Diversicare Healthcare Services Inc (NASDAQ:DVCR) Q2 2016 Earnings Conference Call August 5, 2016 8:00 AM ET
Kelly Gill - President and CEO
Jay McKnight - CFO
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 will be forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, and these statements involve risks and uncertainties, may cause actual events, results and/or performance to differ materially from those indicated by such statements.
You are encouraged to review the risk factors and forward-looking statement disclosures the Company has provided in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as well as 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 reconciliations of those measures to 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.
Thanks Michelle. Good morning and thank you for joining Diversicare's second quarter 2016 earnings conference call. Also with me this morning, is Jay McKnight, our Chief Financial Officer, who will provide the financial details from the quarter.
No doubt, the majority of you have reviewed the data contained in our earnings release given the financial results for the quarter. At the outset, it's important to note that we took non-recurring charge of just over $2 million related to the exit of an underperforming facility in Ohio. This charge is specifically related to the accelerated accounting treatment of continuing ramp payments over an extended period, which jay will further explain in his comments.
We also had a notable but much smaller charge in the quarter for transaction expenses related to the disposition of this facility plus other expenses related to other acquisition and regulatory matters. With these non-recurring charges in mind, our income is closer to breakeven for the quarter. Although, we recognized this is still well behind our and your expectations. Putting the non-recurring charges aside for a moment, the first area of note for the quarter is the softening of revenue related to occupancy and skills mix.
Our occupancy, as a percent of available beds was actually slightly ahead of Q2 last year and generally within historical levels. However, our skilled mix is the area which we saw an unusually heavy reduction in the volume of Medicare patients served. However, the relative bright spot is that our volume of Managed Care patients served remained consistent through this time last year. Given the discretionary placement process of the Managed Care environment, we see holding those volumes steady in an otherwise softening market as a very good sign that case managers and other referral sources alike continue select Diversicare centers replacement when given choice in the market.
Finally, we are pleased that our payer rates generally held expectation. When you consider the acuity factor and the rate setting methodology, this is indicative that our acuity profile remains steady despite of softening of the patient volume. Once again, I believe this is a direct reflect that our referral sources continue to have confidence in us and recognize our industry leading quality outcomes.
Now on to turn to the cost side of our business. Those of you who have followed our performance for an extended period of time will note that consistency of our operating expenses as a percent of revenue quarter-to-quarter. As I pointed out on numerous earnings calls what I’ve been most proud of is our balanced outcomes overall. Unfortunately this quarter we had a number of exceptional expense items that in aggregate contributed to the unfavorable results. An example is an expense of $200,000 during the quarter related to the deductible portion of insurance claims at two facilities in Houston resulting from heavy flooding in the area.
With this overview, I’d now like to provide you some details on our financial performance. Revenue at $95.8 million, decreased by 0.5% from the year ago quarter. This decline was largely the result of decreased Medicare centers. Although, our total centers held steady compared to this quarter in 2015, and our room and board rates were comparable to 2015. As I mentioned, we experienced a significant increase in skilled mix for the quarter.
As a result of the decline in our skilled mix, our operating margin for the second quarter was 18.2% compared to 20.4% of revenue in the second quarter last year. Finally, I am pleased to report that CMS has notified providers that Medicare rates will be increased by a national average of 2.4% effective this October. Of course, our actual increase may vary due to differences in geographic intakes and patient volumes.
Now reporting on the topic of quality of care, Diversicare continues to demonstrate industry leading quality of care outcomes as measured under the national CMS five star ranking system. Once again, we are pleased to report that our score and other quality measures domain continues to rank number one in the nation compared to our for profit peer group, and well above the national average for all provider groups. To provide a better perspective, our score and the quality measure domain is 4.32 relative to the all-in industry average of 3.47.
Additionally, our Company’s overall star rating is 3.26 compared to the national industry average of 3.23, and is well ahead of our for profit peer group of 3.04. Finally, both our quality measures and overall star ratings under the five star rating system has notably and consistently improved over the past year and half. We take great pride in the results we are achieving in these areas, and I want to thank our operations team as well as all of the other dedicated Diversicare team members for their focused diligence in achieving these results.
Before I turn the call over to Jay for his comments, I am pleased to report on the performance of our most recent acquisition in Fulton, Kentucky. After leading this facility through the most swift and successful integration process we’ve conducted thus far, it's rewarding to report that this facility is exceeding expectations. Revenue overall is ahead of our pro forma estimates including total occupancy skilled mix and reimbursement rates, operating expenses are also well managed. The net result is that this facility was a solid contributor for the quarter.
Now with that, I’ll turn the call over to Jay.
Thank you, Kelly. In the second quarter, our revenue decreased by $483,000 or 0.5% to $95.8 million. The facilities we added during 2015 contributed $900,000 more revenue than the prior year, while revenue at our same store facilities decreased by $1.4 million, primarily driven by patient mix, as Kelly shared. At the operating expense line, our facility level operating margins, as a percentage of revenue, held constant at just under 20%. Total operating expenses increased by $1.7 million or 2.3% compared to last year. The facilities we acquired in 2015 contributed $800,000 of this growth, while the balance was from our same store group.
Our professional liability expense for the quarter of just under $2 million was comparable to the second quarter of 2015 in both dollars and as a percentage of revenue. General and administrative expenses increased by $540,000 to $6.8 million in the second quarter. Total G&A as a percentage of revenue increased to 7.2% in the second quarter compared to 6.6% last year. Our lease expense in the quarter decreased by $332,000 from the second quarter of 2015 to $6.9 million or 7.2% of revenue for the quarter compared to 7.5% during the second quarter of 2015. The decrease is due to exercising our real estate purchase options and two of our leases in the first quarter of 2016 as discussed on last quarter’s earnings call and in the last earnings release.
Also notable during the quarter was a non-recurring charge of $2 million related to the Company’s exit of a lease in Ohio that Kelly mentioned earlier on the call. This charge and related liability required by these accounting rules and were decreased over the remaining original life of the lease as related payments are made. EBITDA $1.8 million compared favorably to $4.3 million in the second quarter of 2015. For the quarter, net income attributable to shareholders as a loss of $2.1 million or $0.35 per share compared to income of $508,000 or $0.08 per share last year. Adjusted earnings per share accounting for non-recurring lease termination and acquisition costs was a loss of $0.12 in the second quarter compared to $0.14 income a year ago.
Finally I’d like to make a couple of brief comments on our balance sheet before Kelly’s closing remarks. Receivables decreased $3.7 million to $40.1 million at the end of the quarter compared to $43.8 million at the end of 2015. The decrease is largely the result of an increase in collections from the facilities we added in the 2015. That concludes our view of the quarter’s financial results. I’ll now turn the call back over to Kelly for some concluding remarks.
Thank you, Jay. To recap our performance for the quarter, I am heartened by the consistent high quality results of our clinical programs those measured by the CMS five star program quality measures. Despite the financial results this quarter, I have a strong belief that being a leader in the delivery of quality of care outcomes is a significant competitive factor that would drive our long term success and shareholder value. I’d like to once again thank all of our Diversicare Healthcare professionals for their hard work towards demonstration of our mission statement to improve every likely touch by providing exceptional healthcare and exceeding expectations.
This concludes our prepared remarks today. With that, I will now open the call for questions.
Thank you. I just want to once again thank all of you for joining our call today. We appreciate your interest in Diversicare Healthcare Services and we look forward to sharing our results with you in future quarters. Thank you so much.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.
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