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AdCare Health Systems, Inc. (NYSEMKT:ADK)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 ET

Executives

Brett Maas - Hayden Investor Relations

Boyd Gentry - Chief Executive Officer

Ron Fleming - Chief Financial Officer

David Rubenstein - Chief Operating Officer

Analysts

Jeffrey Cohen - Ladenburg Thalmann

Mike Petusky - Noble Financial

Operator

Ladies and gentlemen, welcome to the AdCare Health Systems Inc. First Quarter 2014 Earnings Conference Call on May 8, 2014. Throughout today’s presentation, all participants will be in a listen-only mode. (Operator Instructions)

I will now hand the conference over to Brett Maas. Please go ahead sir.

Brett Maas - Hayden Investor Relations

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 their remarks, we will open up the call to questions. We’d like to remind everyone that this call be available for replay through June 8, 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 website at www.adcarehealth.com.

I would like to mention that this call is being simulcast on the website along with a slide presentation. If you have not already done so, now would be a good time for you to go to the website 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 brett@haydenir.com and I will gladly send you a copy.

Please turn to Slide 2. I would like to take a moment to read the Safe Harbor statement that provides important cautions regarding the 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 AdCare’s actual results to materially differ from those expressed or implied on this call.

Listeners should not place undue reliance on forward-looking statements and are encouraged to review AdCare’s SEC filings for a more complete discussion of the factors that could impact AdCare’s results. Except as required by the 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 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 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 the remarks, they will entertain appropriate questions regarding the presentation. AdCare reserves the right to curtail any questions or statements which are irrelevant to AdCare’s business related to pending or threatening litigation, derogatory or otherwise not appropriate unduly prolonged substantially repetitious 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 - Chief Executive Officer

Thanks, Brett. That’s kind of a mouthful that you just gave a start. 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 will begin with a strategic and operational update and then I will turn the call over to Ron for a more in-depth review of our 2014 Q1 financial results. And finally, I will provide a business update and then we will open the call up for Q&A.

Please turn to Slide 4. The first quarter was a solid start for AdCare. Building on the transitional year we just completed and I am encouraged by the continued progress we showed. We continue to improve facility level operations. We have reduced our operating expenses, which drove incremental profitability on the EBITDAR. – on an EBITDAR basis and we continue to move toward positive net income. Our recently launched marketing initiatives show promise for revenue growth later this year and beyond. This performance was achieved despite some severe winter weather that hampered our results. Without the two winter storms, our EBITDAR would have been even higher. Clearly, momentum is building.

Specifically, we are focused to filling our vacancies with skilled and managed care patients, while selectively emphasizing Medicaid in certain primarily rural markets. As I have mentioned previously, Barry Somervell, our new Senior Vice President of Strategy and Development is actively identifying and reaching out the hospitals in areas where we haven’t established presence, working closely to meet the changing needs of these acute care providers and strengthening partnerships to build a robust referral pipeline. In a few moments I will talk about our progress in Little Rock which has been driven by Barry’s involvement. Issues like CMS’ new penalties to hospital for readmission are focusing hospital administrators to change the way that they operate. We will also continue to renew and improve our facilities including adding experienced personnel to help us to meet the needs of our hospital partners.

Simultaneously we will continue to evaluate a variety of acquisition opportunities to increase our footprint and leverage the current infrastructure and expertise. 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, but additional financial and operational controls in place and resolved the accounting restatement. Recently we began revealing our existing M&A pipeline including the identification of new targeted opportunities certain of which we began, we can close during the second half of 2014.

Finally, we remain focused on cutting costs and improving operational efficiency wherever we can. We have done a good job of this in the last few quarters. 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. As I will discuss later in the call we are executing on a restructuring program that will take meaningful costs out of the business over the next few quarters.

Please turn to Slide 5, key operating metrics. In order to better understand our financial results, I thought it would be helpful to look at a few of our key operating metrics that drive those results. Slide 5 includes a five quarter view of the statistics the management team employs to assess our business mix utilization and occupancy rates as well as track our census. As I mentioned our current focus is on optimizing this increased capacity and growing our occupancy rate back into the 80% plus range. Critical to our growth strategy and ongoing improvement is the mix of patients at each of our facilities. As indicated in the slide skilled mix is up sequentially over last quarter and would have even bit higher if it weren’t for the weather. Also, occupancy continued to increase posting an improvement on both the sequential and year-over-year basis. So while occupancy continues to be a priority it’s most beneficial to our financial results when management concerts with the mix of patients.

