Diversicare Healthcare Services' (DVCR) CEO Kelly Gill on Q1 2018 Results - Earnings Call Transcript

Diversicare Healthcare Services Inc. (OTCQX:DVCR) Q1 2018 Earnings Conference Call May 3, 2018 5:00 PM ET

Executives

Kelly Gill - President and Chief Executive Officer

Jay McKnight - Chief Financial Officer

Analysts

Peter Lux - Private Investor

Patrick Retzer - Retzer Capital

John Lewis - Osmium

Operator

Good afternoon and welcome to the Diversicare Healthcare Services 2018 First 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, 2017 as well as other public filings with the Securities and Exchange Commission. During today’s call, references maybe 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 like to turn the call over to Kelly Gill, President and Chief Executive Officer.

Kelly Gill

Thank you, Sabrina. Good afternoon and thank you for joining Diversicare’s 2018 first quarter earnings call. Also with me is Jay McKnight, our Chief Financial Officer, who will provide the financial details later in the call.

Before we begin a discussion of our activities this quarter, I want to encourage our investors to review our disclosures and risk factors in our SEC filings. As we have noted before, as is the case with others in our industry, we are subject to an unresolved governmental investigation into our therapy practices and our practices relating to the preadmission evaluation forms required by TennCare and the past reforms required by the Medicare program. We also continue to have a substantial presence in other jurisdictions that have some of the highest professional liability cost per bed in the country. These factors and other challenges facing our industry have been taken into consideration in developing our operating and strategic direction.

Now I will move into a discussion of the quarter and year-over-year results. However, before I begin, it’s important for me to point out that beginning this quarter comparisons of the year-over-year revenue are complicated as a result of the recent changes in accounting rules related to revenue recognition and reporting. Jay will provide more clarification in his prepared remarks and we will do our best to clarify the differences in the affected financial results as we work through this transition year from an accounting perspective on revenue recognition.

In accordance with ASC 606, reported net revenue for the quarter was $141.3 million. Under common GAAP, net revenue for the quarter was $144.5 million, up $125,000 over the prior quarter. The equivalent revenue per day figure on a common accounting basis is up from $1.57 million in Q4 of last year to over $1.6 million per day in Q1 this year. Total occupancy was up slightly by 20 basis points and skilled mix was up considerably to 16.1% over 14 .7% last quarter. Our weighted average reimbursement rates were essentially flat. However, we saw a nice uptick in our Managed Care rates. Operating expenses as a percent of revenue were well controlled and were 79.5% versus 80.5% quarter-to-quarter.

G&A expenses as a percent of revenue were up by 20 basis points due to the change in revenue reporting, however, still were very well controlled. Net loss for the quarter was $103,000 compared to income of $1.3 million for the year-ago quarter and a loss of $5.9 million last quarter. Remember that we took a non-recurring, non-cash tax expense of $5.5 million last quarter related to the new tax plan. Reported EBITDA for the quarter was $4.43 million as compared to $4.6 million last quarter. Adjusted EBITDA was $4.48 million over $3.71 million, respectively. Jay will provide additional context of these increases in his comments in a few minutes.

From a year-over-year perspective under common GAAP, net revenue increased by $2.94 million. Our Park Place center in Selma, Alabama contributed $2.3 million of the increase, with the balance coming from an increase in reimbursement rates. Medicare rates were up 1%, Medicaid rates were up 1.7% and Managed Care rates were up 2.7%. Total occupancy was slightly soft and down only 20 basis points. However, our skilled mix increased to 16.1% from 15.7% year-over-year and was largely driven by the heavily flu trend this season.

Operating expenses were 79.5% as compared to 78.2% last year. This increase is due to a successful provider tax appeal last year that reduced operating expenses by $2.2 million. Absent that credit, the quarters were comparable. Year-over-year G&A expenses as a percent of revenue were 5.8% as compared to 6.3% this time last year and was down $834,000 in absolute dollars. Reported EBITDA was $4.43 million, down from $6.18 million last year. The equivalent adjusted EBITDA was $4.48 million versus $5.53 million. The difference is due to the provider tax refund in the prior year that I previously referenced.

