Diversicare Healthcare Services' (DVCR) CEO Kelly Gill On Q2 2014 Results - Earnings Call Transcript

| About: Diversicare Healthcare (DVCR)

Diversicare Healthcare Services Inc. (NASDAQ:DVCR)

Q2 2014 Earnings Conference Call

August 8, 2014 08:00 AM ET

Executives

Kelly Gill - CEO, President and Director

James Reed McKnight - CFO, PAO, EVP and Secretary

Analysts

Will Settle - Woodmont

Operator

Good morning and welcome to the Diversicare Healthcare Services second quarter conference call, today’s call is being recorded. I would like to remind everyone that in addition to historical information, certain comments made during this conference call will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and these statements involve risk and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. You encouraged to review the risk factors and forward looking statement disclosures the company has provided in its annual report on Form 10-K for the fiscal year ended December 31, 2013 as well as in its other public filings with the Securities and Exchange Commission.

During today’s call references may be made to non-GAAP financial measures, investors are encouraged to review those non-GAAP financial measures and the reconciliation of those measures to the comparable GAAP results in our press release furnished under Form 8-K.

I would now like to turn the call over to Kelly Gill, the President and Chief Executive Officer.

Kelly Gill

Good morning. Thank you for joining us today to discuss Diversicare’s Second Quarter results. Jay McKnight our Chief Financial Officer is also with me this morning and he’ll provide a detailed review of the second quarter results a little later in the call. Before I review the second quarter highlights I’d like to touch on a few of our financial metrics which significantly improved during the quarter.

First we continued to see increases in revenue which grew to 82.3 million during the second quarter as compared to 61.5 million in the same period a year ago, driven by our acquisition activity but also from improved same store results, additionally our skilled mix has improved to 17.2% from 14.3% since the second quarter of 2013 as we concentrated our efforts on attracting and caring for higher acuity patients.

We also continued to demonstrate the capabilities of our operating platform through improved general and administrative expenses as a percentage of revenue which decreased from 9.4% to 6.5% compared to the same period last year.

These continued improvements contribute to our adjusted EBITDA performance of 4.6 million in the second quarter compared to an EBITDA loss of a half a million for the year ago quarter.

In the first half of 2014 we have generated over 6.5 million in adjusted EBITDA which represents the most profitable six month period since the inception of our 2010 strategic plan. In addition to strong financial metrics we’ve also continued to make strides in terms of our quality of care outcomes, the overall Diversicare average for Five Star increased again this quarter and is at the highest level since making significant investments in our quality of care programs as outlined in our 2010 strategic plan. Additionally this quarter, 94% of our centers remained at a four or five star status in quality measures, compared to 78% for our peer group.

As I mentioned last quarter we have completed the first two phases of our strategic initiatives and are now focusing our efforts on growing and strengthening our portfolio. In that regard we acquired operations at the 73 bed skilled nursing center in Kentucky effective June 1st. We anticipate an annual revenue contribution in excess of 4.5 million from this facility and we expect it to be accretive after our initial costs associated with startup.

Subsequent to the end of the quarter we completed three transactions that demonstrate our continued momentum with regards to our portfolio growth. On July 1st, we completed our exit from all of our operations in West Virginia totaling 240 skilled nursing beds. The transaction was completed right on schedule with our previously announced plans. Also, effective July 1st, we assumed operations of three leased facilities totaling 339 skilled nursing beds in the state of Missouri.

We’re pleased to enter our third new state since embarking upon our acquisition program. The properties in Missouri will become an extension of our Kansas region which further leverages our existing operating infrastructure and contributes further to drive G&A leverage as a percent of revenues. These additions to our portfolio are expected to contribute upwards of 17 million in annual revenues and should be accretive soon after our integration efforts are complete.

Finally we announced this week that the addition of two facilities in the state of Ohio totaling 184 license beds, 42 of which comprised of standalone AOI, we expect these facilities to contribute in excess of 9 million on an annual basis. The skilled nursing center in this group is currently undergoing an extensive renovation program and we expect it to be accretive once these activities are complete. The net effect of exiting West Virginia and adding these six new facilities resulted in an increase of 472 beds and we expect a positive financial impact as a result of these transactions.

Similar to our exit from Arkansas, we feel we have made good strides forward to manage our overall risk and professional liability exposure while also expanding upon and entering new markets which we believe we can build upon as part of the long term growth plan in the company.

As you can see we’ve made significant progress in enhancing our portfolio in the last quarter. Over the past 24 months we have integrated 19 new facilities including our expansion into Missouri and the recently announced addition of two facilities in Ohio, while strategically exiting 15 facilities. To provide a broader perspective had we not exited these centers our portfolio overall has grown by 41% in just two years. We have accomplished this growth through a combination of assuming leases and purchasing assets. While leasing nursing centers is an important part of our growth strategy, we have nonetheless shown an improvement in our percentage of home properties as well from 17% to 25%.

Over the same period of time we have improved our operating footprint by entering three new states, Missouri, Indiana and Kansas and exited operations in two other states.