Turning to Slide 6, let me speak about our path to profitability. As we look to further improve our financial results and increase shareholder value, we have identified four key drivers that have a material impact on future results. First, facility occupancy and patient mix. These two metrics are the key drivers of both revenue and profitability. Facility occupancy is important as higher occupancy generally leads to higher revenues and an increased leveraging of our fixed costs. Within each facility we also closely monitor and actively manage the mix of patients specifically the number of Medicare and managed care admissions. We have made steady measurable progress against both of these key metrics. We have continued to expect further improvements in occupancy and patient mix in the coming quarters following the step up of our sales and marketing efforts and as our clinical service offerings are rolled out to our hospital partners.

Second is the selective review and exiting of unprofitable facilities. During 2013 we disposed two skilled nursing facilities and as of year end have one variable interest entity for sale. As disclosed in the first quarter Q, we have taken definitive steps to divest one owned facility and a second leased facility. The owned facility is listed for sale and the landlord of the leased facility has been given notice that we will not renew the lease which expires in September. For the quarter just ended the combined net loss of these two facilities was $400,000, most of which is now included in the discontinued ops section of the income statement. We continued to evaluate a second lease facility which had a net loss during the quarter of $69,000 for possible sublease or divestiture. Exiting these facilities will not only bolster our financial results going forward, but will also provide additional capacity to finance potential acquisition targets.

Third, is to improve the operating efficiency of the company, reducing our cost of services and our corporate SG&A as a percent of revenue. With cost reduction initiatives put in place during 2013, we have reduced our corporate overhead run rate excluding one-time cost, projects and stock-based compensation to approximately 10.4% of revenues. In fact, the corporate overhead run rate has improved by over $600,000 when compared to the last quarter of 2014. Our overhead reduction plan will help drive this percentage to under 7% this year. These reductions will continue into 2015 and will be further leveraged as we grow our top line generating even lower overhead expenses as a percent of revenue. And the last item along our path of profitability is the selective refinancing of facility mortgage debt and lower cost HUD financing.

We currently have 24 separate facility mortgages totaling approximately $136 million at an average interest rate of 6.6%. Approximately, a third of our mortgages are in various stages of HUD refinancing process. The pace at which these facilities can be refinanced is influenced by the performance of the facility underlying the loan, the overall queue of financing requests at HUD as well as prepayment terms and conditions in the existing mortgage. 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. We now have the first tranche of mortgages in the HUD approval queue, which we expect to be approved by the end of the third quarter ensuring interest savings for all of 2015.

Turning to Slide 7, our financial results again demonstrate the operational progress we are making to increase efficiencies and lower our costs. Cost of services were down in the quarter to 83.5% of patient revenue on a year-over-year basis compared to 84.9% in the year ago period. This improvement illustrates that our cost containment and leveraging of our fixed costs and infrastructure is beginning to take hold. As I mentioned earlier, general and administrative costs, excluding stock-based compensation has decreased as a percentage of total revenue from 8.3% in the first quarter last year to 7.4% of revenue in the first quarter of 2014 affirming our continued efforts to eliminate redundancy and improve efficiencies at the corporate level. As I mentioned earlier, we expect normalized cash G&A to be in the 6% range by the end of the year and even lower in 2015.

Turning to Slide 8, I will provide more detail about the initiatives underway to achieve this goal. Through a thorough review and analysis of our corporate overhead and operating expenses, we have identified a series of target opportunities to further reduce expenses and improve operational efficiencies. These initiatives include restructuring the finance support team, consolidating and centralizing our payroll functions in a single location, centralizing accounting support functions through streamline and standardized processes as well as exiting an agreement to manage facilities for a third-party. Each of these actions will position us to better address core changes in our delivery model. We are beginning to realize the benefits of these programs and expect the improvements will reduce expenses at an accelerating rate in the coming quarters until we reach a full run rate as we exit 2014. The net effect of these initiatives, which will reduce both G&A and cost of services, is in excess of $2.5 million annually.

