Regional Health Properties, Inc.
Q1 2015 Earnings Call Transcript

Published: 15 May 2015

[Operator:]

Welcome to the AdCare Health Systems Inc. First Quarter 2015 Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to Brett Mas with Hayden IR. Please go ahead sir.

[Brett Mas:]

Thank you and good day. Joining me on the call today are Bill McBride, AdCare's Chairman and Chief Executive Officer; Allan Rimland, AdCare's president Chief Financial Officer, as well as Sheryl Wolf, AdCare's Senior Vice President, Controller and Chief Accounting Officer. I would like to mention this call is being simulcast on the Company's website at www.adcarehealth.com. Go between the forward-looking statements of this time. Any forward-looking statements made today’s call 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 differ materially 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's actual 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. Also AdCare’s supplemented GAAP reporting with non-GAAP metrics such as adjusted EBITDA and EBITDAR When reviewed together with AdCare's GAAP results, these measures can provide a more complete understanding of AdCare's businesses. This should not be relied upon to the exclusion of GAAP financial measures. A reconciliation of these measures to GAAP is available in today's press release. Now I would like turn the call over to the Chairman of the Board and Chief Executive Officer of AdCare, Bill McBride. Bill, please go ahead.

[Bill McBride:]

Thanks, Brett. Good afternoon and thanks to everyone for joining us today. During and subsequent to the end of the first quarter of 2015 we made additional progress towards completing the transition of our business model from an owner and operator of healthcare facilities to a property holding and leasing company. I'm pleased to be here today to provide you with an update and a preview of where the company is headed. We have entered into agreements of 36 of our 40 healthcare facilities with only 4 pending final disposition. As you may recall commencing leases and the related operations transfers are typically subject to obtaining regulator licensing and financing approvals some of which are beyond the control of the company. We have been making steady progress and not only leasing the facilities but just as important transferring operations as quickly and as efficiently as possible to our new operators. Let me break down the portfolio for you. Off the 36 facilities today 25 have transferred operations to third party operators or under management contract. Eight facilities in George, Ohio and North Carolina are expected to have the operations transferred completed during the second quarter pending the requisite HUD approval and licensor approval. Two facilities in Oklahoma are expected to transition to third party operators during the third quarter pending licensor and finally one is expected to be sold and closed during the third quarter subject to certain termination provisions and closing condition. So clearly we’re making progress and making great strides in wrapping up this phase of our transition. I did want to spend a few minutes and discuss the successful leasing and related operations transfer of eight of our facilities in Arkansas that happened on May 1st. As I mentioned on May 1, 8 of the Arkansas facilities transferred operations to Aria. We’re currently evaluating various sale and lease options with other regional operators for the two remaining Arkansas building. The initial term with Aria is 10 years with one to five year renewal option. The annual based rent under the eight leases in the first year is 5.3 million in aggregate with 2% annual escalator feature in the initial term increasing to 3% during the renewal term. All of the leases have the protective features similar to leases extended by other healthcare REITs including cross defaults, guarantees and security deposits. In addition to the leases we provided Aria with the $2 million cash payment as a lease inducement. The lease inducement will be used by Aria to bolster their working capital and liquidity. We will receive payments of 29,500 per month for the next 10 years or $354,000 per year which would fully amortize the lease inducement and provide an attractive rate of return of approximately 12.5% per annum to the company. Our business is essentially positive to spread investing and we believe this attractive return on our investment capital represents a good use of shareholder capital. We are beginning to put our money - and we expect to now several additional investments over the next few months. All of these efforts and accomplishments today have set us on a course to improving and creating a more stable cash flow. Accordingly the Board declared a quarterly cash dividend of $0.05 per common share. The dividend was paid during the second quarter of this year and would represent approximately a 5% annual yield based on the current stock price. The Board remains committed to returning cash to shareholders through a quarterly dividend policy. We have accomplished a great deal in a short amount of time and we’re now positioned to continue on to the next phase of our company's evolution and further increase value per shareholders. Another important part of our strategic plan was to lower general and administrative expenses. We have continued to make great progress in this area and these efforts will accelerate as more operations transfer during the second quarter and the third quarter of the share. As we look ahead we’re seeing numerous opportunities to extend our portfolio of owned and leased properties as well as in best to expansion renovation of our current portfolio at attractive rates of return. We’re the amidst of identifying potential targets of building a pipeline of potential investment opportunities. As we take measure and controlled approach to any acquisition we will evaluate each opportunity against the set of financial hurdles to ensure we’re allocating capital towards the higher caliber projects that we will expect will increase shareholder value. I will now turn the call over to Allan Rimland, our President and CFO to provide the details of our first quarter financial results and discuss some of our recent financing. Allan?