Our financial results for the quarter specifically our EBITDA demonstrate that Diversicare has the ability to quickly and efficiently add facilities and implement our best practices to through drive results.

One last thing I’d like to mention is that in June Diversicare was added to the Russell Microcap Index as part of its annual reconstitution. We are very pleased to be added to the Russell Indexes and believe along with our successful acquisition over the last few years this inclusion represents an important milestone for the company as we continue to increase our visibility in investment community.

With that I’ll turn the call over to Jay.

James Reed McKnight

Thank you, Kelly. I want to reiterate Kelly’s comment to say that we are very pleased with the second quarter’s results. Before diving into the detailed financial results for the quarter, I want to make a comment regarding the classification of West Virginia’s operations in the financial statements reported for the quarter. Financial impacted the West Virginia facility has been reported as discontinued operations for all periods, current and historical presented during the second quarter.

At the top line, our reported revenue increased by $20.8 million or 34% to $82.3 million. Of this increase, our recent acquisitions contributed 18 million in the quarter, more specifically as we broken out in our press release, the acquisitions we made in 2013 contributed 14.7 million at the year-over-year increase and the acquisitions we made so far in 2014 generated 3.3 million in the quarter.

We also saw 5% increase in same store revenues to 2.9 million versus the second quarter of 2013. This increase was driven by increased Medicare and Managed Care census with general increases in rate.

At the operating expense line, our overall expense is 64.7 million increased 28.6% compared to last year primarily driven by the expenses associated with our recent acquisitions. As a percentage of revenue total operating expenses decreased 32 basis points to 78.6% in the second quarter.

Our professional liability expense for continuing operations for the quarter was 1.6 million a decrease of 200,000 compared to 2013. Now this has been and will likely continue to be a [indiscernible] number for us, we believe our facility portfolio hasn’t an improved risk profile as a result of our repositioning.

G&A expense decreased by 400,000 to 5.4 million compared to the second quarter of 2013. As a percentage of our revenues, G&A expense decreased from 9.4% to 6.5%, demonstrating the continued focus on maintaining an efficient corporate infrastructure in the midst of our strategic portfolio growth.

Finally, lease expense increased 30.1% to 6.3 million, reflect in the additional lease cost associated with the newly added facilities including Seneca Place, the four CHP facilities and our two 2014 additions fixed brands and Nicholasville.

Interest expense also increased by roughly $200,000 to $0.9 million, reflecting execution of the purchase options for the Rose Terrace in Q1 of this year, the refinancing expansion of our credit facility associated with the Kansas acquisition last year and the outstanding balance on the revolver as result of the ongoing Medicare and Medicaid change in ownership certification process.

On an adjusted basis our EBITDA for the quarter was 4.6 million compared to negative EBITDA of half million in the second quarter 2013. For the quarter net income from continuing operations was 1 million or $0.17 per share compared to a loss of 2.4 million or $0.43 per share last year.

On an adjusted basis we reported net income of 1 million or $0.17 per share for the second quarter of 2014 compared to an adjusted loss of 1.9 million or $0.32 per share in 2013.

I'd like to make a couple of brief comments on our balance sheet before Kelly's closing remarks. Our cash receivable balance of 42.6 million increased 10 million since year end 2013. Our CHOW AR has increased to 6.8 million compared to 5.1 million at year end 2013. 2.5 million of the increase in receivables as a result of Kentucky delaying Medicaid payments for the month of June which is consistent with its (state live) [ph] cash management program at the end of this fiscal year.

(Thus equates) [ph] to the end of the quarter these payments were received. Likewise we had 9 million outstanding on our revolver compared to 8 million within the last quarter. We received several of our certification letters, we are submitting our billings to CMS, we are actively receiving our [indiscernible], all of which lead us to anticipate that our CHOW AR and revolver should decrease over the course of the quarter.

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

Kelly Gill

Thanks, Jay. The second quarter results show the robust nature of our platform and demonstrate what we are capable of achieving. We have taken many of large steps forward to reposition the company but I have taken these steps with the powerful and methodical approach. Our quality outcomes are attractive to ACO’s and Manage Care peers alike. We have built the infrastructure required not only to operate the performance of payers but I have also developed the considerable operating platform which is both effective and flexible that meets the demand of the future trends and our strategic partners.

Finally, we recognized that none of our success is possible, we’ll have each and every one of our over 5,500 Diversicare team members, I want to recognize them today and let them know I am proud of each and every one of them.

So with that I want to thank you for your time this morning. We’ll now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Will Settle of Woodmont, your line is open.

Will Settle - Woodmont

A few questions here, so the West Virginia closed. I understand the income statement but Jay maybe help me put the balance sheet come July 1, what -- and I know there’s some discussion in the queue regarding this but just summarize what you expect to have, I know it’s a little strange with the VIE or different things going on.

