Regional Health Properties, Inc.
Q2 2013 Earnings Call Transcript

Published: 15 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. And thank you for participating in today's conference call to discuss AdCare Health Second Quarter and Year-to-date Financial Results for the period ended June 30, 2013. [Operator Instructions] This conference is being recorded today, August 14, 2013. I would now like to turn the conference over to Jeff Stanlis of Hayden IR. Please go ahead, sir.

[Jeff Stanlis:]

Thank you and good day. We appreciate your patience today. With us today are Boyd Gentry, AdCare's Chief Executive Officer; and Ron Fleming, Chief Financial Officer; as well as Dave Rubenstein, Chief Operating Officer. Following their remarks, we will open up the call for questions. We would like to remind everyone that this call will be available for replay through August 21, 2013, starting later this evening. A webcast replay will also be available via the link provided in the company's press release available on the company's website at www.adcarehealth.com. I would like to take a moment to read the company's Safe Harbor statement that provides important cautions regarding 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 factors that could impact AdCare's results. Except as required by Federal securities laws, AdCare does not take -- undertake any public -- does not undertake to publicly update or revise any forward-looking statements or changes arise as a result of new information, future events, changing circumstances or for any other reason. Statements made during the call that are forward-looking include, but are not limited to statements that the company expects its optimization strategy to continue to drive strong overall adjusted EBITDA from continuing operations, statements regarding the sale of 6 facilities, statements regarding the company's current plans to issue equity instruments, statements regarding the signing and closing of the expected acquisitions, and statements regarding the company's expected annualized run rate. In addition, any AdCare facility or business the company may mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities, as well as the use of terms like we, us, our, and similar verbiage, are not meant to imply that AdCare Health Systems Incorporated has direct operating assets, employees or revenue or that any of the operations are operated by the same entity. Also, AdCare supplements its GAAP reporting and 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 to turn the call over to Chief Executive Officer of AdCare, Mr. Boyd Gentry. Boyd, please go ahead.

[Boyd P. Gentry:]

