Regional Health Properties, Inc.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Good day and welcome to the AdCare Health Systems Incorporated Second Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brett Mas of Hayden IR. Please go ahead.

[Brett Mas:]

Thank you. Joining me on the call today are Bill McBride, AdCare's Chairman and Chief Executive Officer; Allan Rimland, AdCare's President and Chief Financial Officer; and Clinton Cain, AdCare's Vice President of Finance. I also like to mention this call is being simulcast on the Company's website at www.adcarehealth.com. I am now going to read the forward-looking statements. 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 AdCare's 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 the factors that could impact AdCare results. Except as required by Federal Securities Laws, 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, FFO and adjusted FFO. 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. After management concludes their remarks they will respond to questions regarding the presentation. Now, I would like to turn the call over to Chairman and Chief Executive Officer of AdCare, Bill McBride. Bill, please go ahead.

[William McBride:]

Thanks, Brett. Good afternoon and thanks to everyone for joining us today. I am particularly pleased to be with you this morning as we mark a pivotal point in our strategic transition. Effective July 20, we have entered into agreement for all 40 of our facilities. Roughly, a year ago this company laid out a plan for our shareholders to transition from an owner and operator of healthcare facilities to a healthcare property holding and leasing company. With the signings of the final agreement to sublease the two facilities in Georgia, we’ve completed an important step in our strategic plan. All of our transition efforts to progress steadily with operational handoff to the new operators. We expect to transition the remaining seven properties one of which will be sold over the over the next two to three months subject to closing conditions, approvals and consents. We continue to optimize our existing property portfolio by seeking longer lease terms, higher rents and higher rent escalators. At the same time, we are seeking to optimize our capital structure by refinancing debt to reduce interest expense and extend maturities. As a result our business now has a more predictable earnings and cash flow profile and this has given the board the confidence to take the first step towards establishing and maintaining regular quarterly cash dividends on the company's common stock. The stability of our business also gives our management team the confidence we need to provide guidance for our post-transition financial model. I’ll walk through the details after Allan reviews the quarter and year-end financials. We’re now able to begin focusing on the next phase of our strategic plan that is to develop a pipeline of attractive opportunities that will enable the growth of our portfolio as well as invest in our current facilities. We’ve established a clear state of evaluation criteria and internal hurdles that will not only be a complementary and strategic fit with our existing portfolio, but will also preserve and enhance returns to our shareholders. We are considering both single facilities primarily from existing operators as well as other acquisitions of multiple properties that will be accretive to our cash flow. To date, we’ve made offers on a few properties and our pipeline continues to grow. We are generally seeking attractive opportunities with lease cap rates in the range of 10%. Our goal is to diversify our operator mix and reduce our geographic concentrations while focusing on accretive acquisitions. We’re not currently prepared to discuss the actual number of opportunities in our portfolio or timeline for making an acquisition. I will say that we are not lacking for opportunities. As I mentioned we've already bid on a few opportunities and we will be bidding on others shortly. As we’ve previously mentioned we are encouraged that we've not been competing with a larger healthcare REITs thus far. Our strategy and belief that we can identify and pursue smaller acquisition targets without competing with a larger healthcare REITs as thus far proven true. We are highly competitive with our bids while maintaining a disciplined approach. Additionally, as I’ve mentioned in previous calls we have put over $4 million to work with a positive spread with our existing tenants and lease inducement in short-term financing transactions and facility expansions. I look forward to updating you with our progress on this front when we have some definitive transactions to announce. I will now turn the call over to Allan Rimland, our President and CFO to provide the details of our second quarter and year-end financial results.

[Allan Rimland:]

