obviously it depends on how fast our really cultural changes occur. So let me give you some, maybe our little bit deeper dive, building on really David’s comments. It’s not just data and training and teaching our teams to be better marketers. I don’t want to diminish that. But we also have had to and will continue to need to make additional physical property plant investments in our facilities, and in that regard over the last six or nine months we have spent several million dollars improving what our -- I mean I will stop, I heard, I could rattle off, you know five facilities, a little one cluster outside of West Markham. You know West Markham was a foreseen shape but the other three facilities that we acquired to really complete that cluster needed significant physical plant improvements before they could realistically compete and enroll those patients.

And literally three of the sub-acute sections of those buildings have recently come online. We are spending $1 million right now in Oklahoma City on a ideally positioned facility, that’s been kind of a very, kind of a historical legacy, but good neighborhood in Oklahoma City, and we have got some physician partners that have said, hey, when you open -- when you reopen, we literally going to shake off that building down back to the occupancy point. We have had took folks out of that facility so that we can renovate it. And we’re getting to be a large enough company where what happens to one building kind of doesn’t necessarily dilute the entire company. But if you take 50 or 60 beds offline in a facility, it becomes unprofitable or more unprofitable, while you build it.

In addition to those physical plantings, which we now think we’re going to continue to make those investments that the big ones are behind us. As an example in Little Rock and this is stuff that’s kind of come out of the Somervell deep dive into that Little Rock marketplace where by the way he is meeting with people at the three large acute care providers at Little Rock and the feedback that Rubenstein and I are getting from these meetings are things like one of the heads of post acute strategy for one of those hospital systems literally pulled Barry aside after their meeting, I won’t tell you which hospital and kind of said so Barry you have this job, Barry have this job at a top 10 market, the biggest hospital system in San Antonio [Bandit] where he was literally have this guys job and this person at this hospital pulls Barry aside and says how do I do this.

So he is the partnership and the share of mind that’s coming there is terrific but this next piece of investment is as an example in Little Rock we’ve just hired a transitional care nurse a very specific nurse focused on a very specific program that we’re installing at the request of hospital. So we’re also looking at realigning with several of the hospital list which would be physicians that work for the hospitals that will now become on-medical directors of facilities. So all of these kind of chest piece, it isn’t I wish it was as easy as here is the program go set the lever but it’s really an intuitive process. So as those things take hold that skilled mix will go up.

If we look at -- and so this will be longer term I do not want to suggest this is ’14 but if you at the public companies out there the recently companies and where ’14 in change the lap large company that no longer is out there but some was in 18%, 400 basis points higher than us. Skilled is in the low 20s. Ensign who is currently best in class is in -- it is a high 20s or low 30s. There is no reason that especially those facilities which we have which are focused on this strategy which will never be all of our ability so we’ll always be regional or rule buildings that don’t fits them all but the buildings that we’re focused on here which is it’s a third of our portfolio there is no reason that those buildings can’t get well into the 20s which will pull that ’14 up.

And so there is also a reason that we shared with you what a 100 basis point is worth that we wouldn’t -- so do I believe that we can get the 100 basis points this year, yes. Can we get 400 basis points this year, I truly like to hope so and we’re incredibly excited about it but I don’t think we can move it that much this fast but longer term there is no reason we can’t. I’m sorry for the long answer to that give you some help though.

Mike Petusky - Noble Financial

Yes. So are you essentially then saying, hey look if we’re not clicking along between 15% and 16% as you enter ’15 essentially you wouldn’t have met your own internal hurdle rate. I mean is that fair?

Boyd Gentry

I think the 15 is clearly fair. And the other piece of it is we’re going to keep pushing other people of the cost model overhead and I’ll give you we’ve got a base run rate that we’ll work in Ron and I are beginning to look at opportunities on the corporate overhead side. I mentioned in my prepared comments and it may be just might have fallen over the top because I’m sure you guys were, when is he ever get a stop mode we outpost the IT of this company when we started building the platform. It was the right decision to take what is a piece of the strategy that doesn’t necessarily create revenue and earnings but you got to have it right or fast things happen, right, so we outsource that.

The contract that we entered into we’ve now entered into an amendment which allows us in the second half of the year to either rebid that process or take specific thesis of our IT strategy back in house. We think we can save a few bucks there, and that would be nice but also we think whatever we do we’re going to get better productivity for our field folks out of it. I want to give you one more thought that I think will help you a bit too so not only is it mix but the other thing that we think we’re poised to take advantage of a bit is rate. And so David you’re probably the best person to answer this question on the Medicare rates by talk about our strategy to take point of care to next level.