Next, please turn to Slide 9 for a case study of our core facility, Little Rock Cluster. We currently have four facilities in the Little Rock Metro area that were acquired beginning in 2012. These facilities generated a combined revenue of approximately of $6.2 million as of the first quarter of 2013. Under AdCare’s management, we have taken these underperforming facilities and transformed them into more efficient, higher quality financially performing business units. By focusing on quality of care and the two primary drivers, occupancy and patient mix, we have been able to increase revenues and profitability. In fact, profitability over the five-quarter period depicted in the slide has increased over fivefold and we continue to improve.

EBITDA margins for this portfolio are now over 10% and climbing. Recall that when we got started in the Little Rock in 2012 one of these facilities West Markham was not yet open and completely empty. On an aggregate basis, these four facilities have gone from occupancy of just under 52% at the end of 2013 to almost 65% occupied with the 28% skilled mix as of the first quarter of this year. This improvement translates into a 33% increase in revenue to more than $8.3 million for the quarter. This is a great example of the type of work our team is doing and what we can accomplish by leveraging our infrastructure and driving operational efficiencies.

Turning to Slide 10 for some additional insights on these improvements, the four facilities at Little Rock are strategically located near the large acute care providers. We are partnering with these hospitals to leverage our collective expertise and improve the quality of care and clinical outcomes for patients both in the hospitals and as they transitioned to our skilled nursing facilities. Our sales and support teams work very closely with the hospital based staff and physicians to identify patients who may need post acute care following their hospital stay. At the same time, we work hand-in-hand with them to evaluate their care needs, reduce returns to hospital, and improve health outcomes. As you can see from the slide, we are using data especially discharge data to target clinical program development and hospital partnerships.

Turning to Slide 11, as you can see we again made significant improvement on a year-over-year basis in adjusted EBITDAR increasing from $4 million in the first quarter of 2013 to approximately $5.4 million in the first quarter of 2014. Quarter-after-quarter, we have consistently delivered improving adjusted EBITDAR and operating margins. We expect this progress to not only continue, but accelerate as our overhead reduction program and enhanced sales and marketing activities are executed. The results for the quarter again reflect the progress we are making in core operations as well as shoring up non-operational issues. The management team is turning their full attention energies and resources on strategic and operational growth for 2014 and beyond.

I would 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 - Chief Financial Officer

Thanks, Boyd and good morning everyone. Please turn to Slide 12. I will review our financial results for the first quarter of 2014. During the quarter, our revenues increased to $54.9 million, which is a slight increase of 0.5% from $54.7 million in the first quarter of 2013. For the first quarter, cost of services decreased as a percentage of patient care revenue to 83.5% from 84.9% in the prior year first quarter driven by increased operating leverage across the enterprise. As a result, our gross profit for the first quarter increased to $9.5 million or 17.3% gross margin compared to $8.7 million of gross profit or 15.9% gross margin in the year ago period.

Operating income in the first quarter of 2014 was approximately $1.3 million, a significant improvement compared to an operating loss of approximately $846,000 in the first quarter of 2013. First quarter 2013 included approximately $1.1 million and non-recurring expenses related to the audit committee’s investigation.

General and administrative expenses were also significantly lower during the first quarter of 2014 at approximately $4.6 million or 8.3% of total revenue compared to $4.9 million or 9% of total revenue in the year ago quarter. Excluding the amortization of stock-based compensation, general and administrative expenses were 7.4% of total revenue in the first quarter of 2014 compared to 8.5% in the first quarter of 2013. We now expect full year 2014 general and administrative expenses, excluding non-recurring charges and amortization of stock-based compensation to be approximately 7% of total revenues. The net loss attributable to our common shareholders in the first quarter of 2014 was $3 million compared to a net loss of $2.9 million in the first quarter of 2013.

The first quarter of 2014 included a loss on extinguishment of debt of $583,000 primarily from the conversion of subordinated promissory notes to common stock and $108,000 in other expense primarily related to management contracts in Oklahoma. The first quarter of 2013 included a $2.1 million non-cash derivative gain and $1.1 million in non-recurring expense related to the audit committee’s investigation.

