Regional Health Properties, Inc.
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Good day. And welcome to the AdCare Health Systems Inc. Second Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Stanlis with Hayden IR. Please go ahead.

[Jeff Stanlis:]

Thank you, and good morning. Joining me on the call today are Allan Rimland, AdCare’s President, Chief Executive Officer and Chief Financial Officer and Clinton Cain, AdCare’s Senior Vice President and Chief Accounting Officer. I would also like to mention this call is being simulcast on the Company’s Web site at www.adcarehealth.com. I would like to remind you 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 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 factors that could impact AdCare’s results. Except as required by Federal Securities Law, 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 except for those related to litigation matters. Now, I would like to turn the call over to Allan.

[Allan Rimland:]

Thanks, Jeff. Good morning, and thanks to everyone for joining us today. The second quarter was one of continued progress towards our objectives of working closely with our tenants to help improve the underlying performance of our portfolio, reducing corporate overhead, improving the balance sheet and resolving remaining legacy issues, principally professional and general liability matters. We are increasingly looking toward growth of our portfolio as we evaluate acquisition opportunities. Operationally, our portfolio operating metrics again improved in the second quarter as a result of intense focus by our regional tenant operators on clinical, operational and financial aspects of running skilled nursing in assisted living facilities. For the three months ended June 30th, our portfolio occupancy rate was approximately 83.1%, up from 82.6% in the first quarter and the quality mix was 26.5% consistent with the first quarter of 2017. Rent coverage increased to 1.76 times before management fees and 1.35 times after management fees in the second quarter of 2017 compared to 1.71 times and 1.29 times in the first quarter of 2017. These metrics exclude the nine Arkansas facilities that we sold in late 2016, the three Peach facilities that are currently in fill-up and the recently acquired Meadowood facility, as well as our three managed facilities in Ohio for all periods. We expect the upward trend to these metrics to continue over time, albeit more slowly. As noted in prior calls, improved performance to the underlying portfolio increases our overall flexibility in terms of potential mortgage debt refinancings. Our three facility subleased affiliates of Peach Health Care Group continued to do well after making significant capital investments into their buildings, and we were successful in conjunction with the tenant in re-certifying our Jeffersonville and Oceanside facilities. Second quarter occupancy for the three buildings was 49.7% as compared to 30.4% in the first quarter with the current occupancy at 56.7%. Our quarterly G&A was again lower during the second quarter as a result of further reductions in headcount, lower non-compensation expense and lower stock-based compensation; at $822,000 for the second quarter and more importantly, approximately $900,000 of cash G&A in the quarter, which we define as G&A less stock-based compensation. Cash G&A was well below our stated goal of $1 million per quarter. As a reminder, our cash G&A includes expenses related to our facility management business. We continue to look for additional opportunities to further reduce G&A but at this point, we believe we’re at a G&A level sufficient to support our existing base of business, excluding any non-recurring items. Moreover, we would benefit from economies of scale in the future as the existing corporate infrastructure is equipped to handle modest acquisition activity and an expanded asset management function. From a balance sheet perspective, we've taken a deep dive into each and every financing agreement to identify opportunities to lower interest rates, extend maturities and execute cash out refinancings. Subsequent to the end of the second quarter, we extended the maturity date of $1.2 million