AdCare Health Systems' (ADK) CEO Bill McBride on Q4 2015 Results - Earnings Call Transcript

| About: Adcare Health (ADK)

AdCare Health Systems, Inc. (NYSEMKT:ADK)

Q4 2015 Earnings Conference Call

March 29, 2016 4:30 p.m. ET

Executives

Jeff Stanlis - Hayden IR

Bill McBride - Chairman and CEO

Allan Rimland - President and CFO

Clinton Cain - SVP and Chief Accounting Officer

Analysts

Rod Cerny - Smith Hayes

Michael Lee - Hypotenuse Capital

Artem Fokin - Caro-Kann Capital

Ephraim Fields - Echo Lake Capital

Keith Rosenbloom - Cruiser Capital

Operator

Ladies and gentlemen, welcome to the AdCare Health Systems' 2015 Fourth Quarter and Year End Earnings Call. As a reminder, today's conference is being recorded. And at this time, I'd like to turn the call over to Jeff Stanlis, with Hayden IR. Please go ahead, sir.

Jeff Stanlis

Thank you, good day. Joining me on the call today are Bill McBride, AdCare's Chairman and Chief Executive Officer; Allan Rimland, AdCare's President and Chief Financial Officer; and Clinton Cain, AdCare's Senior Vice President and Chief Accounting Officer. I would also like to mention that this call is being webcast on the company's Web site, at www.adcarehealth.com.

It's important that I note that 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 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.

After management concludes their remarks they will respond to questions. I would now like to turn the call over to Chairman and Chief Executive Officer of AdCare, Bill McBride. Please go ahead. Bill, please go ahead.

Bill McBride

Thanks, Brett [ph]. Good afternoon, and thanks to everyone for joining us today. As we exited 2015, we've completed the transition from an operator of primarily skilled nursing facilities to a healthcare property holding and leasing company. We entered 2016 with an investment portfolio comprised of 35 leased or subleased properties and three managed properties. We currently are focused on winding up the remaining activities related to our legacy business and seeking to further improve the performance of our healthcare real estate assets.

Simultaneously, we believe the time is right for the Board to consider strategic alternatives, and that process is well underway. We continue to proactively look for opportunities to improve on the performance of our portfolio, including working with tenants, and making adjustments to lease agreements as necessary, working with our lenders to improve terms when there is an economic benefit to do so, and streamlining our operations to divest non-core assets and lower overhead costs. During the fourth quarter and subsequently, we've made several improvements in these areas.

First, we welcomed a new tenant, Skyline Healthcare as the operator of our nine facilities located in Arkansas. Skyline is a well-established, well-capitalized operator in the state of Arkansas already and other states across the Eastern U.S., and is known for their outstanding nursing staff and high-caliber delivery of subacute and long-term care. The master leasing agreement includes an initial term of 15 years with two five-year renewal options, monthly rental fees of $450,000 with 2.5% annual rent escalators, a two-month cash security deposit, and a one-time short-term option for the lessee to purchase the facilities for $55 million. As part of the process, we were able to increase the rental revenues from these properties and significantly improve the credit profile of the overall portfolio. We expect Skyline will commence operations on April 1.

Second, we have paid down or received commitments to refinance or extend approximately $44 million of our short-term debt.

Third, we continue to make progress on reducing our G&A expenses in the first quarter as we were able to reduce overhead costs associated with our operating legacy business.

As we discussed during our conference call in January, we've been continuing in our transition relating to our legacy businesses, including collecting patient accounts receivable, the filing and settlement of Medicare and Medicaid cost report, and continued progress in managing outstanding professional liability claims. We are also working with one of our tenants, New Beginnings that has filed bankruptcy, who operates three facilities that we have under our master lease agreement. New Beginnings has neither affirmed nor rejected the master lease to date, although they are currently paying us post-petition rents.

As many investors have requested in previous calls, included in our press release today is a set of operating metrics for our portfolio, that we believe measure and reflect the performance of our properties as a whole. For the three months ending December 31, 2015, our occupancy rate was approximately 82.4%, the skilled mix was 12.0% and our rent coverage before and after management fees was 1.5 and 1.0 respectively. We intend to provide investors with these metrics on an ongoing basis as a means to evaluate our portfolio from a purely operational perspective.