On a per share basis, basic and diluted EPS attributable to common shareholders, was a loss of $0.18 in the first quarter of 2014 compared to a loss of $0.20 in the first quarter of 2013. Boyd previously mentioned our adjusted EBITDAR results as a key metric for management to evaluate performance and manage the company. The adjusted EBITDAR margin for the first quarter 2014 was 9.9% compared to 7.3% in the first quarter 2013. A full reconciliation of this metric to GAAP net income or loss is available in the press release we distributed yesterday.

Please turn to Slide 13 for a summary of our balance sheet. Cash and cash equivalents at March 31, 2014 totaled $16.7 million compared to $19.4 million on December 31, 2013. During the quarter, the company issued approximately 694,000 shares of common stock on exercise of warrants resulted in net proceeds of approximately 2.3 million to the company and also issued and sold an aggregate of $6.5 million in principal amount of new subordinated convertible promissory notes. These 2014 notes bear interest at 10% per annum and mature April 30, 2015.

Also during the first quarter $2.9 million of aggregate principal amount of the 2010 subordinated convertible promissory notes was converted into shares of the company’s common stock, $4.5 million of aggregate principal amount of 2011 subordinated convertible promissory notes was repaid and $6.5 million of restricted cash was used to reduce outstanding debt. Total debt decreased $160.3 million at December 31, 2013 to $154.1 million at March 31, 2014. We believe we have sufficient funds for our current operations, scheduled 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 March 31, 2014 to holders of record at the close of business on March 21, 2014. The Series A preferred stock is listed on the NYSE market LLC and trades under the symbol ADK.PA.

This completes my summary report on our results. For a more detailed analysis, including a reconciliation of non-GAAP measurement, please refer to the press release we issued yesterday and Form 10-Q we filed with the SEC today.

Now, I will turn the call back to Boyd.

Boyd Gentry - Chief Executive Officer

Thanks, Ron. Turning to Slide 14 for an update on the business, those of you on the call that knows us know many of these facts, but we now operate and manage through our subsidiaries a total of 38 facilities across eight states comprised of 35 skilled nursing centers, 2 assisted living residences, and 1 independent living senior housing facility for a total of approximately 4,200 beds and units in service. Of these 38 facilities, 26 are owned, 9 are leased, and 3 are managed to third-parties. We expect to grow revenue and earnings both organically and through acquisition.

Now, please turn to Slide #15. During our recent fourth quarter and full year 2013 conference call, we have provided the investment community guidance for the full year 2014 based on our best estimates. There were several variables, which could impact our results including revenue mix and interest rates. This guidance only anticipates our organic results and does not assume any acquisitions. With that said, we are reiterating our full year 2014 guidance for revenue of $225 million to $250 million, representing up to 12% growth compared to fiscal 2013. As a reminder, this takes into account lower revenues from exiting non-core facilities in the management contract that we exited during the quarter. The range is also impacted by the uncertain timing associated with the exiting of the three divestiture facilities.

Just as we delivered during the first quarter, we expect year-over-year improvement in operating income and EBITDAR in actual dollars and as a percent of sales. We believe 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 a range of revenue and directional guidance on profitability makes the most sense, but I expect to get more specific earnings guidance later this year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen - Ladenburg Thalmann

Hi, guys. Thanks for taking my questions.

Boyd Gentry

Hi, Jeff.

Jeffrey Cohen - Ladenburg Thalmann

So, quick one for you, Ron, what was the cash generation lost during the first quarter in the cash basis?

Ron Fleming

Hang on, Jeff, just a second. Yes, let me get back to you, I have got to add this.

Jeffrey Cohen - Ladenburg Thalmann

Okay. I will keep going. So could you talk about the HUD refinancing a little bit, Boyd as far as what’s being done now, so you are talking about this first tranche going in the HUD queue, how many is in the first tranche or how much and what is typical for the queue as far as timeline and turnaround and it sounds like you are guiding to get interest expense down to 6% by the end of the year, which is encouraging and why wasn’t this done more aggressively earlier?

Boyd Gentry

It’s a great question and look the process with HUD is very complex and time consuming and so we have got about a – there is a third of our entire portfolio we are in process with. The actual number of facilities that are in the queue, I think we have got five now or we will have within a day or two five in the queue. And we have got another couple of that should hit it shortly. Good news with respect to HUD and the queue and that the queue itself had run as long as nine months within recent history and it’s recently cleared out and our advisors there, we use two different firms to help us with HUD financing are saying that frankly the queue is down to three months or four months. I hedged in my comments and said end of third quarter I think we can actually get the interest savings by the end of the third quarter, so 150 basis points. And we are – we have got a couple of other buildings that we believe can actually get in and clear by the end of the year. So I would use this as a rough estimate, $30-ish million with a full year of savings next year, some in the fourth quarter, 150 basis points.