James Reed McKnight

So the balance sheet already has all of the assets and liabilities directly related with the West Virginia facilities classified as discontinued operations. So there is a current asset of discontinued operations and then there is the liabilities are treated the same way, the VIE will be gone, effective July 1 so that’s all going to be showing up through the third quarter, but everything has already been moved to be classified as the assets and liabilities, but one of the most notable items is remember we had to execute the debt on that whenever we execute our purchase of Rose Terrace we had to take out our debt on it which kind of changed from the way the VIE that was from the amount, that’s held in the current liabilities of discontinued operations, that’s the lion’s share of that number. But yes it will all be all going away, the gain associated with the sale on that transaction will be recorded in the third quarter.

Will Settle - Woodmont

And are the proceeds that they give us 16 million, is that it, has the money been, how’s that work?

James Reed McKnight

The gross sales proceeds were 16.5 million and obviously there’s expenses and cost related to that. That was all received on July 1, it was received after the end of the second quarter, so none of those proceeds are reflected in the balance sheet as of June 30, that all comes through in the third quarter financial.

Will Settle - Woodmont

And so you have that cash net of expenses but then…

James Reed McKnight

And it's not in here.

Will Settle - Woodmont

But if you already like the debt associated with it you already adjusted for that or that will be, I guess what’s the net increase to shareholder’s equity if you will, come July 1 or the closing of this.

James Reed McKnight

There’s actually -- there’s a lot that going into the transactions, I’m just going to speak from a high level. From a high level we received 16.5 gross proceeds there are cost and expenses that go against it, there was a mortgage on the Rose Terrace facility of approximately $8 million that was paid off at the closing. All of that transacted in the third quarter and it’s not reflected in the June 30 balance sheet.

Will Settle - Woodmont

Okay, great, well suffice it to say the balance sheet was better July 1, at the same period.

James Reed McKnight

Yes.

Will Settle - Woodmont

Okay, great, great. I think I saw proposed nursing rate from Medicare, out in the 2% range for fiscal '15, have you all had a chance to look at that and I guess, can you give me some idea just based on your current Medicare mix what you think you’re fiscal '15 Medicare rate improvement will be.

James Reed McKnight

Well obviously we were unable to offer guidance in that respect but here’s what I think we can be comfortable with, first of all, yes there is at a national level across all payers there is a 2% increase in Medicare rates, I believe effective October 1, carrying in to the rest of 930 of 2015. Now what may or may not be visible to the Westin community is the fact that with that there’s a rebasing of rural and urban markets, that goes with that that adjusts the wage index component of the rates, and that’s the component that is less visible, I believe that there was a little bit of delay in Medicare in getting some adequate specifics out for each provider to calculate specifically, so I would lead with that and then of course overarching the rate structure itself is the obvious other components that go into the acuities scoring with the Medicare system that remain unchanged.

Will Settle - Woodmont

Nice to see the increases [indiscernible] On the -- I think I saw CapEx acquisition activity of 1.8 million for the first half of the year, that’s the right number, basically I’m looking for with all the facilities you brought on and kind of where you are and assimilating and upgrading what do think maintenance CapEx is going to be?

Kelly Gill

Yes we just thought we'll purchase the property and equipment it’s 1.8 million, that includes buying systems for the new facilities, so remember every time we take over a new facility from one of our platform we go in and modernize if they’re not up to date on their technology, so that includes maintenance CapEx on the centers that we leased and owned as well as other purchases, it’s really hard to forecast what that number is going to be a lot of it depends on timing, any kind of disastrous rather situations you have to deal with and such as freezes in the winter et cetera. But yes, that number year-to-date of 1.8 million you’re looking at is the right number.

Will Settle - Woodmont

But just, I guess the run rate is 3.6 million and that sounds like it even includes some unusual items for ramping up a facility, but just seems low relative to the number of facilities you have. Does that -- I am trying to remember historically, kind of the metrics there that you require to spend, that’s encouraging. I am glad it’s been more of I just want to see if that’s sustainable, that 3.5, 4 million is that a good assumption?

Kelly Gill

It’s really hard to predict. I mean it comes back to where we are in the [indiscernible] leases with all of our different centers and where we are in our requirements. It’s a much bigger broader conversation. I mean I think you can look at multiple years and kind of get what your gut feel is, that’s where we are. We meet all of our obligations and that’s where we are at the first half of the year.

Will Settle - Woodmont

Well obviously, that’s appealing, if that’s kind of your required maintenance number and for the first half of the year I was looking for here, 7.5 million of cash flow adjusting for some of the working capital take of the acquisitions [indiscernible] you guys have been pushing back against the [indiscernible]. So congratulations.

Operator

Ladies and gentlemen this concludes our question-and-answer session. I’d like to turn the call back to Kelly Gill for closing remarks.

Kelly Gill

Thank you, operator. I just want to say thanks to all of you for participating in our call this morning. We’re delighted to share our second quarter results with you. And with that we wish you a good morning and look forward to sharing our results with you in the third quarter. Have a nice day.

Operator

Ladies and gentlemen, thank you for participating in today's conference.

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