Thanks, Jeff, and good afternoon. I know it's been several months since we've conducted a conference call, and I want to begin by apologizing for this delay and the issues that occurred. I will address the situation today mostly to describe the concrete steps we've taken in the past few months to get the company back in the form our shareholders rightfully expect and how this will position us for the future. Last few months have been filled with numerous activities to get our financial restatements completed in an accurate manner. We're now in a position to communicate our second quarter and year-to-date 2013 results in a timely manner and are able to focus on improving and growing our operations going forward. We appreciate the patience and understanding of all of our stakeholders and other interested parties and want to welcome you all to this call. It became clear that our corporate accounting and finance functions were not where they needed to be. As you know, over the last 3 years, we've been growing rapidly, acquiring, integrating and optimizing facilities. While there is no question that this growth strained our internal accounting and external reporting capabilities, we've never faltered or compromised care for over 4,000 patients and residents. However, it became clear that we needed to make improvements, and these issues were spotlighted during our transition to KPMG as the company's new external auditors. The challenges we face, including the restatement, served as a clear indication that we needed to make both changes and improvements to our accounting team and processes. With that in mind, I want to welcome Ron Fleming, our new CFO, to his first AdCare Health Systems conference call. Ron joined the company on May 15, bringing a wealth of experience to AdCare. During the last 10 years, Ron served as CFO of a large, for the record, larger than AdCare, oncology physician practice management company after a short stint at a skilled nursing roll up that experienced explosive growth not dissimilar to AdCare. Prior to that assignment, Ron spent over 10 years at Mariner Health Care and his predecessors, a variety of accounting positions, including Controller and Chief Accounting Officer. As many of you on the call know, I was part of the Mariner team with Ron during which time we grew to a $2.5 billion revenue New York Stock Exchange company. So Ron has experience for the senior finance position of a publicly traded company as well as extensive M&A experience, and has managed large accounting and finance teams for companies with many facilities located across multiple states. So his expertise matches all of our needs, and I believe he is the ideal person to lead our finance and accounting team going forward. Since joining us 90 days ago, Ron and his team, in particular Sheryl Wolf, our new Vice President, Controller and Chief Accounting Officer, done an extraordinary job to complete our financial restatement in a timely manner. In a short time, Ron and Sheryl have brought about a complete metamorphosis of our back-office operations. And I can say with confidence that the efforts of the newly reconstituted finance group has given us the appropriate team to support our business model. We now have solid financial controls in place and significantly improved systems, all of which are needed to effectively and efficiently run this organization now and into the future. Our fundamentals are already showing the progress that we've made. We delivered 20% quarter-over-quarter revenue growth and increased revenues by 26% for the first 6 months compared to the same period last year. This growth is inclusive of a cut in Medicare reimbursement that began in April of this year, as well as both the loss of revenue from our divestiture of 6 assisted living facilities at the end of 2012 and a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia. In addition, the company executed 2 sublease arrangements effective as of June 30 of this year to exit the skilled nursing business in Tybee Island, Georgia, that has lackluster financial results. These operations are also reported as discontinued ops in our second quarter financials. We're beginning to make progress on profitability, as evidenced by our EBITDAR trend. EBITDAR, as you know, is earnings before interest, tax, depreciation, amortization, rental expense, and we believe this is a key metric in evaluating our progress. We delivered $4.7 million in EBITDAR in the second quarter, up from $3.9 million in the first quarter, and up from $2.5 million for the fourth quarter of 2012. You can find the reconciliation table for this metric in the press release we issued this afternoon. Having the right financial team in place, with significantly improved systems, has allowed us to streamline our collection process and institute cost-reduction measures. Both are related to our new finance team and both will directly impact our operational profitability going forward. One of the first areas to address was our collections process, which is an area that traditionally represents a key challenge for healthcare companies. We focused on improving our admissions process, as collections issues commonly reflect inappropriate admissions. Our efforts to bolster our admissions policies to improve data collection and paperwork has already produced significant results. In fact, our revamped collections process has resulted in a lower provision for bad debts in the first quarter to the second quarter. In addition, we've continued to pursue new fixed-price contracts for certain expenses involving some of our supplies, an area of our business that has significant cost and carries with it execution risk. These fixed-price agreements, which we expect to execute in the next few weeks, are anticipated to reduce our operating expense by at least $250,000 annually. Finally, we continue to streamline our corporate function with an ongoing review of our SG&A cost to eliminate some redundancy at the corporate level. We've finalized plans to reduce our corporate expenses by approximately $700,000 annually beginning this quarter with the reductions taking full effect in the fourth quarter. In aggregate, these initiatives should reduce our go forward expenses by $1 million on an annual basis. Coupled with the improvements in collections, this represents more than $1.5 million swing in our run rate financial performance. During April, AdCare, along with everyone in the industry, including doctors, pharmacies, medical device suppliers, and anyone receiving Medicare reimbursement, experienced the mandatory 2% revenue reduction due to the sequestration. We're happy to report, however, that our optimization processes have resulted in improvements in average Medicare rates offsetting almost 2/3 of this decrease. Accordingly, we've seen our average Medicare rate reduced by less than $4 of patient day in the quarter. Some of our progress is overshadowed by the noise in our financials, specifically related to the noncash derivative charge and the one-time expenses related to our restatement. We booked a charge of $848,000 associated with the audit committee review during the second quarter. In addition, we recognized a noncash charge related to our derivative liability of $1.9 million in the second quarter. This derivative charge is going away in October of this year, and I'll let Ron speak more fully about this noncash derivative when he provides financial details later in the call. I think we've made progress, and this will become more evident in future quarters. I'd now like to turn the call over to Ron Fleming to step us through a summary of financial results for the quarter and 6 months. Ron?

[Ronald W. Fleming:]