Thank you, Bill and good morning everyone. Beginning with this quarter the presentation of our financials includes the reclassification of operating results of facilities that had transferred operations to discontinued operation in both current and prior year period. Our second quarter results again include a mix of facilities that we operated during the quarter as well as leased by third-party operators. Patient care revenue and expenses were recognized only for facilities that were operated throughout the period. For facilities that were transferred during the period, patient care revenues and expenses have been reported as discontinued operations up to the data transfer. Beginning on that page, rental revenues were recognized. So while still a bit of a mixed bag we are gaining increased visibility into the underlying business as operation transfers of an increasing number of properties become fully effective. Having said that let’s take a look at the financial results. Starting with the quarterly results, second quarter revenue was up 16.2% to $23.3 million compared to the second quarter of 2014 of $20.1 million. Total revenues include both patient care and management revenues for facilities that were operated throughout the quarter as well as rental revenues for facilities that were transferred during the quarter. Rental revenues of $4.2 million represented 18% of total revenues in the second quarter of 2015 compared to $296,000 or 1.5% of total revenues in the prior year period reflecting the transitional shift in our business model. Facility level costs were hiring during the quarter as compared to the prior years quarter driven by a number of areas including higher labor costs, insurance costs, and higher bad debt. G&A expenses decreased approximately $1.7 million more than 40% year-over-year primarily as a result of the decrease in salaries and expenses consistent with our transition plan. We expect additional reductions in G&A as we complete our transition plan. During the second quarter of 2015 adjusted EBITDA from continuing operations was approximately [$2 million] compared to a negative $800,000 in the second quarter of 2014. A reconciliation of this metric to our GAAP numbers is available in the press release we distributed today. Net loss attributed to common stockholders from continuing operations for the second quarter totaled $3.4 million or a loss of $0.17 per basic and diluted share compared to a net loss of $7.4 million or a loss of $0.43 per basic and diluted share in the second quarter of 2014. Moving on to review of our balance sheet, cash and cash equivalents at June 30 totaled $15.3 million compared to $10.7 million at December 31. Total restricted cash and investment at June 30 totaled $14.4 million as compared to $8.8 million at December 31. Total debt at June 30 was $146 million compared to $151 million at December 31. Subsequent to the end of the quarter we paid down an additional $7.9 million of debt in connection with the sale of our Bentonville, Arkansas facility and the maturity of convertible debt instrument. In addition, we continue to work to refinance certain properties with HUD and/or conventional mortgage debt helping us to secure low interest rates and more favorable terms including longer maturities. These transactions also can create the potential for cash are refinancing to further bolster our growth capital. We expect two properties to be submitted to HUD by the end of this year. In summary, we are focused on increasing shareholder value to the acquisition of additional properties as well as by further optimization of our current real estate portfolio and capital structure. We have numerous options in both areas to drive and improve the financial results and ultimately greater cash flow. I'll now turn the call back over to Bill.

[William McBride:]

Thanks, Allan. As I mentioned the transition is nearly complete and this progress has given the board and management the information necessary to provide investors with a financial snapshot of our post-transition financial model. Please note that the snapshot does not include the benefit of any acquisitions. Once operations for the remaining six properties have been transitioned to third-party operators and once we closed on the sale of a property in Oklahoma which is under contract. We currently expect on an annualized run rate basis rental revenues are expected to be in the range of $30.0 million to $30.8 million. Third-party rent expense is expected to be approximately $8 million. G&A is expected to be between $4.5 million and $4.8 million including non-cash stock-based compensation. Interest expense including the amortization of debt financing costs, is expected to be in the $7.1 million to $7.2 million range. Preferred stock dividend is expected to approximately $5.9 million. In sum, we see adjusted FFO per share in the $0.25 to $0.30 range. Key drivers of meeting the top end of the range would include deployment of current cash on hand and restricted cash. These modifications and refinancings and more aggressive cost cutting on the G&A level. I would also point out that we will continue to have some costs related to the legacy business or sometime which we have factored into our numbers. As a reminder, on June 30, 2015 the Board of Directors declared a cash dividend of $0.05 per common share. This represented a 10% increase over the dividend declared at the end of March. This quarterly dividend represented an annualized dividend of $0.22 per share or a dividend yield of 5.7% based on the closing price of the stock on August 11. I am also pleased to report that have some good news regarding the federal income tax implications of our dividends. Due to our projected current and accumulated negative earnings and profits, our E&P cash position. Cash dividends paid to common shareholders for the year 2015 and until such time the company may have a positive current or accumulated E&P will be treated as a return to capital for shareholders to the extent available for federal income tax purposes. In summary, I am pleased with our progress to date and increasingly encouraged by the opportunities in front of us. I firmly believe AdCare’s position to become one of the fastest if not the fastest growing healthcare real estate investment trust. We are now ready to answer any questions you may have. Operator, can you open it up.

[Operator:]

Yes, thank you. [Operator Instructions] And we’ll take our first question from Chris Doucet from Doucet Asset Management.

[Christopher Doucet:]

Good morning, guys and congratulations.

[William McBride:]

Good morning, Chris. How are you?

[Christopher Doucet:]

Good of the seven remaining properties that you have how many of those are from Oklahoma and where the remaining properties from?

[William McBride:]

Of the seven remaining, three of those properties are in Oklahoma and of those three as I mentioned previously one of them is under the contract to sale and the other two will be leased on a long-term basis. That particular book the other two properties is actually the operator who is going to be leasing them is taken over some of that day-to-day management functions of those properties in order to transition them or [indiscernible]. On all three as you may and remember from previous calls Oklahoma is one of the most difficult states to transfer license, it's just a very time-consuming process with a lot of due diligence on behalf of the state. All three of those applications have been submitted and have been deemed complete by regulators in Oklahoma and they have up to 90 days to grant approval and we’re in the process where they have accepted those applications and are remaining for approval to be granted and then those transfers and/or sale will occur. The other properties are – there is two properties in Georgia that were leased from Omega which we have an operator and lease signed Omega has consented to the transaction and we’re just waiting for the final subleased documents to be signed by Omega, but we have a term sheet signed by Omega. So those will transfer our expectation is that will transfer on September 1. The other property is in Arkansas and that’s the property that we expect to lease to one of our existing tenants Aria who operates our other properties in Arkansas. They should take that over sometime in the fourth quarter. We as part of our agreement for them to lease that property and it will be cross-defaulted and cross-collateralized with the other properties in Arkansas that Aria operates for us the other eight. That facility has been capital expenditures that we agreed to do relating to some roof fixing in such that we needed to complete before Aria took that over that’s why that one was delayed. And in the final property is also in Georgia is the property that we got HUD loan on very recently and we’re waiting – we just got back this week HUD approval to transfer operations. I spoke with the operator yesterday, he believes he can have the facility ready to go on September 1 to transfer that property.