[Allan Rimland:]

Thank you, Bill. Good afternoon everyone. Before discussing our first quarter financial results I would like to introduce our Vice President of Finance, Clinton Cain. Clinton joined the firm almost four years ago and works closely with Bill and me focusing particularly in the areas of accounting and finance. The financial results I will briefly review today primarily reflect our legacy business of operating facility. The presentation of our financials include the reclassification of operating results of facilities that have transferred operations to discontinued operations in both current and prior year's period. As more and more leases become effective, investors will gain enhanced visibility into the results of our core business of owning and leasing or subleasing healthcare properties as we will recognize rental income for properties that have completed operational transfers and not patient care revenues and related operating expenses. In addition, we plan to provide typical healthcare REIT financials and operating metrics in the coming quarters. With that said let's take a look at the financial results, at a summary level first quarter total revenue was up 0.8% to 47.7 million compared to the first quarter of 2014 of 47.3 million. Patient care revenue was down slightly due to small declines in occupancy and the average Medicare reimbursement per day offset by significantly higher rental revenues reflecting our transition. Operating loss from continuing operations was approximately $325,000 in the first quarter of 2015 compared to operating income from continuing operations of approximately 725,000 in the first quarter of 2014. Cost of services was higher during the quarter as compared to the prior's year quarter [indiscernible] number of areas including higher bad debt expense, insurance cost and labor cost. General and administrative expenses decreased approximately $1.4 million or approximately 30% quarter-over-quarter primarily as a result of the decrease in salaries and related expenses. As a percent of total revenue G&A expenses decreased from 9.6% for the first quarter of 2014 to 6.7% for the first quarter of 2015. We expect further improvements in the next few quarters as we complete the transition. Net loss from continuing operations was $3.8 million for the first quarter of 2015 compared to 2.6 million in the year prior. We have historically used adjusted EBITDAR or adjusted earnings before interest, taxes, depreciation, amortization and rent as a direct measure of our operating performance. We will believe adjusted EBITDAR is useful to investors in evaluating our performance, results of operation and financial position because it helps to identify trends in our day to day performance after the line items that have little or no significant impact on our day to day operations. During the first quarter of 2015 adjusted EBITDAR from continuing operations was approximately $3.5 million compared to 4.7 million in the first quarter of 2014. A reconciliation of this metric to GAAP numbers is available in the press release we distributed earlier today. Moving to review of our balance sheet. Cash and cash equivalents at March 31, and December 31, 2014 totaled $10.7 million. Total restricted cash and investments at March 31, 2015 totaled $8.1 million as compared to $8.8 million at December 31, 2014. Total debt at March 31, 2015 was $151.8 million compared to $151.4 million at December 31. Our recent private placement of 10% convertible subordinated notes 2017 raised gross proceeds of $7.7 million. The notes have a conversion price of $4.25 per share. The March 31 balance sheet that’s in the press release does not reflect the public offering of 575,000 shares of preferred stock which raised gross proceeds of $14.8 million. And close subsequent quarter end the preferred stock was issued at $25.75 per share and has a $2.72 annual dividend per share. I will now turn the call back over to Bill.

[Bill McBride:]

It's an exciting and pivotal time to be with AdCare and we look forward to bringing you more good news on our continuing progress in the quarter's ahead. At this time I would like to ask our operator to open the call out for your question.

[Operator:]

[Operator Instructions]. We will go first to Gentry Klein with Cetus Capital.

[Gentry Klein:]

Couple of quick questions, firstly in terms of the pro forma revenues that it's there I know it's about 26.8 million of pro forma revenues as well as the expenses the pro form expenses of 2.5 million on the G&A side. Are we still tracking in-line with those numbers?