And then the other items that will drive us continuing to be able to get there are – let me give you an example. We talked about Little Rock and Little Rock has been – it’s just topic, I mean it is taking off and that – all those buildings – those buildings are I guess this is two different portfolios with those buildings are in and they were turnarounds. And turnarounds in the one building are our great West Markham facility was a start up. And so those facilities were in the – they need to improve as a total. So I need to get all of those facilities to be kind of humming before we can maximize our HUD take out. And so those facilities probably won’t be eligible or they won’t able to maximize the mortgage financing behind them in HUD until sometime next year. But I am highly confident they are going to get there and so that portfolio would be a logical portfolio that can go early next year. So the why not earlier is really behind the things I would tell you most driven by where the underlying facilities are in our optimization program, is that kind of make sense?

Jeffrey Cohen - Ladenburg Thalmann

Yes, it does. And one more if I may, so could you talk about the three facilities that you are planning on divesting. So it’s one owned and two leased and could you talk about why this is occurring and more specifically what’s wrong with those facilities or is it a mix, is it a population, is it a geography, is it a staff issue, I mean what are the issues and what are the lessons learned?

Boyd Gentry

Sure. Also a fair question, so the leased facilities which by the way are not assets held for sale given the accounting treatment. And I don’t know whether I can give you that particular, but we can’t even if we have intent – even if we have given notice to a landlord, it’s still is burdening the P&L the two leased facilities until just the lease does out or in the case of the other facility we do a sublease. Both of these leases I would call just with purchase. We ended up with these facilities as part of a larger group that we acquired. We knew that these were weak facilities and they are not meeting our expectations and we are divesting them.

Clearly, as a point that we acquired the larger portfolios, there was some chance that, that might have happened, but I would tell you we have now gotten more aggressive and said hey, if we have facilities don’t meet our criteria, we are going to exit. The owned facility is a standalone facility in a metro market that simply has not performed. And it’s on us and our team it’s not made our numbers. And we have because it’s not linked to a cluster, because it’s not an important kind of clog in a bigger strategy, we look at it and said we continue to make improvements in that facility by the way, but it’s better to cut our losses, move on. We also believe that we can at least cover our debt on the ice exit of that facility. So rather than use our operational resources to get sucked into a facility that even as we improve, it doesn’t have the operational momentum that our better facilities are will exit it. We don’t have any other owned facilities that fits that criteria. In fact, there are no other facilities in our portfolio that fits the criteria.

And so off the top of my head to the best of my knowledge, these three facilities we have just talked about are the only facilities which have losses that are not moving in the right direction. There is one facility in the portfolio, which had a loss in the quarter that we anticipated that’s made significant improvement. And that’s a facility in Oklahoma City that we just completed a $1 million renovation on. We actually budgeted that facility, so I am not making money in the quarter, it didn’t. So, this kind of cleanup puts us in a position, where now the keepers of the keepers and we are kind off to the raises on. And what I have pointed to Jeff is and I appreciate the comment, but I truly feel that the company is at an inflection point relative to the step up in the profitability. And we see it and you are – we have given you some guidance as to where the cost saves will be, but the revenue pickup, I mean, I would point just Little Rock as an example. That’s what varies in the time for 1.5 months, 2 months. We used it as a lab. We took our sales and marketing team. We got them smarter with Barry’s guidance and we have seen that market just – it’s just beginning to take off. And so we are – we have got a couple of other things that are staged behind it that we are excited about. So, I hope that helps you a little bit. And I think Ron do you have the figure for the cash?

Ron Fleming

Yes. Jeff, in the first quarter, continuing operations generated approximately $2.4 million in cash excluding working capital changes.

Jeffrey Cohen - Ladenburg Thalmann

Got it. Thank you. And one more, the one facility that is for sale, can you give us an indication of approximate size as far as number of beds and approximate size as far as the mortgage?

Boyd Gentry

Have you got that?

Ron Fleming

Mortgage is $5 million, that’s 121 beds.