of mortgage debt related to our Northwest facility in Oklahoma from December of this year to July 2020, thereby reducing near-term maturities. In addition, we expect to submit an application to HUD to refinance mortgage debt associated with one of our properties. If completed, we expect significant interest rate savings and lower near term debt amortization. At June 30th, we reduced our short term debt maturities to approximately $4.1 million, down from $13.2 million at the end of 2016. Assuming a repayment of our remaining $1.5 million of convertible debt in October of this year, our short term maturities would be $2.6 million consisting primarily of scheduled debt amortization. Turning for a moment to legacy issues. We have made significant progress to resolving one remaining legacy issue, uncollected patient care accounts receivable. During the quarter, we collected more than $900,000 in outstanding legacy receivables. Although, there remains a modest balance of legacy accounts, which we still may -- believe still maybe collectible, and we continue to pursue those accounts aggressively. There is de minimis balance sheet exposure at this point. In management’s view, this legacy issue is largely resolved. We have reduced our professional liability and general liability lawsuits from 44 to 41 as of today. Of the remaining 41 lawsuits, 28 have been filed in the State of Arkansas by the same plaintiff attorney; we settled have 24 cases within December of 2015. These actions generally speak on specified compensatory and punitive damages of former patients for the Company’s facility. The statute of limitation for medical malpractice, typically the key issue in these lawsuits is two years, leading us potentially exposed for additional cases for only seven of our facilities as of today, which will be zero at the end of this calendar year. We are working diligently to bring these lawsuits to resolution as early as possibly as nearly all of these matters are currently in mediation, scheduled for arbitration or trial in the next several months, or in active settlement discussions. Looking ahead, our pipeline of potential acquisitions continues to be strengthened by additions of high quality potential transactions. We are diligently evaluating a number of transactions, at this time, targeting transactions with cap rates in the 9.5 plus range based on initial cash rents. These potential transactions range in size and geographic region, and we are looking to both expand our landlord relationship with existing operator groups, as well as develop new operator relationships. As a reminder, our communications practice with the investment community as it relates to acquisitions is to make a public announcement once a definitive agreement has been executed. And finally, as you may recall in the first quarter of this year, we formed a wholly-owned subsidiary of the Company and filed a registration statement to begin the process of reorganizing our corporate structure to enable the effective adoption of certain charter provisions, restricting the ownership and transfer of the common stock. The effective adoption of these provisions will position to the Company to regain compliance with certain continued listing requirements in the New York Stock Exchange, formally known as the New York Stock Exchange MKT. In addition, if the Board determines in this future the qualifying for and electing re-status would be in the best interest of the Company and shareholders, the effective adoption of these provisions also would better position the Company to comply with certain of the federal income tax rules applicable to reach under the IRS code, to the extent such rules relate to the common stock. Adoptions are proposed ownership and transfer restrictions which is subject to shareholder approval, is to be voted on by our common shareholders at a special meeting scheduled for September 28th. Reorganization, if approved and completed, we’ll also allow us the opportunity to continue our business under a new name, Regional Health Properties, and trade under the ticker symbol RHE. With that, I will turn the call over to Clinton Cain, our Senior Vice President and Chief Accounting Officer.