To summarize our financial results, revenue on a common GAAP basis increased by $3 million, with almost $700,000 of that coming from our same-store portfolio. With operating expenses being well controlled and a reduction in G&A expense, EBITDA for the quarter was $4.4 million. We’re normalizing the prior year’s EBITDA results for the provider tax refund. We grew EBITDA by over $400,000.

Now I’d like to discuss the progress we’ve made with the acquisition we completed last year of Park Place in Selma, Alabama. Revenue contribution from the center this quarter was $2.3 million and facility-level contribution for the quarter was $800,000. Overall, the center is performing to our expectations. Next, I want to discuss our quality measures outcomes for the quarter as measured under CMS’ 5 Star program. Our team has improved our overall QM score of our legacy portfolio from 3.94 to 4.03 since this time last year and continues to lead our for-profit peer group. The Golden Living portfolio we acquired last year now has an overall QM score of 3.45 compared to 2.41 at the time of the acquisition. Therefore, our combined QM measures for our portfolio have improved to 4.07 currently from the 3.51 at this time last year. I am gratified with the objective results of our 5 Star QM outcomes and I want to recognize and thank our over 8,000 Diversicare team members for their dedicated service to our patients, residents and family members.

Before I turn the call over to Jay for his comments, I would like to briefly report on recent news from CMS regarding a new proposed Medicare Part A reimbursement system. CMS unexpectedly announced late last week an overhaul to the reimbursement system for skilled nursing facilities that will directly correlate the reimbursement rate to the patient security and care needs as opposed to the current model, which ties reimbursement to the services provided. This new proposed system is called the patient-driven payer model, or PDPM, and replaces the previously proposed RCS-I model under consideration. The intent from CMS is that the PDPM reimbursement methodology in its final form will replace the RUG IV system that’s currently in place, and it’s expected to be implemented on October 1, 2019. Part of the intention of the new reimbursement system, as shared by CMS, is to reduce the administrative burden on providers, while encouraging innovative care in these centers. Our initial view of the PDPM is a positive one, and we will be studying it in-depth, while it is in the public comment period.

As for the Medicare market basket increase this year, I shared on our last call that we expect to receive an industry-wide increase of 2.4% effective this October. As has been the case in the past, our adjustment will be calculated based on our specific service, geographies and mix of patient acuity. Our resulting net rate has historically been slightly less than the national adjustment amount.

Now I’ll turn the call over to Jay for his comments.

Jay McKnight

Thank you, Kelly. As we shared with you on last quarter’s call, an accounting change related to revenue recognition was effective on January 1, 2018. The common methodology for health care service providers used in the modified retrospective approach during this year as a comparison to the current year revenue confirmed a common GAAP presentation methodology compared to the prior year revenue. Please remember that the impact on the bottom line of this methodology changes is minimal and mostly relates to bad debt expense now being recorded as a reduction of revenue instead of as a component of operating expense.

We discussed this change in our 2017 10-K and I have updated those disclosures with our Q1 10-Q. Our reported revenue for the quarter was $141.3 million. The revenue would have been $144.5 million under common GAAP, which compares favorably the last – to last year’s quarter of $141.5 million. Our new center in Selma, Alabama contributed $2.3 million of revenue in the quarter. Our operating expense as a percentage of revenues increased from 78.2% of revenue to 79.5% of revenue for the year-over-year – quarter-on-quarter basis. Total operating expense increased by $1.6 million or 1.5% compared to last year’s first quarter. Last year’s operating expense included a $2.2 million provider tax refund. Normalizing to that amount, operating expenses are down $600,000 year-over-year.

General and administrative expenses decreased by $834,000 compared to the first quarter of 2017. Total G&A as a percentage of revenue decreased to 5.8% in the first quarter compared to 6.3% last year. G&A as a percentage of revenue under common GAAP reflects a year-over-year decrease from 6.3% to 5.6%. Our professional liability expense for the quarter of $2.8 million represents roughly 2% of revenue and it’s consistent with Q1 of last year. Our lease expense in the quarter of $13.7 million or 9.7% of reported revenue for the quarter was flat year-over-year. EBITDA of $4.4 million compares to $6.2 million in the first quarter of 2017. Again, adjusting the year ago quarter for the non-recurring provider tax appeal, EBITDA will be up $400,000. For the quarter, net loss attributable to shareholders was $100,000 or $0.01 per share. Adjusted EBITDA of $4.5 million compares to $5.5 million for the prior year quarter.