[Christopher Doucet:]

Okay, that’s good news. Okay, so shifting gears a little bit I wanted to delve a little bit more into this tax issue that you brought up. So how much of the dividends if you continue to increase your dividend slightly for the next several quarters, how long the dividend be tax preference going forward do you think?

[William McBride:]

For quite a while.

[Christopher Doucet:]

Yes, explain a little bit…

[William McBride:]

Quite a while, I believe our E&P Allan jumped in I think our NOL is close to $30 million. And so I believe for the foreseeable future the taxes are going to be deferred certainly throughout 2015. 2016 the company will have to make a determination and Allan and I are beginning to do work on this to determine whether or not we want to go ahead and elect REIT status. Under REIT status, the dividend would not be treated the same. A portion of that could be taxable to shareholders. It doesn’t matter for 2015 because the company would not qualify to file the REIT because our revenue – our income from operations in the revenue side is too large for us to meet REIT qualifications for this year. For 2016 if everything transfers as we expect that it will, and if nothing unforeseen happens with the company having to take back a facility or something then under that scenario the company could elect REIT status at the end of 2016. If it chose to do so for a variety of reasons, which we have not made that determination, the tax treatment could be slightly different for shareholders. If continue along this line of being a property holding and leasing company then for the foreseeable future those dividends would be tax deferred. They are essentially treated as a return of capital or reduction in your basis.

[Christopher Doucet:]

Okay, that’s good news.

[Allan Rimland:]

Chris, it’s Allan. Just in response to your question our negative [E&P position] is well over $50 million.

[Christopher Doucet:]

Excellent.

[Allan Rimland:]

As Bill commented the foreseeable future it would be a while and gives the company the ability to really look at its tax position for the benefit of AdCare and its shareholders.

[Christopher Doucet:]

Okay. And once all 38 properties that are going to be held or leased what would be the average lease term in the portfolio?

[William McBride:]

I believe right now we're in the range of seven to eight years is our average and one of the things that I’m doing Chris, I think glad you asked is there is a number of transactions that the company had entered into prior to my arriving or had already reached as I’ll call it handshake agreements on a number of properties. Some of those leases were in the five-year variety and that is what’s bringing me average down to that seven or eight-year. I’ve already begin and I mentioned this in the text. I’ve already being going back to them on a selected basis and looking to see whether those operators are like to extend those leases. Now what we’re trying to do is obviously now we have a little bit of history with these new operators in the buildings. Not a lot, but a little bit. And so what we are doing is going back and taking a look at how are they doing in these buildings in these initial few months, how is the census looking in those buildings, how is the revenues looking in those buildings are we kind of happy with the transition plan, a structure they’ve got in place. If we are and it can report I believe that in the vast majority of cases we are. We are looking to extend those. For example, there is two facilities I was speaking with our operator in Alabama, we have two facilities in Alabama speaking within – yesterday, is current deal was the five-year lease and the escalators were just under – between 1.5% and 2% a year. I talked to him about doing a changing it to a 15-year lease for which we would go up to 2% for the first five years and then 2.5% for the next 10 years and he is interested in doing that we begin drafting the documents for that. There has been some other opportunities in Ohio, we've already done and there will be others going forward. So I expect to answer your question shortly it’s right now between 70 I expect that number to be much closer to 10 by the end of the next quarter.

[Christopher Doucet:]

Okay. And I don’t know if you guys can give us some specifics to give us a sense of how the portfolio properties are actually performing since the alternative operators took over from AdCare is this something that can you give me a sense of what the consensus of the census is now versus when other properties were initially taken over or maybe the occupancy?