[Bill McBride:]

As far as the 26.8 which is what Gentry is referring to is sort of when AdCare did an 8-K last year there was a projection of sort of what our rental income would be from all the properties in the portfolio once AdCare had completed leasing out and transferring the operation to the new entity. As of now the company is tracking on that or slightly better than tat towards reaching the top line number in there. As far as the $2.5 million of overhead we’re still quite a bit above that although as we mentioned in the call this numbers are coming down rapidly. We said that we expect to be close to that price slightly higher than by the end of the year on a run-rate basis. And the reason is higher is obviously the timing when that 8-K was done last year the timing of the transfer of facilities there was an assumption that those all would be transferred by the end of last year and obviously that has taken for a lot of reasons longer than the company had anticipated when it did that 8-K and so obviously having to keep the people on staff until we get the facility transferred. But the top line looks achievable, are better, and the bottom-line looks like we will get there or close to that by the end of the year on a run-rate. Allan did you’ve any comments on that?

[Allan Rimland:]

No that’s fine, that’s exactly the point I think we have been talking with investors. I would point Gentry that as we do report our income you will see it on a straight line basis and straight line revenue will have a slightly higher revenue than the cash rent that we look at it as well.

[Gentry Klein:]

Got it. So the GAAP revenue will be slightly higher.

[Allan Rimland:]

Yes.

[Gentry Klein:]

Okay and that’s because of the escalators that are built-in to the leases, GAAP requires you to basically take a component of those escalators and book that one on a straight line basis obviously from a cash standpoint you get it when the escalators go into effect?

[Allan Rimland:]

Right.

[Gentry Klein:]

Second question is on the liabilities of the disposal group held for sale, are those and the variable and the liabilities especially with the VIE, are we planning on disposing these assets this year and when you typically report total debt you include those liabilities which are about 12.2 million in total debt. Is it fair to say that when we monetize or exit these assets that we will shed that 12.2 million of total debt?

[Bill McBride:]

Yes as far as the VIE, that’s on balance sheet because it's been reported as a VIE, it's not really - it's not a direct obligation of the company. The company guaranteed the debt of the entity that’s operating the VIE and so for financial reporting purposes it was made - the termination was made by the company and the auditors that several years ago that entity had to be consolidated. So we have consolidated the results of those operations which includes consolidating them on the balance sheet which means we put that debt on balance sheet and that particular entity I believe there is about just under $6 million of that debt related to the VIE and we expect to close that deal before the end of the year. And the debt would go away.

[Gentry Klein:]

Well was going to ask on that on the disposal group held for sale.

[Bill McBride:]

Similarly I mean that’s basically our properties that we have through our planning on selling so upon sale the debt would get paid down basically.

[Gentry Klein:]

Okay, so it's fair to look at total debt as we can take the numbers on your balance sheet, you tend to include the total or you tend to include the debt of the VIE as part of total net? It sounds like the right way to probably look at this on a pro forma basis when you exit these facilities is the debt number should be lower by about 12.2 million?

[Bill McBride:]

Correct.

[Operator:]

[Operator Instructions]. We will go next to Chris Doucet with Doucet Asset Management.

[Chris Doucet:]

I want to ask a couple of continuation questions from Gentry's questions, so you mentioned that you hope to sell the VIE by the end of the year and so 6 million in debt that you guarantee will go away and then of course you announced that you were going to sell the Oklahoma piece and that piece has about 2 million in debt is that correct?

[Bill McBride:]

3 million.

[Chris Doucet:]

3 million in debt and what will be the disposition of the last four properties that you haven't leased or sold or done something with?