Jeffrey Cohen - Ladenburg Thalmann

121 beds and $5 million. Super, thanks a lot guys. I appreciate it.

Boyd Gentry

Thanks, Jeff.

Operator

Thank you. (Operator Instructions) Thank you. Our next question comes from Mike Petusky from Noble Financial. Please go ahead with your question.

Mike Petusky - Noble Financial

Hi, good morning. I guess, the first question I have is traditionally your first quarter you see a sequential improvement in revs, obviously there are winter storms. Do you guys have any way of quantifying or get the meeting $1 impact associated with the storms?

Boyd Gentry

We didn’t put it – we purposely didn’t put in the queue, because it is subjective, right. And I didn’t – we didn’t want, I mean, I will give more thoughts and David you might have some comments after the fact. We can easily identify over $200,000 worth of bottom line impact that get impacted. I think that number could be higher. And it’s – the actual impact of – and I appreciate you were rolling, I can’t remember if you have experienced what we did here in Atlanta on two occasions and some of those stores also made it to Little Rock, but effectively freezing, not unintended a freezing of all activity for reach. So, you had – you had (indiscernible), you missed incremental skilled patients, we had over 100 pipe burst in a facility here in Atlanta, a 100. And that took out I think 17 or 18 beds out of service that we had to move patients on. We had staff that was literally locked in the facility, because I couldn’t get home that had significant over time and the life. So, it was – I don’t want to – if I add that to the quarter, I don’t know we start getting to a point, where we had the best quarter ever in our history. If we jumped up for some – if I stretched it, I would just tell you, hey, everything else that happened in the quarter was so positive. We are excited where we are, but I don’t know if you are using the number 200 to lay up to add in and that would be something north of there.

Mike Petusky - Noble Financial

What about revenue impact?

Boyd Gentry

Revenue, when I came up with that 200, I use just rough and ready a 40% drop through on revenue to EBITDAR, so you could gross up the 200 by at least that, so $0.5 million in revenue.

Mike Petusky - Noble Financial

Alright, okay, very good. Hey, I got a little bit lost in between the presentation and then the question around the refi, how many buildings do you actually think will be refied by the end of the third quarter?

Boyd Gentry

We have got – we have got a pin total, a couple of them are actually HUD that we can lower the interest rate on that will begin pursuing. So, total facilities that I think we will be absolutely through the queue with including two refinanced facilities – to rerate that facilities. I think we are probably a 7 or 8.

Mike Petusky - Noble Financial

Okay, alright, very good. And then in terms…

Boyd Gentry

By the way, Mike, I don’t want to drive it, but the operational improvement or exceeds the interest rate phase. It’s great with the interest rate phase, because one such there is locked in, it’s there for 30 plus years, you can just, you only have to model that right, but the operational phase are significant from a leveraging perspective as that makes sense.

Mike Petusky - Noble Financial

Yes. And so how will that – you are referring to that million that you pointed out in the press release?

Boyd Gentry

In my comments, there is a million in the press release that my comments – the run rate of that number is over $2.5 million.

Mike Petusky - Noble Financial

Right. So, how will that come through, I mean, is that kind of ratable throughout the year or how does that – how does those savings kind of show up throughout the year?

Boyd Gentry

It’s little back end loaded, but not a lot back end loaded.

Mike Petusky - Noble Financial

Right.

Boyd Gentry

And we also expect some revenue – we are working on some things that will drive some rate increases as well. We haven’t quantified those for you today, but those are positive. We have got a Medicare rate increase announced out of CMS that you can factor into your numbers as well.

Mike Petusky - Noble Financial

Okay. And then on the skilled, so what you have been the success in terms of the skilled percentage as we go out – go throughout the year, I mean where does the – I think it was 15.4 this quarter, I mean, what is success to you guys as we go through the year?

Boyd Gentry

I believe that we can move that 15.4 by the end of the year at least 100 basis points. So, the 15.4 or 16.4 and it will keep improving. And I think occupancy has an opportunity to rise another 100 basis points a quarter. So, what are we 77.8, we will be over 80 by year end.

Mike Petusky - Noble Financial

Got it. You are saying that with fairly high conviction and am I taking that the right way?

Boyd Gentry

You are.