That concludes our review of the quarter’s financial results. I’ll now turn the call back over to Kelly for some concluding remarks.

Kelly Gill

Thank you, Jay. As always I would like to conclude this call by stating our mission statement, which is to improve every life we touch by providing exceptional healthcare and exceeding expectation. I would also like to recognize all of our Diversicare Healthcare professionals for their hard work towards demonstration of our mission statement and achievement of our goals to be a recognized industry leader.

This concludes our prepared remarks today. With that, I will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from the line of Peter Lux. Your line is now open.

Peter Lux

Hi, guys. Thanks for taking my call. Since we don’t have any analyst coverage, I’d like to ask some questions on behalf of myself and some other stockholders I am sure. Jay, you and I had this conversation, I remember last year, you guys harped on how occupancy had been down, because it was a slow flu season. Well, according to all national reports, this year was a record flu season and yet when we spoke you said that will be reflected in our census. Although I see the census is up slightly in this metric, it doesn’t account for the way you stressed last year’s flu season or lack of it and this year’s. I mean, I don’t see that there was a significant bang in occupancy and census relative to the increased flu season?

Jay McKnight

Yes. Hi, Peter. Thanks for the question. I would like to point, we do give some pretty good occupancy data on both the licensed nursing beds and on the available beds. The table at the end of our press release reflects that our actual occupancy on our available nursing beds is 84.6% for the quarter. And Kelly alluded to a substantial skilled mix in the quarter at 16.1% over 14.7% for the fourth quarter of last year. So actually, we saw a really nice spike there.

Kelly Gill

And I would go on to say, Peter, that as we track flu trends for the industry, we do actually see increases consistent with the flu trends year-over-year.

Peter Lux

I want to congratulate you in getting your quality metrics I also think that’s a significant milestone. Has it really translated, because I don’t really see it is translating into significant occupancy increases overall system-wide? Is that because of the competition in the markets you are working?

Kelly Gill

Well, what we are saying and I can appreciate that the common market doesn’t have a full appreciation of kind of the headwinds that the post-acute sector is seeing right now. But industry-wide, we are seeing – the post-acute sector is seeing significant drop in overall occupancy. But with that, the dynamic is – but we are also seeing an increase in overall patient acuity, which helps support industry-wide improvement in the revenue rates per patient day. And so the fact that we are essentially holding our own in occupancy given the headwinds and shrinking market at the industry, I would consider that to be a positive reflection of our performance.

Peter Lux

Taking that a step further, with the sweet spot of your target market increasing as people live longer and the numbers seem to increase and Baby Boomers seem to be coming into your sweet spot. What do you account for the drop-off in overall occupancy in nursing homes across the board? Is that because more home healthcare people stay in their houses longer? I mean, what’s the trend and what do you see changing that, if anything?

Kelly Gill

Sure. In today’s market, there is a number of factors that are playing into that and home health is certainly one of those. But also, there has been a tremendous increase in the expansion of new construction expansion within the senior housing market, particularly within assisted living and memory care services in that license space. And so they are particularly seeing a significant increase in acuity. So they are seeing lot more centers with available beds. They are taking a higher acuity patient and that would certainly account for some unmeasured amount of pressure on to the skilled nursing centers.

Peter Lux

But have you seen new build than skilled?

Kelly Gill

No, very little.

Peter Lux

And that’s really where mostly your business comes from, one should say, 80% of your – close to that is your mix of skilled. Is that true?

Kelly Gill

Well, on a per patient basis, rule of thumb for the industry is on skilled mix basis, which are your acute patients, which typically come directly from an acute hospital that ranges from say the low teens to the 20% industry0wide. And then the vast majority – the balance are residents in the skilled nursing center, which are typically or usually at least in the majority funded by Medicaid.

Peter Lux

So, this management team that you and Jay have been employed you are going on, I would say, 3 to 5 years, I don’t know the exact nature. Now you have been basically had huge amount of transactions, some sole, some government, which was a positive move and you bought and sold and basically almost doubled the size of the company also increasing obviously the leverage and the debt associated with that, but actually, the actual growth rate, same-store sales have basically been flat. Is this related to exactly what we talked about just before?