[Bill McBride:]

Okay, so two of the four of the last four property are actually leases for the company with Omega, another healthcare REIT, those leases are significantly below market leases so the rental income the rental expense for us that we’re paying on those homes is significantly below market. We have identified two and now there is one that we have actually gotten into drafting a sublease with and getting the approval process through Omega for that tenant to step in the building and in essence sublease the building. We will make a significant spread over that lease with Omega when we collect the rent from our subleaser or tenant. We are now - that is being basically approved by Omega and we are finalizing the sublease with him, Omega will approve that and since it's Georgia the state that we can reasonably transfer license relatively quickly. We expect them to be sometime during the third quarter for sure if not before. So that would be the disposition of the two parties in Georgia, it's an existing tenant of ours that’s already two building, we have a relationship with them, good operator know them and frankly they are very excited about getting into those buildings. The other two buildings are the two buildings in Arkansas that we did not end up leasing to Aria. One of which we’re in sales discussions with I’ve decide - the company decided to basically sell that building. A building that’s probably our poorest performing building in Arkansas, it's an area with a lot of competition and there are a couple of operators that want to be buy it, that are already operating in that area. It's not Aria, completely separate and they will pay well above the debt. So want to put some net cash proceeds on the deal and it's our determination that it would be better to basically sell that, take that cash and invest it another facility where and get a good rate of return that would actually further diversify the company and lower our exposure in the State of Arkansas, so that’s the one property. The other property in Arkansas is the property that needed some capital improvements, we’re beginning to do those now. As soon as those are completed we expect to lease that property out to a number of who have expressed interest and that with the conclusion of that that would basically wrap up the leasing side of the 40 properties and just leave us with operational transfer and thanks for your words regarding gaining [ph] transfer, some of it is unfortunately out of our hands. I'm pleased to report though that the six properties in Ohio were HUD. We got the packages approved by the banks first and then submitted to HUD and it's a very expensive process, it's almost the same process that you go through in order to get a HUD loan initially. Those are all in HUD, the bank has approved them, they expect to HUD to approve them hopefully by the end of this month, early June at the latest and then we will move rapidly to transfer the operations of those six facilities and our goals to get those done by the end of the second quarter.

[Chris Doucet:]

And so then which was my next question, so then the last two HUD, two other HUD properties I guess those are in Georgia right? How long do you think those will take to transfer over?

[Bill McBride:]

Well those also are being - it's in the approval process now with HUD it's been submitted to HUD and one of them is working on the package right now to submit that to HUD, that was one facility that was, we did the HUD loan - and Clinton you can jump on if you remember the exact month we closed on that HUD loan but it was sometime later this year. So we closed on that in December and then basically got the facility leased out for that, we didn’t want to get into a leasing arrangement on that one until we completed the HUD financing. We got the HUD financing done, got the lease and now we’re submitting that package to HUD. So that will be the last one that we have with HUD.

[Chris Doucet:]

Okay, and one last question Bill and then I will step back in the queue and let somebody else ask questions but that one last Arkansas property, how much is the debt on that?

[Bill McBride:]

The one we’re selling or the one that we’re going to lease?

[Chris Doucet:]

The one you’re selling.

[Bill McBride:]

Right at 3 million.

[Operator:]

And we will go next to Andy Carothers with Bagley Securities.

[Andy Carothers:]

Would you in general give me an amount of the term of the leases that you’re seeking and what sort of increases year-over-year that you might expect from these properties, get an idea of what your capability might be enable to increase the dividend?

[Bill McBride:]

The majority of our leases are 10 years, there are few that are just over five years, so the average you know 7 or 8 years, if I guess you’re weighted average to them, none of them are less than five years. And then the majority of them are 10 years. The escalators in the leases range between 2% and 3% per year, so if you were to say okay, let's take that $27 million number that we talked about it's sort of total leased revenue that was filed in the 8-K and let's just say you put out 2.5% escalator on that $27 million, you’re going to come-up with roughly $600,000 doing this semi-HUD [ph] but roughly $600,000 of rent escalation every year just from the existing portfolio, just from the stated increases that are already built into the leases and if you were to divide that by the number of shares of $20 million you get several cents of FFO growth just from the underlying escalators in the leases, roughly $0.03. We have about $0.03 of growth on the existing share base from just the escalators in the portfolio without the company making any additional investment.

[Operator:]

And at this time that concludes our question and answer session. I would like to turn the call back over to management for any additional or closing remarks.

[Bill McBride:]

Thanks for everyone for joining us today. We look forward to continuing to update you on our progress during our next conference call. Thanks again and good day.

[Operator:]

And this does conclude the conference. We thank for your participation.