Diversicare Healthcare Services, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings, and welcome to the Diversicare’s Fourth Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. As a reminder, this conference is being recorded Thursday, March 11, 2021. I would now like to turn the call over to Anna Stutler, Director of Financial Reporting. Please go ahead.

[Anna Stutler:]

Thank you, Kevin. Good afternoon, and welcome to the Diversicare Healthcare Services 2020 fourth 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 that may cause actual events, results and/or performance to differ materially from those indicated by such statements.

[Jay McKnight:]

Thank you, Anna. Good afternoon, and thank you for joining Diversicare’s 2020 fourth quarter earnings call. As we’ve shared before, we have had and continue to have substantial exposure in certain jurisdictions that have some of the highest professional liability cost per bed in the country. Although the COVID-19 pandemics impact on our census and on our skilled nursing patients and residents is clear, at this point, the industry can’t predict the impact of the COVID-19 pandemic on our future professional liability costs. These factors and other challenges facing our industry have been taken into consideration in developing our operating and strategic direction. The last 12 calendar months have been very chaotic in our country and specifically for our industry. If you recall, we announced that we settled our government investigation. And within a few days, we entered into a pandemic with a particularly devastating impact on skilled nursing patients and residents. Dependency of our investigation and now COVID-19 have affected how we’ve been able to speak publicly about the company and our plans for the future. Now a year after we sell our government investigation, we are seeing some less negative impact of the pandemic on our company and our residents. We are not free of the COVID-19 crisis yet, but we would like to take this opportunity to discuss how we see our near-term future evolving. Our first priority is protecting our patients, residents and team members through the end of this pandemic. While doing so, we are focused on returning to a normalized patient-served volume. The pandemic has had a material impact on our long-term resident population as it has for the entire industry. We will continue to be focused on operational efficiency and excellence, our fundamentals as a skilled nursing portfolio operator. As our operations generate free cash flow, we intend to invest in our team of caregivers, invest in our physical plants where we care for our patients and residents, move forward with complementary services and improved programming in our current services, and when it makes sense, we will invest in smart acquisitions adjacent to or in our current footprint. We believe that these activities have the potential to increase the value of the company by improving scale and operational efficiency.

[Kerry Massey:]

Thanks, Jay. As Jay highlighted in his comments, the COVID-19 pandemic had a very significant impact on our operations during 2020. We experienced reduced occupancy at our centers. At the same time, we experienced a significant increase in our operating costs preparing for and responding to the pandemic. Over the course of 2020, we incurred an additional $32.3 million of additional health care-related expenses, most of which were represented by increased labor costs, but which also included COVID-19 testing and the increased cost of personal protective equipment, nursing supplies and food. During 2020, we recognized federal and state stimulus in amounts sufficient to fully offset the impact of the increased operating cost and lost revenue. These stimulus funds consisted of $47.2 million of provider relief funds. We recognized $19.8 million of the funds to offset the increased health care-related expenses and lost revenue that were caused by the pandemic. We also utilized $1.5 million of the funds to finance capital improvements at our centers to prevent the spread of COVID-19. We ended the year with $25.9 million of remaining provider relief funds, which are reflected as deferred income on our balance sheet. We also recognized $17 million of additional patient services revenue from temporary coronavirus Medicaid rate add-ons that several of our states provided, and we received $4 million of other financial assistants from a few of our states.

[Jay McKnight:]

Thank you, Kerry. Diversicare continues to make progress as a company, and we think our most recent strategic moves better prepare us to succeed after the pandemic ends. Our portfolio has a much improved risk profile. Our operations team has deep experience in successfully operating skilled nursing facilities, and we are seeing some hard immunity in our centers. We had to put many initiatives on hold while dealing with the pandemic, but we are optimistic that we can get back on track with our plans soon. As we said earlier, the biggest challenges facing us is the return to pre-pandemic occupancy levels and uncertainty concerning the impact of COVID-19 litigation. A couple of comments on our annual financial improvements before we move to questions. Our annual net income improved from a loss of $36.1 million to $5.2 million of net income. Facility level operating income improved from $94.2 million in 2019 to $110.3 million for 2020. Annual adjusted EBITDA has improved to $20.3 million from $7.4 million and our earnings per share was $0.99 for continuing operations for the year. Our debt balance from the end of 2019 to the end of 2020 declined by $14 million. We ended the year with $30 million of cash on the balance sheet and a much improved working capital situation. We encourage you to review our investor deck on our investor website and filed today with the SEC – with our press release under Form 8-K. I could not be more proud of the Diversicare team. They continue to impress by providing high-quality care in the most challenging time our industry has ever seen. The frontline team, the center and regional leadership and the support team here in our headquarters are all going above and beyond to care for our patients and residents and to support one another. As is our custom, we’d like to conclude this call by reminding you of our mission statement to improve every life we touch by providing exceptional health care and exceeding expectations.

[Operator:]

Thank you. Our first question is from Tom McDonald, who’s a Private Investor. Please go ahead.

[Tom McDonald:]

Thank you. I’m curious about the average Medicare rate in your facilities. It says that it was $502. And I know that a number of your competitors are much higher rates. Ensign Corp. showed $673 for the year. And according to Zimmet Healthcare, there was a big increase in the average Medicare payments under PDPM. They’re reporting an average of about $620 a day. So I was wondering if you could comment on the discrepancy between your average Medicare rate and where the industry seems to have been in the past year?

[Jay McKnight:]

Yes. Thank you, Tom. Good afternoon. It’s good to speak with you. And we appreciate you asking some questions. The Medicare calculation is done by Wage Index factors, and it depends on the location of centers. So I can’t speak specifically to Ensign’s numbers or Zimmet that you referenced, ours increased notably whenever we moved into the PDPM program effective October 1 of last year. So when you look at the year-over-year increase, both the fourth quarter of 2020 and the fourth quarter of 2019 were under the same PDPM model. So ours – with the improvement we’ve seen this year, that’s – both of those quarters under PDPM. And we have – tend to have a more rural presence with our centers. And it doesn’t get the same Medicare rate treatment as you see in some of the more urban areas.

[Tom McDonald:]

Okay. If I could ask a second question then. And it’s – in regards to the star rating of your facilities, and I will prep as my comment by saying, I understand the flaws in the star rating. But nonetheless, the industry shows that the four and five-star rating facilities tend to outperform both in terms of census and financial results. And it appears that about 45% of your facilities are currently one or two-star rated facilities. And I’m wondering what the plan is to change that. And how is that impacting census and referral flows from hospitals?

[Jay McKnight:]

Yes. So there’s – you’re right, it is a flawed system, but it’s a system we have. We’ve talked for a long time that we – about how we focus on the quality measures portion of the star rating. And that is an area that we have had the best ability to move quickly. If we look at how we are positioned in most of our markets, our quality measures stack up pretty favorably. It’s the – the survey domain has been largely frozen for the last year. I believe the 45% on the one or two, that number seems a little high. But yes, I mean, that’s something that we’re obviously working on, and it is a stated goal of ours to continue working on our star rating in all of our locations.

[Tom McDonald:]

Okay. Thank you very much. Appreciate it.

[Jay McKnight:]

Take care. Appreciate your participation.

[Operator:]

We have no further questions. I’d like to turn the call back to Jay McKnight for closing remarks.

[Jay McKnight:]

Thank you for joining our call today. We appreciate your interest in Diversicare Healthcare Services and look forward to sharing our results with you in future quarters.

[Operator:]

And that does conclude our conference call for today. We thank everyone for participating, and you may now disconnect.