Kelly Gill

It is. And so while we were confident – I appreciate you recognizing our go-through acquisitions. And on the same-store side with our centers again with the headwinds that we are seeing in the market industry-wide, I think we are doing well to be able to hold our own on our legacy centers. And so overall though through the growth, we are showing improved earnings at the EBITDA level.

Peter Lux

Do you think that being a public company considering the quest of being a public company and what – it seems to me you get very little bang for being a public company, perhaps you would be better off as a private company?

Kelly Gill

Peter, those are matters for the board and we are a public company and that’s really – commenting on strategic alternatives like that is not something we can do.

Peter Lux

Okay. Alright, thanks, guys. I appreciate it.

Operator

Thank you. And the next question comes from the line of Patrick Retzer with Retzer Capital. Your line is now open.

Jay McKnight

Hello, Patrick.

Patrick Retzer

Good afternoon, gentlemen. Congratulations on a good quarter. You have done a great job of growing the company, growing the adjusted EBITDA and so forth. I am wondering how we should especially in light of the headwinds you have mentioned on today’s call, how should we be thinking about growth going forward for the next year or two? Do you think you might be slowing down because of the occupancy challenges and so forth or what are your thoughts?

Kelly Gill

Well, look I just need to kind of refer back and just really center the comments around our historical performance. And as we just mentioned here in this call with the rates that have increased year-over-year and the coming Medicare rate have increased, I think we mentioned we are hopeful that we will get to 2.4%. So the best way to look at that is on our historical performance and we really don’t offer our guidance beyond that. But other than to say that the baby boomer population that is commonly discussed out there is continuing to be favorable. It really – I think the vast increase begins somewhere around 2022. So, the industry is pleased that we are looking at new reimbursement systems from CMS and getting some help there. So there are positive signs to look forward to.

Patrick Retzer

Okay. So in terms of acquiring new facilities over the next year or two, you don’t have anything to add with regard to that, Kelly?

Kelly Gill

Well, you know, Patrick, what, yes, I do. Thank you for that. And I know you have been on a number of these calls. And so I can remind you how many and how often I have commented on our discipline around acquisitions and that – our view has been now really since somewhere around 2015 that the markets – we feel like the markets been overheated and that we are certainly not going to chase those valuations. We have been very disciplined. That process has served us well and we will continue to evaluate the market and pursue opportunities where we think it makes sense for us.

Patrick Retzer

Okay. And at the current share price which has self frustrated, your dividend is pretty attractive at 3% and the Wall Street and investment advisers and so forth track companies that have a history of increasing dividends annually for X number of years. Has any thought in light of your strong cash flow been given to nominal increases in the dividend on an annual basis to start making those lists and get the company some more exposure?

Kelly Gill

Well, I appreciate the question, Patrick. And I would just say that we have an active board and all opportunities available to us are consistently evaluated.

Patrick Retzer

Okay, alright. Well, thanks for good quarter and keep up the good work.

Kelly Gill

You bet. Thank you, Patrick. We appreciate you joining in.

Operator

Thank you. And the next question will come from the line of John Lewis with Osmium. Your line is now open.

John Lewis

Good afternoon, Jay. Kelly, how are you today?

Jay McKnight

We are well, John. Good to hear from you.

John Lewis

Good to be on the call. I just had a quick question, maybe you covered it and I missed it. I see on your balance sheet, you have about $13.2 million in assets held-for-sale, can you give some color on that?

Jay McKnight

Yes, we have got a little bit more information that’s disclosed in the 10-Q. It’s three of our centers that qualified at the end of the quarter is being held-for-sale. There is a footnote that gives a little bit more information. There is really – that’s footnote 9 and really not a whole lot more that we can say about it other than we have 3 that are currently listed for sale.

John Lewis

Got it. Okay, that’s helpful. If you had some – if you make this sale and you free up some dry powder, do you – I guess, you can’t really say in terms of how active you are in terms of looking at other potential deals or do you – are you more inclined to de-lever where you see deals that could clear your threshold in 2018?