[William McBride:]

Well, I’ll give you an example so Aria is our biggest operator. Aria operates the facilities in Arkansas eight of them and they will be taking over in the four quarter the ninth. Aria, the census is relatively consistent in other words it’s not ramped up a lot. However, their Medicare census has gone up quite substantially particularly in a couple of facilities, a larger facilities in Arkansas for example [indiscernible] we’ve seen a significant increase in their Medicare census since we’ve taken that over. The other thing interestingly enough in Arkansas that I don’t me to focus only on that and Allan can talk about a couple other states, but Arkansas is our biggest state right now and it has the largest operator and geographic concentration. In that state under Medicaid when you change our owner you're allowed to rebase your Medicaid rate based on projected budget for our direct costs like nursing, dietary et cetera. Aria was able to get on average between $15, $20 per day additional Medicaid revenue for patient. So in a typical facility, but should stay at the 100 beds and you’ve got 70 those are Medicaid patients with the balance being private in Medicare that’s roughly 2000 plus Medicaid dates per month, but $20 a day you’re adding $60,000 - $40,000 to $60,000 of revenue per month on a typical building. Well, that’s pretty substantial. So we are seeing some significant improvements in financial performance of those buildings irrespective of necessarily of censes because cense is one thing but you want to bring in the right resident, you want to really – these guys are really looking to move the Medicare mix, the private mix and the contracted services mix and that’s to me what's more important because the rate spread in the profitability of those is so much more substantial in Medicaid. Allan, do you want to comment on perhaps South Carolina.

[Allan Rimland:]

Sure, Chris. So I think over time and as we sort of finish up our transition we will be reporting portfolio level either occupancy or coverage ratios. So I think as Bill said, we are anecdotally and spot checking and it’s consistent with the boards thinking last years transition is that local operators simply are running these assets better. I look at the symmetry numbers over the last couple days they operates three buildings for us two in South Carolina and one in North Carolina and a similar view. Our local operators are much more focused in terms of occupancy getting the right patient in managing the cost. And looking at the last couple months that’s the portfolio that covers rent 1.4 to 1 which is our view almost retired coverage is at 1.4 to 1 now one of the facilities that particularly well. That's a portfolio of the cross-defaulted and cross-collateralized.

[Christopher Doucet:]

Okay, excellent news. Thank you guys and congratulation. I’ll step back in the queue and let’s somebody else ask the questions.

[William McBride:]

Thanks Chris.

[Operator:]

[Operator Instructions] And we will take our next question from [indiscernible].

[Unidentified Analyst:]

Hi guys. First of all thank you for providing the post-transition financial guidance. I came in a little late so I apologize if you covered this earlier, but could you just explain to me what is in the G&A number of $4.5 million to $4.8 million?

[Allan Rimland:]

Sure Bill, why don’t I take it? The $4.5 million to $4.8 includes about three quarters of $1 million in non-cash stock-based comp and that is what consulted in the press release. So, on an apples-to-apples basis we’re assuming approximately $4 million of cash expense. Bill mentioned earlier that there will be some ongoing legacy cost in terms of business that is included in that number. And if you look at guidance on a cash basis we look at it sort of $3.75 million to $4 million of G&A. It’s a target it really reflects post-transition to the two pieces of that number one a personnel costs, which I think we’re now on a trajectory to beat that number. So it's a little conservative and then its related to all of our head costs involved in ongoing insurance costs back office, front office and a couple of odds and ends. We get further through the transition over the next couple months I think we fine tune that analysis and really our cutting costs on a weekly or bi-weekly basis.

[Unidentified Analyst:]

Could you go into a little bit more detail because that numbers seems relatively high given your it’s about 100% of your FFO, but equal to FFO and given that you become an asset light business just trying to understand why G&A still is so high?

[Allan Rimland:]

Let me just grab it. In the $4 million number as I said there is probably about $1.5 million, $1.7 million of salaries and wages and as I said I think that’s coming down, coming a little better than expected, the transition from where we are today to what that target G&A is really scheduled in terms of personnel departures. Legal costs are still a number that we’re getting a better handle of there’s been a lot of legal costs involved in the transition and some of the related capital rise. So we’re really trying to holding on a specific number we’re forecasting roughly 300,000 on legal. Auditing and accounting and you go with it our last 10-K and its also the line-item that can go in the transition between our tax accounting and our KPMG work that’s upwards of $500,000 to $600,000 in insurance between VNL and some property level insurance is in the $300,000 to $400,000 range.

[William McBride:]

Allan let me comment on this a little bit, have permitted it is high relative to our size and however I would comment that listen yesterday quite extensively to characterize cost and they are running at about $6.7 million of overhead with about roughly a 100 properties. Now as you know for AdCare to add 20 properties would not increase our G&A expense at all. So proportionately we are really not out of line now there you got to read that has not had legacy operating businesses and with spun out events and it never had legacy operational costs and expenditures and staffing and such. So yes, relatively high to our size but not really relative to peers out there and finally we staff the three and the board has staff the three including Allan and I and others to grow. We are running at rate that we - the expectations of the Board and the expectations of management are to grow and while a substantial amount of our time has been spend in this transitional effort that we had thus far in dealing with getting rid of operations in all of the issues that are associated with that. And that’s right we still have operations people in our overhead for some period of time as we complete the transition and hand off of a number of these properties that will ultimately wind down. But we staff the thing to grow probably the expectations are that we’re going to grow and that’s another one of the overriding reasons that the overhead is where it is.