In September, we announced the execution of a letter of intent to purchase a 55-bed nursing facility in the Tampa Bay, Florida Area. Since that time, the letter of intent has expired, and we have walked away from this transaction. At this time, we believe our capital is better used elsewhere, including repurchasing our stock. However, we continue to invest in our existing facilities with attractive returns that enhance the profitability of the operators and make them more competitive in their respective market.

Our Board continues to be focused on maximizing shareholder value. Subsequent to the quarter end, we repurchased 150,000 shares of common stock at an average price of $2.05 per share.

And finally, given that the key phase of the transition of the company to a property holding and leasing company is complete, the Board has to determine that the time is right to begin exploring strategic alternatives for the company with the assistance of financial and legal advisors.

With that, I'll now turn the call over to Allan Rimland, our President and CFO, to elaborate on some of the items I have mentioned and for a review of our financial results.

Allan Rimland

Thank you, Bill, and good afternoon everyone. As a reminder, the presentation of our fourth quarter and full year financial results includes the reclassification of operating results of facilities that had transferred operations to discontinued operation in both current and prior year periods.

For the first time, we no longer had patient care related revenues and expenses. However, since leases commenced throughout the year, the reported revenues of the company do not reflect the full year effect of our transition to a healthcare property holding and leasing company.

Having said that, let's take a look at the financial results. Starting with the quarterly results, rental and other revenues for the fourth quarter were $6.3 million. For the full year, rental and other revenues were $18.4 million. I would note that GAAP requires companies to straight-line rents over the initial terms of our leases. Because of our switch of Arkansas operators and issues with New Beginnings, rent for those tenants was recognized on a cash-received basis for all of 2015.

General and administrative expenses were $2.5 million for the fourth quarter, inclusive of $265,000 of stock-based compensation and $10.5 million for the full year, inclusive of $942,000 of stock-based compensation. We continue to expect additional reductions in G&A under our new operating model in the next few months as personnel cost savings are realized and non-personnel costs are reduced as well.

Net loss from continuing operations for the fourth quarter was [$4.6] [ph] million, or $0.31 loss for basic and diluted share, and $17.8 million for the full year, or a loss of $1.17 per share.

Moving to a review of our balance sheet, cash and cash equivalents at December 31, 2015 totaled $2.7 million compared to $10.7 million at December 31, 2014. Total restricted cash and investments at December 31, 2015 totaled $12.7 million as compared to $8.8 million at December 31, 2014. The change in cash and cash equivalents was driven by overall de-leveraging of the balance sheet, in particular, the pay downs of lines of credit backed by patient accounts receivable, tenant investments, both capital expenditures and short-term working capital loans, and AdCare working capital needs.

Total debt at December 31, 2015 was $125 million, which includes $987,000 in liabilities of disposal group held for sale, compared to $151 million at December 31, 2014, which includes $5.2 million of liabilities of disposal group held for sale, $6 million of liabilities of VIE held for sale, and $4 million of liabilities of disposal group held for use.

We continue to work to refinance certain properties with HUD or conventional mortgage lenders helping us to secure lower interest rates and more favorable terms, including longer maturities and more favorable debt amortization. In working with certain of our lenders, we have received commitments to refinance or extend approximately $40 million in short-term debt, which we expect to complete by the second quarter. We expect there to be approximately $400,000 of interest expense savings through applying $4 million of restricted cash against outstanding debt and lower interest rates in connection with the commitments received.

We are also working to fully monetize approximately $1.5 million of non-core real estate assets. This pool of assets consists primarily of office buildings and excess lands that are no longer necessary to support our business. Today we have sold one building in Arkansas for proceeds of approximately $325,000, and in the process of selling or subleasing the remaining non-core real estate.

In summary, our financial results are much closer to reflecting the full effect of our transition to a healthcare property holding and leasing model. We continue remain focused on increasing shareholder value by further optimizing our real estate portfolio and our balance sheet.

I will now turn the call back over to Bill.