Mike Petusky - Noble Financial

Okay, alright great. Okay. And then I do want to chat with you a little bit on the slides on the Arkansas buildings, one time and I understand some things have changed, but one time, $8 million in EBITDA margins, 10% would not have been considered success particularly for that West Markham building. I think at one time, you guys were talking about $20 million in EBITDA margins, north of 20% for that building. Can you just talk about what you think maybe the 12 to 24 months goals for that cluster or I mean how big – how much growth and how much expansion of EBITDA can you see there?

Boyd Gentry

Yes. And that’s – those are quarterly numbers, just FY, we have – you don’t annualize those yet, right. And you are right, listen, I don’t – I believe that 10% can be 20% in a year and a half. There is no reason it can.

Mike Petusky - Noble Financial

Okay.

Boyd Gentry

I mean, this is – we showed this as largely, because I wanted to show in a quarter what we have literally in a quarter, profitability is double.

Mike Petusky - Noble Financial

Right, right, I understand. And we are building in isolation actually generating in terms of revs in EBITDA margins, do you guys have that handy?

Boyd Gentry

I don’t have it handy. It would be – it’s obviously, I mean, it’s more than 50% of these numbers. And also within not even talked about or we haven’t talked about Woodland Hills, I mean, there are some snapshots on here, right. Woodland Hills is also going to be a mover throughout the year. So as we brought them, as we brought Barry in and literally he jumped into this market and one other. And in this market, I think previously our strategy was probably I would tell you too focused on West Markham, not just – hey, listen West Markham is a jewel, but it’s how do we work the entire cluster. And Woodland Hills is going to take off this year as well. And we made a leadership change there and when I mean to leadership change, we have gotten – frankly as things have settled down and we can dive in a little bit, we have gotten much better at what I’d call probably talent management. And so we actually took our Woodland Hills administrator and repositioned that individual in another building. We have taken one of our stars and dropped them in the Woodland Hills. The West Markham team is a great team, but we are expanding it. And so we are looking at ways to truly help West Markham reach its goals. So not – is it slower than we anticipated two to three years ago? Yes. Is there a momentum right now? Absolutely.

Mike Petusky - Noble Financial

Okay, so if we take a run rate of about $33 million or so for that cluster, I mean, could that – those buildings essentially see revenue of, in total, say $40 million to $50 million, 18 months from now, with 15% to 20% EBITDA margins. I mean, is that a realistic way to think about that?

Boyd Gentry

Yes. Is it 18 months or 12 months? Those will be my questions.

Mike Petusky - Noble Financial

Okay.

Boyd Gentry

There was capacity in those buildings, look at the occupancy rate, that’s what dragged us down right as a handful of buildings that we purposely acquired that were at frankly deeper turnarounds than we thought, but we are now getting levered with those.

Mike Petusky - Noble Financial

Okay. And then just last question in terms of your outlook for M&A as we kind of get into mid-year here, I mean, how you got, I mean, do you guys have any either building, number of building goals or acquired revenue goals or how are you guys thinking about what you want to do for the remainder of the year?

Boyd Gentry

Yes, good question. And it’s clearly organic is where we are focused. On the M&A activity and we have – this is something that’s kind of turned on over the last three months or four months, I would call it different than what we have done in the past. As an example, we are early phases, I don’t know if it’s even get a pencil out yet, but early phases of looking at an additional building in Little Rock. So, look for us to do rifled acquisition in these second tier markets and as we are kind of ginning up our spots there. When I say different, in the past we have bought facilities that have been available and so still and also a piece of those moves were clearly let’s get beachhead and let’s build. We need to build sufficient mass to support the infrastructure. As we move forward what we are going to focus on from an acquisition perspective is backfill.

I don’t want to tell you I will never look at another area but that will have – stepping out of the existing footprint where we are flier a real strategy is to what we can do with that new market, so backfill. And the other opportunity that frankly has come out of some of our enhanced discussions with Barry as we have upgraded in the hospital markets is something I don’t think we have talked a bunch about is we had a very strategic relationship but frankly we though it before Barry got here in Atlanta with one of the – with the significant county hospital here in Atlanta, which is ideally geographically situated to our – we have a small cluster in Atlanta that fits nicely with this particular acute care provider. This – we manage that acute care’s skilled nursing facility. The revenues associated with that management contract are inconsequential.