[Unidentified Analyst:]

Okay. Thank you for that detail the salary, the legal or in the insurance totaled about $3 million and I think you said total G&A, the cash G&A will be about $4 million is there any other big number that contributes to that extra $1 million that we have and just accounted for?

[William McBride:]

No from its you know I guess into lot of little items and a little bit of contingency and again trying to create some expectations and you view that we are constantly cost-cutting and looking at the overhead structure to shrink it both on the personal and the non-personal cost. It’s just a little harder to get our handles around, because we’re still in that transition and I think we got better visibility over the next couple of months.

[Unidentified Analyst:]

Okay. Thank you.

[Allan Rimland:]

Sure. Thanks.

[Operator:]

[Operator Instructions] And we will take our next question from Zvi Rhine from Sabra Capital.

[Zvi Rhine:]

Good morning guys.

[William McBride:]

Hi, Zvi.

[Zvi Rhine:]

I’ll reiterate what the other two gentlemen said, very happy to see the pro forma financials out there and revenues handling higher than what was originally projected, but just a couple of details, cash interest expense I calculated it comes out for about a blended average of 5.5%, is that correct? Is that inline with what you have there Allan?

[Allan Rimland:]

Yes, I’m sorry, I’m not sure exactly how you are doing it, but the…

[William McBride:]

Net interest amortization.

[Allan Rimland:]

Yes, it includes, 7.1% or 7.2% includes about $600,000 in amortization if you look at average interest costs and we’ve looked it over the portfolio it’s about kind of 5.4% on a cash interest basis at about a 0.5% in amortization of debt financing costs as well as the accounting literature says that we do have the amortization of debt financing costs in our interest expense.

[Zvi Rhine:]

Okay. And does the $7.1 million, $7.2 million in net interest expense does that include the benefit from some of these HUD financings that you expect to close at the end of the year or is that not baked in?

[Allan Rimland:]

No.

[Zvi Rhine:]

Okay. All right and then on restricted cash it seems like restricted cash had grown sequentially what's driving that and at what point is that cash going to become available for the company used for acquisitions and it seems like you have $14 million or so that is restricted.

[William McBride:]

Well, I’ll address just part of it and then Allan can do some. So for example, we have letters of credit that are posted for our worker comp, we were self-insured for workers comp. Since in February moved the workers comp to a fully insured program. However, we still have about $3.5 million of collateral that’s put that against those workers comp. So earlier in the year we had used our accounts receivable as the collateral to support those letters of credit. Obviously, as we have transferred operations of the buildings DARs has been collected and we no longer have accounts receivable to use as collateral so it had to post cash, so it posted that cash earlier this year and that’s one of the reason you’ve seen restricted cash rise, there is a couple of others, but that’s one of the main ones. We have since recently finished an audit of the outstanding reserves and we expect to have some significant drawdowns of the – obviously the expenses gets paid out and then the collateral is no longer needed you update that with an analysis, which we provided them and we expect to see a significant amount of that cash return by the end of the year under that program. So you would see the restricted cash be reduced the cash free-ups and we could use to invest and that’s to the tune of about $3.5 million of that. Allan you may want to address some of the other with the bank, private bank.

[Allan Rimland:]

Sure. On the debt side there is really two big pieces to talk about. One is we have a credit facility with contemporary healthcare that backs our ownership of the companions facility in Oklahoma. That loan is approximately $5 million that is $2 million of cash collateral against the loan. On the sale you would be removing $5 million of debt and $2 million of restricted cash from the balance sheet and that’s a transaction that should close in the next sort of 90 days. In addition our largest conventional lender private bank holds $5.7 million of cash collateral against those loans. That’s a number that has increased over the last few months reflecting more challenging operating at those facilities. There is really two avenues that we’re working with private banks that could happen with that cash. One is there is a view that we can net that cash against the loan thereby reducing interest expense or and probably more beneficial to shareholders that we see improved operating performance at the Aria facilities such that cash is released back to the company and we can use it from a positive spread investment.

[Unidentified Analyst:]

Okay. All right, that was helpful and last – when transition is complete how many of the properties we actually own, is it still going to be 25 properties?

[William McBride:]

So at the end of the deal we are going to have the 38 properties the two sales with 38 other than 38, 14 of them are leased and 24 will be out. And as those 20 owned we have 6 of them with HUD loans and 5 right now with USDA loans and we are going to be as previously announced to discuss – we are going to be submitting another two properties to HUD shortly.

[Unidentified Analyst:]

And the breakdown of the revenue between the owned facilities and the 14 leased facilities if it’s somewhat even?

[William McBride:]

I don't have those numbers, but based on portfolio in the states and the rates in those states there is not going to be a significant difference between owned and leased in terms of revenues per bed.