[Clinton Cain:]

Thank you, Allan, and good morning everyone -- good afternoon everyone. Revenues for the Company in the second quarter of 2017 were $6.3 million as compared to $7.2 million in the year ago quarter. Revenues were lower in the current period due to sale of the Arkansas facilities on October 2016, which was partially offset by rental revenues from the Meadowood and the Peach facility. Revenues for the Meadowood facility is only for a partial period in the current quarter starting on the closing date of May 1st. Lease revenues are recognized on a straight line rent accrual basis in the quarters with GAAP. General and administrative expenses declined 51.5% compared to the second quarter of last year are $842,000 inclusive of negative $80,000 of stock-based compensation as compared to $2.1 million total expense for the second quarter of 2016 inclusive of $240,000 of stock-based compensation. As Alan pointed out, SG&A for the second quarter was below our stated target of $1 million for the quarter. Stock based compensation expense for the second quarter of 2017 includes the impact of the reversal of stock-based compensation expense related to the departure of our former CEO. As a reminder, G&A includes overhead expenses related to our facility management services business of approximately $150,000 per quarter. Interest expense decreased 43% in the second quarter of 2017 to $1 million, down from $1.8 million in the second quarter of 2016. The decrease was primarily due to the repayment of $36 million of debt in connection with our Arkansas properties due to the sale of Skyline Healthcare in October 2016, as well as $6.7 million in principle payments of our 2015 convertible notes since January 2017 and the remaining $1 million in April 2017; partially offset by $4.1 million in new refinancing, our new financing of the Meadowood facility. Our loss from discontinued operations, net of tax, was $604,000 for the current quarter as compared to $3.8 million for the prior year period. The year-over-year improvement was primarily due to lower bad debt expense related to legacy patients care receivable accounts. Net loss attributable to AdCare common stockholders for the second quarter of 2017 was $1.9 million compared to $6.8 million for the second quarter of 2016 or a loss of $0.10 and $0.34 per basic and diluted share respectively. Now, for a review of our year-to-date financial results. Revenues for the six months of 2017 were $12.4 million compared to $14.2 million in the year ago period. The driver of the decrease in year-to-date revenues is the same as for the second quarter and is due to the sale of the Arkansas facility, which was partially offset by rental revenues for the Meadowood and Peach facility. G&A expenses were $2.4 million for the six months of 2017, inclusive of $154,000 of stock-based compensation. G&A declined 47.7% or $2.2 million compared to a total of $4.7 million for the first six months 2016. Interest expense decreased 43% from $3.6 million in the first six months 2016 to $2 million in the first six months of 2017 for the same reasons as mentioned earlier. The net loss attributable to AdCare common stockholders for the first six months of 2017 was $4.7 million compared to $10.5 million for the first six months of 2016 or a loss of $0.24 and $0.53 per basic and diluted share respectively. Turning to a review of our balance sheet. Cash and cash equivalents at June 30, 2017 totaled $2 million compared to $14 million at December 31st. Restricted cash and investments at June 30, 2017 totaled $3.7 million compared to $5.5 million at December 31, 2016. We expect modest reductions in restricted cash in the future, as well as to work diligently with lenders and other parties for release and use on other general corporate purposes. Total debt outstanding at June 30, 2017 was $74.2 million compared to $80 million at December 31, 2016; net of $2.1 million and $2.2 million of deferred financial costs at June 30, 2017 and December 31, 2016, respectively. The reduction of debt in the second quarter of 2017 is due to the pay off of $7.7 million of convertible debt and the principle repayments of $1.5 million of mortgage debt related to two of our Alabama facilities. Scheduled principle amortization of $0.7 million, net of increased borrowing of $1.1 million related to the acquisition of our Meadowood facility. Turning to debt maturities, inclusive of current portion of convertible debt, totaled approximately $4.1 million at June 30, 2017 compared to $13.2 million at December 31, 2016. As Allan mentioned, assuming repayments of our remaining $1.5 million of convertible debt in October 2017, our current maturities will primarily consist of scheduled normal debt amortization. Now, I would like to provide additional information as it relates to our mortgage portfolio. Our portfolio we’d expect to improve upon given the underlying strength of our facility. We have 17 separate debt instruments encumbering all 16 of our home properties; the weighted average interest rate of this portfolio is 4.8% with approximately 60% weighted average fixed to 40% weighted average closing debt. However, given the existence of interest rate floors and all of our floating-based mortgage instruments, a modest increase in variable interest rate will have no impact on our cost of mortgage capital. The weighted average maturity of our mortgage debt is approximately 20 years. And I'll turn the call back over to Allan.

[Allan Rimland:]

Thank you, Clinton. As you have heard, we continue to make progress against our objectives, and as legacy issues are increasingly resolved, we look towards increasing shareholder value through portfolio growth. And now, we'd like to ask the operator to open the call for questions. Operator?

[Operator:]

Thank you. The question-and-answer session will be conducted electronically [Operator Instructions]. We'll take our first question from Demetrius Alexander, Private Investor. Please go ahead.

[Unidentified Analyst:]

We had pretty aggressive M&A rate, the first quarter is for the year. How are you thinking about the M&A rate for the second half of the year as this will drive our profitability -- averaging about negative $2 million for quarter now so that’s unchanged until we get the M&A going. So how do you feel about that?

[Allan Rimland:]

Just try to interpret. Obviously, we did acquire the Meadowood facility for $5.5 million. We don’t really have, I would say, a target for an M&A pipeline. A lot of that is contingent upon how the cash gets cycled in terms of some of these debt refinancings, as well as our ability to attract new capital really equity or cash capital to leverage with that capital. Given our small size of acquiring a couple of facilities, we think is well within our capabilities within our organization, and well within our capital.