Kelly Gill

Well, I just kind of refer back to my answer to Patrick a few moments ago that we have been now really – well all the way back to 2013, we have been actively evaluating acquisition opportunities and those processes have allowed us to be able to achieve our goal of doubling the company. And I think we accomplished that in a 3-year period. So we are confident that we are active in the market in evaluating acquisition opportunities. And in addition to that, clearly as one would think we consistently evaluate our other strategic alternatives available to us.

John Lewis

Got it. Okay. Thank you guys and I look forward to tell and you did clarify – and I guess this is clear. So you guys will get a 2.4% rate hike potentially starting October of ‘19 or ‘18?

Kelly Gill

Well, so just to fully clarify, so CMS has announced an increase of 2.4%. We are quite hopeful that we will see that. There is the impossibility. It’s not a 100% codified. So there are lobbying efforts in place to Congress to ensure that those – that amount is realized, but I don’t have any tangible information to offer to the contrary. So for now, our expectation is that, that we will see that 2.4% until we hear otherwise.

John Lewis

Got it. On quality scores, you said there is a new potential methodology coming out on quality scores. Do you have any – I know it’s very preliminary, but do you have any gut feel if it could be better than the current rate hike as it applies to your quality standards? Would it be 4% or 5% or do you have any kind of gut feel?

Kelly Gill

Yes. And just to clarify again, it’s – the new reimbursement system is not directly tied to quality scores, although there is a value component in there. But from a CMS perspective, their intention is to have – to implement this new reimbursement system, but have it be budget neutral to them. So right now, industry wide is that no one is expecting necessarily a net rate increase. It’s been stated by CMS that they expect it to be budget-neutral.

John Lewis

Got it. But how will that – and I get it it’s budget-neutral, but if you have off the chart’s quality scores, how does that impact Diversicare?

Kelly Gill

Well, quality scores obviously are important for the service that we provide and to garner increased confidence in our referral sources and in our markets and the people that we provide services to, but if they are not necessarily mathematically linked to this new proposed reimbursement system.

John Lewis

Got it. Okay, that’s helpful. And I guess my last question is if you are more comfortable that you are getting a 2.4% rate increase and you – and does that change any of your capital allocation decisions in terms of potential dividend payout in terms of share repurchases across the board or do you – what I guess what level of – where do you need to be? Do you need the clock to actually hit October 1 and actually start seeing the rate increases come through? Where do you get more confident in a spot where you are potentially more aggressive and maybe pulling a lever that drive shareholder value?

Kelly Gill

I mean those – as I just mentioned a few minutes ago, we still need CMS to confirm that we are that they are in fact going to implement the 2.4% market basket increase for our Part A reimbursement. That does begin with the start of the CMS fiscal year, which every year rates are adjusted positively or negatively on October 1. And in terms of any other evaluation, we just have to look at the totality of our organization and as we usually do make purchasing an investment decision then.

Jay McKnight

John, I will clarify one thing. Going back to Kelly’s prepared remarks, the 2.4% is the announced expected market basket increase, but based on our specific geography and patient mix acuity, our resulting net rate has historically been less than the market basket rate and that’s something I just wanted to kind of re-clarify from the prepared remarks.

Kelly Gill

Thanks, Jay.

John Lewis

Okay, Jay. Any order of magnitude is it?

Jay McKnight

It’s slightly less. It’s not materially less.

John Lewis

Slightly, sorry I am on my – I am on the road. You said slightly less?

Jay McKnight

Yes.

John Lewis

Got it. Got it. Okay. So I mean that’s almost – is that mainly incremental margin if you got an extra 2.4%? I mean, is that – that almost all falls to the bottom line or how does that work?

Kelly Gill

Well, John, obviously, there are inflationary pressures all the time. So look, we always have to just see how the world plays out and make decisions more on a real-time fashion.

John Lewis

Okay, guys. Well I appreciate it. Best of luck. We will talk soon.

Kelly Gill

Okay, thank you.

Operator

Thank you. This does conclude the question-and-answer session today. I would like to turn the call back over to Mr. Kelly Gill for any closing remarks.

Kelly Gill

Great, 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.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program. You may all disconnect. Everyone have a great day.