[Unidentified Analyst:]

Okay, perfect. Thanks so much guys.

[Allan Rimland:]

I just want to clarify so once the transition is over we will have 38 facilities, its 24 owned, 11 leased.

[William McBride:]

Yes, I call those are leased.

[Unidentified Analyst:]

Okay. Thanks guys. Appreciated.

[Operator:]

And we’ll go next to Gentry Klein from Cetus Capital.

[Gentry Klein:]

Hi guys, how are you?

[William McBride:]

Good. How are you Gentry?

[Gentry Klein:]

Good. Congratulations on the positive results and continued progress. Most of my questions have been answered just have a question if you can touch upon a little bit about some of the deals you're looking at in terms of generally speaking how do you think about financing these deals in terms of what are the typical loan-to-values and what are the typical capital requirements, how do you think about funding the equity portion and the debt portion of these deals?

[Allan Rimland:]

Well, I can give you a snapshot we’ve looked at and did on the few facilities already, we were looking basically and getting an initial loan from one of our lenders in the range of about 65% to 70% of the acquisition price. We would find the remaining 35% to 40% of the existing cash. We’re seeing initial lease rate based on our operators that we knew are ready to go into those buildings and lease those properties and in those cases do it in a way where we were cross-collateralizing and defaulting that new lease with some incremental leases for protection in the range between 10% and 11% on the growth investments. So if you had to say $8 million investments they were willing to pay more north of $800,000 to $880,000 of rental expense in the first year. Leases were going to be 10 years or will be 10 years or more with escalators somewhere in the 2% to 3% range per year. The return on that is obviously even if you finance it with preferred stock the return was about $30 million of investments to the company is between $0.03 and $0.04 per share on FFO basis. And frankly $30 million of deals in this market right now is not going to be difficult for the company to obtain. That price is right now you're talking about four facilities roughly is about $30 million of deals plus or minus is varied by state obviously it varied by bed size, but that’s roughly for facilities. I mean the pipeline that we have in place is extensive already on deals and like I said we’ve already begin to bid, we will be bidding again shortly on some facilities. The pipeline is rather extending of nursing facilities out there. If you listen to the other healthcare recall activity is very good right now. There's a lot of facilities that are available and you we expect to pursue them vigorously, obviously you know from my perspective I wanted to make absolutely sure that we did a good and effective job of transitioning these facilities off without at all losing focus on that and running around trying to do deals all over the place. I feel that we at a place now have the management team in place now to really start to devote a substantial amount of our time to getting some of these deal signed and getting them into our pipeline. So I expect to see results of that shortly.

[Gentry Klein:]

Great, okay that’s very helpful. And to clarify a little bit when you mentioned that $30 million to $40 million investment could be $0.03 to $0.04 per share on an FFO basis and that may be using preferred stock. Practically speaking it sounds like we could be in a position where we’re using not preferred stock but we are using some of our existing cash and the balance sheet and getting a loan.

[William McBride:]

Yes, I just wanted - either we would only use preferred I am just saying the way I look at it is preferred is an expense of source of capital for the company. We don’t want do that if we don’t need to however even if we did that even if that rate it still would be that to that extent accretive. If we were to be able to use restricted cash that we say pulled out of the restricted cash like I just know walk to workers comp. Allan discussed some of the cash we expect to get freed up from private as our portfolio continues to mature under Aria, if we use that cash obviously those numbers are significantly better than that. But I wanted to say even on a worst case scenario, using that kind of expensive capital it would be accretive, obviously equity capital would be the most expensive and we want to use that if it all very sparingly.

[Gentry Klein:]

Right and the rate on the debt piece I assume that would be closer to what we are seeing from the HUD perspective?

[William McBride:]

No I would think that you're going to see rates probably more I mean I don’t like to be conservative so when we discussed these deals you make me put in like 7% for debt I know he does that because he knows he can do better than that. But we put that number in you and the strategy would be to buy these things was I'm hoping more or like 6%-ish debt - conventional debt. Let them mature for a year or too and then submit them to either a bigger portfolio plastics with the bank in a more favorable rate or high financing to take that debt out and raise actually the amount of loan-to-value as well as lower the interest. And but again even if that 7% fully amortized with amortization expense in the debt. These things are still going to be quite accretive to the company. Because our shareholder base is so – are so small the - of shares we have outstanding it so small relative to the other REITs that the smaller deals are going to highly accretive to us. And obviously, as I mentioned before we have the corporate overhead infrastructure in place already to support adding 30, 34 facilities to portfolio without really any increases in overhead as a result of oversight. Again not to refer that the care investment who is really their trust excuse me who’s really kind of the other sort of small fast-growing healthcare REIT that’s out there is well over 100 buildings and they are starting down announce a little bit of overhead increases, but generally they’ve been running in that $6 million range all we have to know 100 buildings.