There are a little bit more I mean I don’t want to say we don’t make any money on it, but it’s by – when we look at the resources that we put against this it’s the margin is minor. What – we do make a little money, but it’s minor, but what it has done for us, it has quipped us within that hospital in an entirely different strategic setting. And that relationship also is just beginning to yield results in the Atlanta marketplace. And so that model is one that as an example, we kind of dropped a couple of breadcrumbs in one of our other large markets and all of a sudden we have got one of our hospital partners which is interested.

And so it’s just a – I will give it to you as a way that those bed numbers, we included the managed bed numbers and our bed numbers you will see those go up. But it is the strategic high end and the – what I would call rifle or maybe even sniper shotted opportunities. The last thing I will say about acquisitions to the extent that and I think there is a possibility for one maybe two by year end is the facilities that are currently in acute are not turnaround. They aren’t facilities that meet our ultimate expectation, but they are not turnarounds.

Mike Petusky - Noble Financial

Got it. Alright, very good. Well, it sounds like you guys feel like you are seeing some real turn in your business. I look forward to seeing it. Thanks.

Boyd Gentry

Thank you, sir.

Mike Petusky - Noble Financial

Okay.

Operator

Thank you. Our final question comes from (Chris Joseph). Please go ahead with your question.

Unidentified Analyst

Hi, guys. Thanks for taking my question. Fortunately most of my questions have been answered in your presentation. Thank you. I have three questions I guess left, can you please get me an update on Riverchase?

Boyd Gentry

Sure and good to have you on the call this morning, Chris.

Unidentified Analyst

Thank you.

Boyd Gentry

Riverchase there is a contract that has been signed. It is in the final stage of diligence. And if it’s – we have no reason to believe that it won’t hold, if it holds, I think right now it will probably be targeted for an August closing.

Unidentified Analyst

Okay. And I guess Ron this is a question for you. What was the G&A, if you included amortization of stock based compensation for the quarter?

Ron Fleming

In terms of the dollar amount?

Unidentified Analyst

Correct.

Ron Fleming

(indiscernible) I believe it was 8.3% of revenue.

Unidentified Analyst

Okay, 8.3%.

Boyd Gentry

Ron, is it fair to say that that’s a little lumpy in the first quarter too?

Ron Fleming

Right. The stock-based comp was higher in the first quarter that we lowered throughout and as compared to 9% in the year ago quarter.

Unidentified Analyst

Okay. And the last question and with the stock price at $4, I mean you mentioned several tactical things that the company is doing to improve operation and all those things sound very good, but given that the $8 tender offer by one shareholder at this time last year, the 13D filling by major shareholder last fall that suggested the stock was worth kind of a double-digit kind of number and the annual meeting, where several investors said hired investment banker by March 31, 2014 to maximize stockholder value. Has the board succumbed to stockholder wishes and hired an investment banking firm to seek strategic ways to maximize stockholder value?

Boyd Gentry

Absolutely, appreciate the question, Chris. We continue with our policy of not disclosing those activities, but I would tell you so well, I can’t confirm or deny that we have hired a banker or an advisor in those regards, I will tell you that absolutely, the board is focused and has spent significant, significant time talking about, not only these tactical initiatives that obviously the operations team is involved in, but how to think about our company, how to think about it’s work and those discussions have been I think not only active, but well-received and robust. And there is a slightly different composition of the board. We did have several of our legacy directors retire year end. Mike Fox is the filing member that you mentioned is now on the board and the like.

Unidentified Analyst

Okay, hopefully you have good weather this quarter guys and good luck.

Boyd Gentry

Yes, thanks, Chris.

Operator

Thank you. We have no time for further questions. Please continue with any points you wish to raise.

Boyd Gentry - Chief Executive Officer

Alright. Operator, I guess if there are no further questions, I will make just a couple of final comments. We remain diligent about increasing our shareholder value by optimizing our facilities to position us for long-term sustainable profitability. We appreciate your interest in AdCare and I look forward to providing you with additional updates during the next quarterly call. If you have any further questions, please reach out to Ron or myself, thank you and good day.

Operator

Thank you. This does conclude the conference call for today. Thank you for your participation. You may now disconnect.

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Source: AdCare Health Systems' (ADK) CEO Boyd Gentry on Q1 2014 Results - Earnings Call Transcript
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