[Unidentified Analyst:]

I have seen -- just on the pace of it. I mean are you -- we’ll be getting more aggressive with that for the second half of the year, I mean are you worried…

[Allan Rimland:]

That’s more aggressive, right. I mean, definitely, I think we’re more aggressive. My comments is there has been a number of legacy issues that were increasingly resolved. We like to do good deals for the Company and its appropriate underwritings in terms of risk reward at cap rates that we like, and we’re seeing plenty of those opportunities. We pass on a lot of them -- some of them makes sense in terms of portfolio concentration. But as I said, our ability to do single facilities with small groups of facilities in terms of -- those opportunities are there. But again, chasing deals in this marketplace, we don’t think is appropriate in terms of creation of long-term value. We think, right now, it is more of a buyers’ market than a sellers’ market. So we remain patient. But in terms of the pipeline, it’s fairly full right now.

[Unidentified Analyst:]

And then in terms of the preferred, how are you seeing that playing out? I know there is ATM issue more preferred right now, but definitely across the capital. So I think the legacy preferred, you can’t pay off till December. But how were you thinking about that also weighing down profitability?

[Allan Rimland:]

Well, we continue to look at it. And I think we have talked about at December 1, 2017, is the date that sits in our head in terms of increasing the flexibility of what we potentially can do with preferred. Obviously, where the preferred is trading, it’s not suggest that we can do a refinancing of the preferred with new preferred. So we could potentially look at other alternatives in terms of capital or simply leave it in place, and so other parts of the business performing do well. And then we may find a refinancing of the preferred in the later date. It is the expense of capital. Our view it is much cheaper than some of other alternatives as in terms of equity as well.

[Unidentified Analyst:]

And lastly, do you think that we’ll be -- once we get back in compliance after we had the meeting. Do you think that albeit final wish we may see some equity or gain some our investor road shows and get back that going in?

[Allan Rimland:]

Well, in terms of investor outreach Alex, I know you’re in -- I guess, in Richmond, I’m always happy to come down anywhere and lead with investors to talk about the business in terms of growth. I don’t think that the September 20th in New York Stock Exchange issue is the catalyst in terms of potentially seeking new capital. But we’re always addressing those issues. I do think that as a one small obstacle and issue, the potential threat of New York Stock Exchange still is on some people’s mind and is something that we wanted to address.

[Operator:]

[Operator Instructions] We’ll go next to Chris Doucet with Doucet Asset Management. Please go ahead.

[Chris Doucet:]

Just a few quick questions. Do you expect the common stock to start trading under the simple RHE on September 20th, or is it going to be a delay after the meeting?

[Allan Rimland:]

We’ll trade under the symbol RHE. We have to close the merger. I would expect the merger to close fairly close the year that shareholder vote, that’s an internal thing that we have to do is the actual merger is closed by filing with the secretary of State of Georgia. So we’re going through all the internal mechanisms in terms of potential lender consent and landlord consent, which we don’t think is an issue. But I would say very soon thereafter to trade under RHE.

[Chris Doucet:]

Can you talk a little bit about Jeffersonville and Oceanside? I know there were rent increases. Do we expect rent increase from now until the end of the quarter, or do -- and to pump up again at the end of this quarter?

[Allan Rimland:]

Well as I mentioned, I gave at least the investor base -- we excluded those facilities, because they’re still going to fill up and I disclosed what the quarter performance was, as well as the current performance. When we originally structured the lease with the Peach Group, there was a sense that they really wanted to share and fill up lawsuits, and we found that to be very difficult for investors to understand as well as internally. So what we agreed to was a structure, just for Jefferson and Oceanside where the tenant would have post recertification three months of free rents, five months of 50% or discounted rent and then it moves to full rent. In the case of Jeffersonville which reasserted in December -- January, February and March of free rent, so we should be getting full rent in Jeffersonville starting in September; Oceanside reasserted in February, so really works on that same case. To make a long story short, Chris, both of those facilities will be paying full cash rent in September to November timeframe. In either case, we’ve been straight lining the rent since recertification, so we’re going to through cash, in fact, but not a GAAP income.