[Allan Rimland:]

Right just as a follow up on the debt side, I do like to keep the reasonably conservative in terms of how looking at the debt structure. Just as few points of reference right now our private bank conventional loan portfolio is roughly 5.5%. In addition, as I mentioned earlier we’re submitting two properties to HUD this year and those rates are considerably in the low-4s if not even below that with the ability for cash or refi, which I think you alluded to is cash that we could redeploy at high rates.

[Gentry Klein:]

Okay perfect. I really appreciate it and again congratulations on a continued progress.

[William McBride:]

Thanks.

[Operator:]

And we will go next to [indiscernible].

[Unidentified Analyst:]

Hi, I know I had mentioned this to you guys in the past, but I was wondering if you could given any additional thoughts changing the name of the company.

[William McBride:]

We have..

[Unidentified Analyst:]

And why wouldn’t you given the history of the company.

[William McBride:]

It’s one of the things that we are considering, obviously we’re in the works right now to put a proxy statement together for our upcoming Annual Meeting and that’s one of the things that would be under consideration for that because I believe that would require shareholder approval.

[Unidentified Analyst:]

Okay, thank you.

[Allan Rimland:]

It’s Allan. I do appreciate I put that on my list of things to do. We are doing sort of a wholesale kind of corporate cleanup as well so this could be part and parcel to that. Thank you.

[Unidentified Analyst:]

Great.

[Allan Rimland:]

And we are taking suggestions by the way.

[Unidentified Analyst:]

Can I have an auction for the naming REITs?

[William McBride:]

One other thing if we do that I think it would be important – that’s one of the things I mean most of these REITs love to have REIT in the name. You’ll see that’s quite prevalent in the industry. However, as I mentioned previously we are still evaluating what makes them more sense for the company and it’s shareholders as far as electing REIT status which certifies into whether you would want to REIT in the name. And we are considering just because we haven’t sort of done it or gotten back to on it. It doesn’t mean we’re not looking at it, analyzing it and trying to discuss it and figure out the best course of action. So we’re trying to look at – well right now our shareholders are getting a rather favorable tax treatment of the dividend, we believe for them and based on the some preliminary discussions we’ve had, they like that very much. So electing restates while it will potentially broaden the type of investors that can come in the stock in terms of REIT funds that’s better, there maybe some negative from it as the results of the way the dividends would be treated on a go forward basis. And so we’re looking at that in connection with the name and whether we would read in the name and all that. But we are looking at it seriously and we recognized that would probably be perceived as a good change for the company.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

And we’ll go next to Chris Doucet from Doucet Asset Management.

[Christopher Doucet:]

Hey guys, I just had a couple of quick follow-ups. Bill you talked about your robust acquisition pipeline and did you also infer that you actually have bids currently outstanding on different properties?

[William McBride:]

We do.

[Christopher Doucet:]

Okay. And – of the properties not necessarily that you are bidding on now, but the properties that are in your acquisition pipeline, what’s kind of the high-end as far as size of the deal that you would look at right now? Or that you are looking at?

[William McBride:]

I’ve not – we’re looking at deals that are up to 14 facilities as a package. I recognize that would require the company to do some sort of potential raise or whatever, but I think that I don't want to throw those off the table, I mean that’s something that if we thought that was an attractive deal we would take it to the board and will take those to the board and make a determination of what’s the best, if it’s a great deal for the company and very accretive, it’s something we would look at, okay, well how do we finance this. So I think we’re looking at all sorts of deals including deals in the $100 million plus range. I don't think those are necessarily off the table for the company. Those are more difficult to get for a number reasons, those tend to attract the larger healthcare REITs get involved in the bigger deals so the price goes up and more competitive right now. So I don't think it’s likely that we would do one of those particularly our first one or two, but we look at them, we analyze them and part of the reasons we’ve done that, we’ve had a couple of meetings on this already. And sometimes what happens is those things get subdivided at the end for whatever reason. They come out as a 14, 17 facility package and then based on who wants to operate and sort of the ultimate bidder may already have geographic focus in one particular state and not want that state. We can sort of kind of get around the edges of those deals and maybe pick up a few. So that’s why we stay involved in those not because we ultimately think we are going to win and certainly that big of a deal. Although we make sure those deals and if in fact we did get a big deal I would take it to the board and see how we’ll go forward and trying to bring that deal in. But I don’t know if that answers your question.

[Christopher Doucet:]

No it does, thank you. And just another quick question so going back to the G&A and by the way the top line revenue number obviously is a lot higher than I thought it was going to be, but the G&A was about $0.10 per share in FFO than I thought it was going to be. How much of that G&A do you think were going to be able to call back because of other operators taking over properties in just general attrition from employees?

[William McBride:]

I think that is a little bit higher Allan mentioned as we transitioned that operations I mean I think our goal would be to reduce debt by $0.50 million or so over time, but on the same on Chris as we add a much more properties we are going to have to build a little bit of infrastructure and keep some people on board. We’ve got an offsetting factor there going now. I think that the run rate of goal as Allan mentioned of about $4 million. I think that's reasonable for the company over the next 6 months to 12 months.