Bill McBride

Yes, in summary, I am pleased with the progress that we have made in the fourth quarter and on into the first quarter in refinancing our debt and sort of re-tenanting the properties in Arkansas and continuing to reduce our overhead and sell some of our non-core assets. I am excited about getting to work on working with various financial advisors to really determine what's the next strategic direction that will best serve shareholders on a go-forward basis?

With that, I will open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll go first to Rod Cerny with Smith Hayes.

Rod Cerny

Hey, guys. I noticed that -- what was the name of the company that just recently filed –- I don't know if it was Form-4 or something about there, had acquired 3% to 4% of the business, and they wanted you to immediately start looking to sell the company. Have you seen that filing, and have you -- do you have any response to that?

Bill McBride

I think you're referring to the 13-B that was filed?

Rod Cerny

Yes, was it Echo Lake or somebody like that?

Bill McBride

Echo Lake, yes. I've had discussions with them directly, and I think that in general the direction of the company is consistent with the direction that 13-B requested the company to pursue.

Rod Cerny

And you said in your news release you hired a financial advisor. Did you -- is that investment banker or who did you hire?

Bill McBride

No, what we said was we're pursuing that. We have been in discussions with several, and expect to make a selection of both financial and legal advice as a company in the next few days.

Rod Cerny

Oh, in the next few days, okay.

Bill McBride

Yes.

Rod Cerny

Do you have a sense of the valuation, given the current interest rate environment and the cap rate that looked like you achieved with the Arkansas deal?

Bill McBride

I think the company has a slideshow presentation that's out there that really sort of lays out some possible valuations depending upon what sort of cap rate that you would apply to our portfolio, and there's a range, anywhere from 8% to 10% in terms of the cap rate that would be applied. That's sort of saying how we would look at the valuation of the company. Obviously, we don't have any bids or offers right now from anybody. So the market is what the market bears always, right?

Rod Cerny

Correct.

Bill McBride

But we sort of laid out some ways you could value our business, and that that has been presented in the slideshow that's out there on our Web site.

Rod Cerny

Okay…

Bill McBride

Now that has not been updated for the Arkansas transactions, but the increase in rent in Arkansas is not significant, and it wouldn't materially impact those valuations.

I would also note that on the Arkansas, at least the option to purchase by Skyline, if you look at our current rent on those buildings relative to purchase price, depending upon how you look at it, it's about a 9% cap rate.

Rod Cerny

Great. That's all for now. Thank you.

Bill McBride

Thanks, Rod.

Operator

[Operator Instruction] And we'll go next to Michael Lee with Hypotenuse Capital.

Michael Lee

Hello gentlemen, good afternoon.

Bill McBride

Hi, Michael.

Michael Lee

The silence was almost deafening there for a little bit. Thank you for the new disclosures, and I think most people on this call hopefully will be happy about some of these disclosures. My question is, do you foresee, Allan, at all any potential restrictions on your ability to continue to invest cash flow and reducing your capital structure as a result of pursuing strategic alternatives. And if so, are there any structures that you can use to get around that?

Allan Rimland

I'm not aware of any, Michael, in terms of using capital. Are you suggesting to returning capital to shareholders or…

Michael Lee

Yes, I guess specifically, will you be locked up on your share repurchase program in any way? Or if so, could you just…

Allan Rimland

No, I don't believe that any of the debt re-financings that we did would preclude the company from pursuing the plan that we had previously announced.

Michael Lee

And my question is more specifically directed towards the fact that you're looking at hiring financial advisors and to the extent that that might interfere with your ability to buy back stock.

Allan Rimland

We'll have to check with legal counsel. I believe there are some restrictions on that.

Michael Lee

Okay. Just food for thought, I mean, and maybe you were looking into whatever program buying or structuring a program prior to signing any agreement with that respect.

Allan Rimland

Sure.

Michael Lee

Thanks guys.

Allan Rimland

Thanks, Michael.

Operator

[Operator Instruction] We will go next to Artem Fokin with Caro-Kann Capital.