David Rubenstein

Yes, we, primarily from Medicare and in some of the states that we operate in Medicaid, we get reimbursed based on documentation that a certified nursing assistant completes on a daily basis, and in most facilities if the manual process, which leads to errors and omissions. Over the last few months we’ve been testing an automated system which utilizes touch screen kiosk that are on the walls and as the nursing assistant completes their care for resident they walk out of the room, they hit a couple of buttons on the kiosk and that way they don’t forget that they did something for the residents. And so we have a more accurate documentation and that translates into a higher rate.

We roll this out in four facilities and the results that we’ve gotten have ranged anywhere from $25 a day increases per resident up to $70 a day, on average and – I’m sorry -- not for the resident, per facility. So, we’ve seen pretty significant increases and we’ve been able to track that C&A’s are being more accurate in what they’re doing. We’re in the process of rolling that out everywhere. If you take the low end of that the $25 based on where we are now, we’re looking at over $2 million of improvements if the same types of improvements were seen across the portfolio. And we are -- our plan right now is to have those kiosks rolled out into every one of our facilitates in 2014.

Mike Petusky - Noble Financial

Thanks. I’m going to go on the total issue of the mix one more time, and then I’m promise I’ll get off it. So, Boyd, so in average skilled mix in ’13 for the year was 14.9%, up from 14.7% the year before. I understand that the fourth quarter, which is a seasonally poor quarter with 13.8% but when you’re saying 15% that implies 10 basis points of improvement for the year, which is considerably different than the 100 basis points improvement that you put in the slide and I just want to kind of reconcile those two things.

Boyd Gentry

This is a good time in the year, right. And if you take the numbers that David gave you earlier, we’re running close to 15% right now. And that’s without a change in strategy i.e. Somervell that 15% will go down throughout the year and up throughout the year. But with Somervell we believe that we can set higher loads if that make sense and move that number up. So, where do we get for the entire year, I would tell you that we always aggressively budget census, it’s just kind of our industry but it’s also our culture. If we achieve our internal goals, which frankly we want, I mean everything would have to hit it perfectly to hit those numbers. But if we did, we make, we’re well over 100 basis points high. So, I think giving the guidance that we did and setting it at 100 basis points is not an inappropriate beginning assumption for this year.

Mike Petusky - Noble Financial

Okay, and then just a couple of quick ones for Ron. So, given your refinancing I guess activity, what would be a fair way to model quarterly interest expense going forward, I mean it is 3 million a quarter a decent way to model this going forward or how should we think about this?

Ron Fleming

In terms of GAAP interest, yes, that’s appropriate range. We will make some progress going forward, we have some convertible debts that converted in January and we which we have in 8-K at in was also that Boyd talked about some HUD activity which will pick up in the later part of this year. But for now the $3 million has been proper range for GAAP interest.

Mike Petusky - Noble Financial

Okay. And then just share count, average share count for ’14?

Ron Fleming

We’re going into probably about 17.5 million is what we’re running currently.

Mike Petusky - Noble Financial

Okay. And so, you are saying okay about 17.5 million in the first quarter?

Ron Fleming

Yes, I’m not sure we’ll average it, that’s where we are at currently.

Boyd Gentry

Mike, there is some other small things around the edges that we’re absolutely committed to reducing debt and we actually have this first quarter of it. But the other things we’ve got going on and Ron is doing a great job of this is you see a significant amount of restricted cash on our balance sheet that’s really cash collateral against mortgages and the bank from Watson to pay we’ve gone to several of our banks that hold that and those debt, we hate the negative arbitrage take what’s target where we can get out to HUD, let’s do the HUD refinancing earlier and let’s take the negative arbitrage out of the balance sheet. And we’re closed on taking a couple of million, several million dollars of debt loss. It will I mean, it could even $5 million or $6 million here pretty quickly than we can get off. That’s out of 136 million -- 131 million of mortgages, that doesn’t dial a lot but it’s incremental and it’s positive and it reduces interest cost and it lowers our debt. So, we’re working on it.

Mike Petusky - Noble Financial

Okay. So, on the 10 mortgages that are in the re-financing process, do you expect all or most of those to be refinanced in ’14?

Boyd Gentry

Yes. I don’t see why they don’t, the queue is -- they’re entering -- the queue -- they should be out in the fourth quarter.


Thank you. We have completed our available time for question and answer. I would now like to turn the call back over to management for closing remark.

Boyd Gentry

Thank you and I apologize for running a long here. I hope you can see in our comments that we’re extremely enthusiastic about where we’re and we’re focused on accelerating our organic growth and optimizing our facilities to position us for long-term sustainable profitability and increasing shareholder value. We appreciate your interest in AdCare, and I look forward to providing you with additional update as we progress to 2014 and beyond. If you have any further questions, please reach out to Ron or myself. Thank you, and have a good day.


Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

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