[Christopher Doucet:]

Okay. And Allan maybe just…

[Allan Rimland:]

Just as a follow-up I mean it is a tougher number to get a handle on we have as I said some legacy cost right now both on the personnel side as well as the whether its contract services insurance that literally on a week-by-week basis to improve and find those – those are just hard to cost up, but it’s something that we are following on a daily basis.

[William McBride:]

I think Chris when some of the numbers – I’m not going to speak to all day came never but when some of the numbers were put together I think that as I mentioned in the call we staff this thing to grow I mean we don't need what we've got for not going to grow. If we are going to sit here and manage 38 properties and collect rent checks do we need that kind of overhead, absolutely not, that number is high. But if we are going to start adding to this portfolio in a significant way and kind of wind down as Allan mentioned some of the legacy costs then I think that number is probably going to be in that range for a little while. And again not the point to competitors, but the company that’s literally 100 facility portfolio and a 40 facility portfolio in terms of the back office management of that portfolio is not significantly different. The SEC cost, the legal cost, the audit cost et cetera are not significantly different, yes they are 50% higher.

[Christopher Doucet:]

I understand and just switching gears a little bit what is the status of the VIE in Birmingham, Alabama and is that still impacting the P&L of the company?

[Allan Rimland:]

We can talk about the balance sheet and income statement.

[William McBride:]

Yes, the VIE is scheduled to sell – they asked for an extension, they posted an additional amount of collateral rather deposit not collateral, they forfeited $100,000 of the deposit because of the delay that the company will be able to take sometime in the third quarter. We expect that property to close sometime around the end of September. We don’t operate that property, but that is on our books because we’ve to consolidate it so it basically consolidated in our operations then eliminated as an adjustments because of the accounting treatment for VIE. So it’s on the balance sheet, it’s in operations and there is an offsetting adjustment for that. Really the reason we have to do that is because we guarantee the debt, the debt is bond that are outstanding on the properties that’s long time ago guarantee the debt and because of that guarantee as the accounts determined that it was VIE and we have to consolidate that those operations. It’s not having a significant impact negative to us in terms of working capital. We are not funding the working capital for that problem for that facility. So the delay is not impacted that. We are however going to get when it closes about $500,000 of cash that we could then invest, which relates to advance that the company made before many couple of years ago in that property. So we will get some return on sale of about 500,000 it doesn’t impact us on a cash flow basis it does impact the balance sheet because the debt is on the balance sheet but we do expect that to close shortly.

[Christopher Doucet:]

And so roughly $6 million and debt will come off the balance sheet? Is the correct?

[Allan Rimland:]

Yes.

[Christopher Doucet:]

Okay. One last question, just can you give us the status of the faster portfolio?

[Allan Rimland:]

Sure so we have eight leases with eight buildings under lease with Foster that we have subleased. We’ve been in discussions with him about getting wrapped up a final consent to sublease. We believe we have the consent, so there is some discussions about that. I expect to get that results soon, we also be in discussions about possibly extending the portfolio, modifying the portfolio in a way that would be beneficial to both parties. And those are really in the discussion phases right now. I think the disclosure that we had is adequate and inconsistent with where we are in that thing I don’t expect any significant impact to the company resulting from that.

[Christopher Doucet:]

Okay one last question I will step back in queue. But do you guys think that we might hear about something as far as the acquisition front is concerned by the Annual Meeting and when do you expect the Annual Meeting to be?

[Allan Rimland:]

We are working on that right now. We expect the Annual Meeting probably is going to be the 1st of November, we waited to get really the bulk of the operations transferred to have that meeting. We are have taken to the board you know a number of proposals for the Annual Meeting including you know what we’re going to do with this staggered board, particles and by laws that we would need to adopt to be able to at one - some point I like to REIT status and such those are being worked on now and we’ll obviously have to file a proxy statement with the SEC allow time for them to potentially review that it’s my understanding from our counsel that that’s a possibility since it hasn’t been reviewed for some period of time. So we want to leave enough time for that review to occur. So based on that I think it will be sometime early November and yes I would hope that we would have some announcement prior to that. And we are working diligently on trying to complete some acquisitions.

[Christopher Doucet:]

Okay guys congratulations.

[Allan Rimland:]

Thanks.

[William McBride:]

Thanks Chris. End of Q&A

[Operator:]

That concludes today’s question-and-answer session. At this time, I would like to turn the conference back to management for any additional or closing remarks.

[William McBride:]

Thanks for everyone for joining us today. We look forward to updating you on our progress during our next conference call, we hope to have some announcement soon, thanks. Good day.

[Operator:]

This does conclude today’s conference. We thank for your participation. You may now disconnect.