Thanks, Boyd. And good afternoon, everyone. I'm excited to be here to share my knowledge with the AdCare team. I'm familiar with this industry, and I'm pleased to be able to help AdCare assemble a best-in-class financial organization to help the company create sustainable shareholder value. I'll review our financial results for the second quarter of 2013 and then the 6-month results. In the second quarter of 2013, our revenue increased to $56.4 million, which is up 20.3% from the second quarter of 2012. Increase in revenue was primarily due to acquisitions completed since April 1, 2012, as part of our ongoing M&A program. Cost from operations in the second quarter 2013 was $201,000, compared to income from operations of $3 million in the second quarter of 2012. The year-over-year decrease in income from operations was due to increased cost of services for applied facilities, as well as professional services cost and other expenses due to the audit committee's review and the company's financial restatement process. As a reminder, the expense incurred during the second quarter of 2013 related to the audit review and the restatement process is approximately $848,000. Process services as a percentage of patient care revenues increased to 84.9% in the second quarter 2013 from 78.6% in the second quarter 2012. The increase in cost of services as a percentage of patient care revenue is partially due to the company not yet completing its cost optimization strategy on certain 2012 acquired facilities. In addition, in the second quarter of 2012, the company changed its employee unused vacation policy. As a result, the vacation time previously accumulated had to be used by the employee by the end of the calendar year 2012 or be forfeited. Therefore, the vacation accrual and expense were adjusted accordingly in the second quarter of 2012. As a result, we saw an approximate $400,000 benefit in the second quarter last year. The $400,000 benefit last year and $848,000 charge this year represented an approximate $1.2 million swing between the second quarter last year and the second quarter this year. We are now focusing in on careful management of our general and administrative expenses, and I believe we are making progress in this area. As a result, general and administrative expenses decreased to 8% of total revenue in the second quarter 2013, down from 9.2% of total revenue in the second quarter of 2012. We consider adjusted EBITDAR from continuing operations to be a key metric for management to evaluate performance and manage the company. Adjusted EBITDAR from continuing operations is net income loss from continuing operations before interest expense, income tax expense, depreciation and amortization, including amortization of noncash stock-based compensation, acquisition cost net of gains, loss on extinguishment of debt, derivative loss, salary, retirement and continuation cost, other non-adjustments and rent cost. A full reconciliation of this metric to GAAP net income loss is available on the press release we published today. Our adjusted EBITDA from continuing operations was $4.7 million in the second quarter of 2013. This is down from the $6.3 million for the second quarter last year, but is up approximately 19% on a sequential basis from the $3.9 million for the first quarter of 2013. Over the last 3 quarters, we have increased adjusted EBITDA from continuing operations of $2.5 million to $4.7 million, an increase of 84.9%. Let me turn to our year-to-date financials. For the 6 months period ended June 30, 2013, revenue increased 26.7% to $112.7 million from $88.9 million for the same period last year. The loss from operations for the first half of 2013 was $1.2 million compared to operating income of $3 million for the same period in 2012. The year-over-year decrease in income from operations was due to increased expenses from newly acquired facilities, this $2 million in expenses related to the audit committee's review, and the company's financial restatement process. Our cost of services, as a percentage of patient care revenue, increased to 85.2% from 81% in the same period in 2012. General and administrative expenses were 8.4% of total revenues in the first 6 months of 2013 compared to 9.3% of total revenue for the same period last year. Again, reflecting our efforts to improve the efficiency of our organization. The noncash derivative gain for the 6 months ended June 30, 2013, was $0.2 million compared to a noncash gain of $0.8 million in the same period in 2012. Adjusted EBITDAR from continuing operations for the first 6 months of 2013 was $8.7 million compared to $9.9 million in the same period last year. At this point, let me speak to the noncash derivative that has appeared on the income statement as either a gain or a loss on a quarterly basis for 2010 and impacts the bottom line. But the GAAP derivative gain or loss is always noncash. Second quarter 2013 reflects a $1.9 million derivative loss compared to a Q2 2012 noncash derivative gain of $352,000. The noncash derivative expenses related to an anti-dilution provision and our subordinated convertible promissory note that was placed in 2010 referred to as a ratchet provision. According to the terms of those notes, if AdCare were to issue common equity at prices less than the current conversion price of $3.73 per share, we would then be required to modify the conversion price issuance. So that the holders of those notes would not wear[ph] the dilution impact of issue[ph] net new common stock. Assuming that we do not issue the common stock and currently the company has no intention of issuing common equity, derivatives loss will continue to fluctuate over the duration of these notes until they mature in October 26, 2013. And then at that point in time, they will no longer be reflected in our financial statements. Moving to our balance sheet, cash and cash equivalents at June 30, 2013 totaled $10.2 million as compared to $15.9 million at December 31, 2012. We believe there will be sufficient funds for our current operations. And finally, the Board of Directors declared a quarterly cash dividend of $0.68 per share on the company's 10.875% Series A cumulative redeemable preferred stock, which was paid on July 1, 2013, to holders of record at the close of business on June 20, 2013. The Series A preferred stock is listed on the NYSE market LLC and trades under the symbol ADK.PA. This completes my summary reports and our results. For a more detailed analysis, including a reconciliation of non-GAAP measurements, please refer to the 10-Q and press release we issued today. Now I'll turn the call back to Boyd.