[Chris Doucet:]

But what is the true cash impact that that will have from now until then?

[Allan Rimland:]

Well, right now both facilities are paying 50% rent, its 50% and they will be -- again, Jefferson will be moving up to full rent in September and that’s the larger facility. Jefferson is 57,000 a month, so 57 -- it’s about $150,000 to $200,000 increase, Chris, in terms of cash flow probably in the quarter from where we are today.

[Chris Doucet:]

From both facilities?

[Allan Rimland:]

Yes, because both of them are paying 50% right now.

[Chris Doucet:]

And in the second quarter, you only had about 60 days worth of rent from Meadowood, or was it 30 days?

[Allan Rimland:]

Yes, 60 days. It was in May 1 start.

[Chris Doucet:]

And do you see any improvement coming as far as the G&A is concerned in the near future? I mean, that was obviously your goal, the $822,000. But is there any upside to that also?

[Allan Rimland:]

I think there is. I mean we are merciless with it and the team is really looking at everything, and it's my view that we use it -- especially a zero based budgeting system, which is -- to make a long story short, we don't assume just because we had last year, or in Q1, we have it this quarter. We have to justify every expense. And I've a smile on my face when Clinton comes down to the hallway and say, we just saved 5,000 a month of things that we just no longer need -- no longer need as a business. So we continue to shed -- so there're some additional headcount reductions over the next couple of months, mortgage is on the non-compensation expense. We're retooling some of our expenses and some of our headcount, as I alluded to. We're having more people focused on the area of asset management who will fine tune that piece of the organization as well.

[Chris Doucet:]

And two more questions and I'll step back in the queue. You mentioned that you thought that acquisitions were getting more difficult to make. Did I understand that correctly? And if so, what does your pipeline look like at this point?

[Allan Rimland:]

No, I don't think -- I don't think -- they're difficult to make. I think we're disciplined in terms of what we like and what we look at. We like the returns. We like to stick toward that 9.5 plus initial cap rate. We look at the quality of the operations. We look at the strength of the overall operator. We look for portfolio diversification -- and there's plenty of those opportunities that are there. I alluded to -- our ability to do a small portfolio is pretty reasonable, given what we see out there. But lot of those opportunities are there -- some of it is just a timing of our capital just comes into the company, both equity capital as well as some mortgage refinancing that we’ll look at to fund those acquisitions. But no, I think we're -- we feel very good about those cap rates. We’re looking at deals all the time, and I'm spending more and more of my time looking at acquisitions in asset management as opposed to some of those legacy issues, setting aside [deal].

[Chris Doucet:]

Last question, and I'll step back in the queue, and this is maybe little bit more subjective. But are you targeting the fourth quarter for cash flow breakeven, or maybe even being cash flow positive in the fourth quarter?

[Allan Rimland:]

I don't think it's a real target, Chris. I think well it depends on how you define cash flow breakeven. We're really close on that. And I think when you start to look at the queue and or any investor, happy to circle back with me. They were couple of one-times in the quarter or non-recurring items. So the true underlying cash flow or funds flow we'll look at, we're pretty close to cash flow breakeven. It depends on how you look at things like debt amortization and some of the non-recurring costs. Building cash flow to some extent, as you alluded to, is when Jefferson and Oceanside will flip both cash paying rent; the further effect of acquisitions, continued G&A reductions, release as Clinton talked about, some of this was restricted cash to do acquisitions.

[Operator:]

[Operator Instructions] And we'll go next to Larry Raiman with LDR Capital Management. Please go ahead.

[Larry Raiman:]

Couple of quick questions. Could you provide any more disclosure with regard to the recent acquisition, and what type of coverage that was -- that's now running at, the Meadowood facility?