Artem Fokin

Hello, guys. I want to ask a question about the strategic review process and your plans to engage financial and legal advisors. So it sounds that in the past you were holding a view that given the transition of the company business, you probably need until the end of 2016 or so before you fully transition the company, you show your new results based on your business model, you had a little bit more history, you got the chance to execute, maybe do a little bit more deals and then you will be thinking about strategic review process. So what was the thinking behind your decision to engage in it now? Is it just, you know, bunch of shareholders pushing you to do that or something else changed?

Bill McBride

Well, I think back when I first joined the company, back in October of '14, I sort of said that I thought once we completed the program of leasing out all of the properties it would be a good time for the company to look and see what made the most sense for it on a go-forward basis. AdCare looked back in '14, the Board had put it on the strategic path of deciding to become a property holding company, and it took this long basically till the end of 2015 to get all the facilities leased out. We are still wrapping up the last of the clean-up relating to the legacy business from the accounts receivable and the liabilities and such, but I think at this point where the company is today it makes sense now to say, okay, what can this portfolio get in today's market?

Now, doesn't mean for sure that you are not going to continue to grow it internally, but for sure, but I think it's a logical time for the company to look at this and say, okay, what makes the most sense on a go-forward basis, given what's gone on, given the price of the stock and the access to capital, given the levered balance sheet that we have, now is the time to take a good look at that. And depending on what the results of that are, make the decision, shall we sell or merge, shall we get a strategic partner and look to grow with a strategic partner, or merge with a private company, or should we go standalone, let the portfolio to continue to mature and reduce the overhead, and look at all of those options with the help of a strategic financial advisor and say, okay, what is the best return for shareholders?

Obviously, there are a number of shareholders that have made quite public their desire to pursue a certain tact, and we do listen to those, and those are evaluated, but ultimately the Board will decide what's best for the shareholders, and with their points of view taken into account.

Artem Fokin

Okay. Thank you.

Bill McBride

Welcome.

Operator

We will go next to Ephraim Fields with Echo Lake Capital.

Ephraim Fields

Good afternoon, guys. We have been critical of both management and the Board in the past, but I just wanted to take this opportunity to congratulate you guys and the Board overall for the news that you announced today, because I think it's the right decision and a great move for everyone involved, and we look forward to tracking the Board's progress throughout this process.

Bill McBride

Thanks, Ephraim.

Ephraim Fields

Thanks.

Operator

And ladies and gentlemen that does conclude the Q&A portion of today's conference. At this time, I would like to turn it back over for closing remarks.

Bill McBride

All right. Well, thanks for everyone for joining us today. We look forward to updating you on our progress during our next conference call. Good day to everyone.

Operator

And ladies and gentlemen, we have a question coming to the queue. We will go next to Keith Rosenbloom with Cruiser Capital.

Bill McBride

Okay. Go ahead. Hey.

Keith Rosenbloom

Sure, Bill. Hey guys, how are you doing? And first of all, I just wanted to echo Ephraim's comments from Echo Lake to just congratulations to the Board I think for taking up real objective view of this. I just want to get clarification on the balance sheet. The balance sheet that you put in the press release show that the balance sheet as of 12/31 and I know there were some things that had gone on the first quarter. Could you give us a sense for how much debt the company is carrying today?

Allan Rimland

The balance sheet at year end is probably consistent with where we are at the end of Q1.

Keith Rosenbloom

Okay.

Allan Rimland

It's been a little of debt amortization. I would also note in my comments that if you want to look at it on a pro forma basis, we have applied about $4 million of restricted cash against our debt balances. So when you look at it on a net debt basis, it's the same, but debt would go down by $4 million, and restricted cash would go down by $4 million.

Keith Rosenbloom

It would go down also by $4 million.

Allan Rimland

Yes. But net status -- change is about the same, but for the amortization of just regular -- regular amortization of debt.

Keith Rosenbloom

Terrific. All right, thank you guys.

Bill McBride

You're welcome.

Allan Rimland

You're welcome.

Keith Rosenbloom

Congratulations again.

Bill McBride

Thank you. Okay, I think unless there is another question out there -- are there? No? All right, well, that wraps it up for today. Thank you everyone for joining us, and we look forward to updating you on our next call.

Operator

And ladies and gentlemen this does concludes today's conference we thank you for your participation, you may and now disconnect.

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