[Boyd P. Gentry:]

Thanks, Ron. As you know, AdCare's been focused on building our skilled nursing facility presence in key markets through an aggressive M&A strategy. We acquired and began operating 8 additional facilities during 2012 and added 3 more through the first half of 2013. We now operate, through our subsidiaries, a total of 47 facilities across 8 states comprised of 43 skilled nursing centers, 3 assisted-living residences and 1 independent living senior housing facility for the total of 4,781 beds and units in service. Of these 47 facilities, 26 are owned, 9 are leased, 11 are managed for third parties, and 1 is a consolidated variable interest entity. The facilities are located in Alabama, Arkansas and Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. We believe that we've reached the point, where we can be more selective in our M&A activity and move forward at a more methodical pace. Our criteria for an acquisition includes identifying facilities that are not operating at optimized Medicare census or reimbursement rates. AdCare has been able to increase the average daily census of facilities acquired, representing a direct increase in profitability over time. Specifically, Medicare census of our acquired facilities has increased from 297 skilled patients at the point of acquisition to 421 at June 30, 2013. Our acquisitions had an average facility Medicare rate of $405 per day at the time of acquisition versus an average Medicare rate of $435 per patient day, as of June of this year. In addition, over the past year, AdCare has been able to increase the average daily census of acquired facilities operated. This translated into an increase in occupancy, which was 78.4% as of June 30 of this year versus 77.5% at June 30 of last year. Those facilities experienced a certain amount of churn as patients are admitted and discharged. This is one of the ways that we create value by increasing Medicare census, optimizing reimbursement rates and integrating acquisitions into our infrastructure. We have an exceptional operating team, and they have a proven track record of providing the highest quality of healthcare services to the elderly. Coupled with our new financial team, we now have the resources and systems to support our current operations and the expected growth. As I said in the press release we issued today, I'm proud of the progress that we've made, and my confidence in the future of AdCare has never been greater. I'll say that while we expect to move more selectively in our acquisitions, we've continued to identify and evaluate targets. When the evaluation stage on several prospects and assuming we reach agreement with these parties, we would hope to announce these perspective deals over the next couple of months. The resources, systems and controls we have in place we put in place over the last 6 months bolster our scalable foundation, and we will -- which will allow us to grow more effectively as we restart our M&A program. Additionally, our experienced team and processes will keep us on track as we expand. In summary, this has been a productive period for AdCare, as we reinforce our back-office functions to more effectively support our growth in the future. Now at this time, I would ask our operator to open the call for your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

[Jeffrey S. Cohen:]

So firstly, could you comment on the tender offer from a few months ago?

[Boyd P. Gentry:]

Sure, and thanks for joining us, Jeff. We have no information that's not out there publicly. So actually no comment on the tender.

[Jeffrey S. Cohen:]

Okay. Could you talk about EBITDA and EBITDAR margins? How you view them now, and where you think that could get over the next 9 to 16 months?

[Boyd P. Gentry:]

Better to start with. I think as we've talked on previous call, we've previously given guidance that we thought that we could achieve a 10% EBITDA margin. That business, that book of business had in it our assisted living facilities, which do have a higher margin and tend to pull that up. So with the -- now that we've divested that business, it will be, obviously, more difficult to achieve a 10% margin. We're working diligently. We've got a number of things in the works. So clearly, we see that margin increasing. I want to go a quarter or 2 before we stick the stake in the ground as to where we think it really will mature out. So I'm not ready to say that we can get to that 10% without the assisted-living at this point in time. But clearly, we see that margin increasing. And I've got David with us today. I don't know that David -- I don't think David's actually participated in our call in the past. Any thoughts on EBITDAR margin? You want to give a couple of programs we've -- we're pushing out there right now?

[David Rubenstein:]

Yes. the -- well, and I guess, I'll start with, this is the period in the year where usually our census does take off. And we saw some pretty significant increases last year. The acquisitions that we made towards the end of last year, beginning of this year in South Carolina, Oklahoma and Georgia, those facilities have been doing extremely well for us and have really come on right out of the gate, come on really strong. And so we're anticipating that, yes, as they mature, we're going to see even better things out of them. As Boyd mentioned on the call, we are looking at implementing some capitated rate programs for a lot of our key expense areas. And what we're doing -- we have had success doing that in the past, and what we're attempting to do with some of those key areas is locking in a good price per patient day with built-in savings in exchange for guaranteed business with vendors and contracted business with vendors. And it takes, basically takes all the execution risks out of the day-to-day operations for those line items. And so those expense savings can pretty much be counted for every month. And so we're in the process of implementing and analyzing in a lot of our key expense areas there. The other big thing that we're doing right now is assessing a lot of our key relationships with some of our referral sources. And as hospitals begin to start picking partners, we've positioned ourselves in some of our key markets with those hospitals, and we're anticipating over the next few months to develop some good relationships there to take advantage of some of the ACO-type situations that are arising in some of the more preferred provider agreements with hospitals to have a better impact on our referral sources.