[Allan Rimland:]

Larry, we gave C-Ross, which is the operator, I would say, a free pass. But they’ve been a little delayed in terms of presenting the May-June financings and we should get them in the next day or so. Anecdotally, we’ve accented exactly what they expected. We do -- I mean this one sits next to our Coosa facility, so there is some shared overhead. But anecdotally, they figured exactly what they bargained for. They feel good about it. We underwrote to facility --hold on one second, I’ll get you that…

[Larry Raiman:]

Yes, I was just really curious whether that would be consistent with the coverage. Congrats on it going up in this quarter. Consistent with the overall portfolio coverage is plus or minus little better or might it be dilutive to that coverage ratio?

[Allan Rimland:]

At least the way we look at it in terms of analysis, probably -- hold on one second. We underwrite it basically as average coverage so [multiple speakers].

[Larry Raiman:]

Okay good, thanks…

[Allan Rimland:]

And Larry and it's a good question. We don’t want to stretch from a credit quality perspective and acquire stuff where the coverage is simply just aren’t there in the near-term basis, and there is no hope of getting in there. This one is assisted living, it’s not as, I would say as volatile as SNFs from a reimbursement perspective, and especially because C-Ross is operating the facility next where we thought which had less risk to it.

[Larry Raiman:]

Is there any comment you can make with regard to Beacon Health and C.R. Management, and how they’re doing since they’re your two largest relationships? And anything of note one way or another with regard to those two relationships?

[Allan Rimland:]

We continue to have dialogue, obviously, with both on a regular basis given our size. I mean, we really speak with all of them. Anecdotally, I could suggest that from, -- over last quarter, both Beacon and C-Ross facilities on portfolio basis improved on a linked quarter basis.

[Larry Raiman:]

Glad to hear that. I give you a lot of credit for moving forward on a lot of the agenda items that you’ve had to go through over the last 12 to 18 months. And keep up the good work.

[Operator:]

We’ll take a follow-up question from Demetrius Alexander, Private Investor. Please go ahead.

[Unidentified Analyst:]

I missed one question before. So the CEO 10,000 feet, what’s on your roadmap the rest of the year? What would you like to see happen? That’s it.

[Allan Rimland:]

Well, a vacation would be nice Alex, but they don’t pay me for that. It’s a little bit [levity] on a Monday night. When I look at the next couple of months or so and you’re right one of the things that I am spending increasingly more time in acquisitions it's where I spend a lifetime in acquisitions, as well as the capital rates inside. So I think that’s an increasingly -- amount of time and things like G&A, which I think is well of the control, but there’s still room to go AR, pretty much done. I think the elephant in the room unfortunately we can’t spend a lot of time talking about it for lot of reasons is the lawsuits. We have a lot but we’re spending a lot of time on -- and trying to get some resolution on it. Obviously, the biggest -- bowls of those losses to the 28 cases and we’re in dialogue around that. And we think that probably is significant catalyst in terms of the stock, as well as reducing some of the uncertainty around it. So if I have to say, where am I spending most of my time and what keeps me up is the losses, principally those 28, in acquisitions and capital. I think the asset management function is going to get more robust overtime. We feel good about the portfolio. There is always weak systems, weak signs in this portfolio and we spend a lot of time with operators to how to think about it. One of the thing -- you talked about acquisitions before. One of the things that we’re also looking at is to invest capital in our existing properties. And we’ve talked -- speaking with all of our operators they want to increase the capital investment in these properties for higher rent for some of these buildings or so.

[Operator:]

And at this time, there are no further questions. I will turn the conference back over to Allan Rimland for any closing comments.

[Allan Rimland:]

Operator, we’ll hold for just 30 seconds in case someone hops back in. We had that issue a couple of quarters ago.

[Operator:]

Very good [Operator Instructions]. And it appears we have no further questions sir.

[Allan Rimland:]

Okay, thank you operator. And thanks to all of you for joining us today. We look forward to updating you on our next conference call. Thank you.

[Operator:]

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation and you may disconnect at this time.