[Boyd P. Gentry:]

Jeff, let me just translate something there because I think it's inherent in our -- in both David and my comments. But we've done, I think, a pretty good job on the cost side. We've got a couple of things in the works, as David mentioned. But the key to achieving our objectives on the margin front is really pushing mix. And so it's the census side of the equation that David mentioned. And more specifically, it's managed care and Medicare, and hence his comment that as we look at last year, as doctors and physicians that drive that census kind of stop their summer vacation schedule and the kids get back in school, actually the number of surgeries go up, and we typically see a top in skilled census. That will be -- that will assist us in driving our margin more than our continued cost side of the equation. Sorry for the long-winded answer, but hopefully it helps a bit.

[Jeffrey S. Cohen:]

Yes. Just a few more quick ones. As far as the Medicare reimbursement rates, you're at about $439. Is that pretty much topped out? Or do you think there's another $10 or $20 or $30 in there over the next year?

[David Rubenstein:]

Yes, I -- this is David again. I believe that we still haven't fully optimized where we think we should be. And a lot of it has to do with our rates are driven not only by the types of residents we take, but how accurate our documentation is. And well, some of the improvements that we've seen this year were the results of better documentation and better processes that we've rolled out with our certified nursing assistants, who complete a lot of the forms that translate into reimbursement. We are in the process of rolling out an automated system that's part the electronic medical record to capture the activities of daily living that these CNAs are performing really at the point of service. And by doing that, what we have seen is the CNA captures that as soon as they do it. They don't have to remember to write it down in the chart afterwards. We put touch screen kiosks all throughout our facility. They hit a couple of buttons on the screen and it translates directly into the MDS, which is the document that calculates the rates we get reimbursed on. We have seen increased rates through more accurate documentation like that by the implementation of these types of systems in the past. We are in the process right now of rolling that out in the building and testing it right now in a building here in Atlanta. And as soon as we're done with that testing, we will be then rolling it out to all of our facilities. So I believe through better documentation with our electronic systems, we will see rates increase as we get better at it.

[Jeffrey S. Cohen:]

Okay, got it. And just one more me, if I may. Do you expect any other investigation expense for the third quarter? And if so, approximately how much?

[Ronald W. Fleming:]

Yes, this is Ron. Yes, we do expect additional expenses in the third quarter, perhaps as much as $400,000. And then we should be done with that line item.

[Operator:]

[Operator Instructions] Your next question comes from the line of Michael Fox with Park City Capital.

[Michael Fox:]

I just had one quick question. When you look at the portfolio of homes that you own or lease, can you talk about the profitability levels on the homes that you own versus the profitability on the homes that you lease?

[Boyd P. Gentry:]

I'm not sure that -- we don't manage the business any differently between the 2. So we've not -- I don't know if I've got that at my fingertips.

[Michael Fox:]

I understand you don't. I'm just curious.

[Boyd P. Gentry:]

Let me -- I don't have the data at my fingertips to kind of look at the 2, but let me give you 1 thought because I think it ties into our release. We have -- we've now subleased 3 facilities that were previously part of our lease portfolio. And we announced -- the one that we've just announced, the Tybee Island facilities, while it is technically 2 nursing facilities, they sit literally right next to each other. They share services and, effectively, are one facility. They just happen to have 2 different licenses. On those -- so those 3 facilities, the 1 we did in the fourth quarter and these 2, these -- I would put these in the category of -- and I know, Mike, we've talked about this with you in the past that when we acquire more than 1 building or 1 or 2 buildings at a time, the portfolios typically have weaker components in them. And I guess, these 3 were the weak sisters, if you will, of a portfolio that we've kind of internally refer to as triad or foster that literally we've operated for a couple of years. So it's typically harder to -- we're still in the lease for these. And there's local operators that will try to make a better go of it than we will. So I would say once we've parsed those from our portfolio, there's nothing else in the leased portfolio we have out there that we don't believe can hit our standards. So the ongoing handful of leased buildings that we've got left, we don't view differently or operate differently than our regular ones. I'm not sure if that was responsive, but it gives you a little feel.

[Michael Fox:]

Yes. Well, yes, it wasn't really responsive. I'm just curious, I'm not saying you manage them any differently, I was just curious how it worked out. But -- so on those subleases, you just effectively -- you still own the homes and you're just leasing them to a third-party to operate essentially?

[Boyd P. Gentry:]

We've transitioned -- we've actually child[ph] the license to a subtenant that operates the facilities, and they pay us the same rent that we pay the landlord. One thing I'll mention on leases, and our leases include this, is virtually every lease I've seen in the industry has -- they have some typical annual increase. And so our leases, by and large, increase 2% a year. And that's a -- that would be what I would suggest to you is a lower end of what you see out there. It's not uncommon for the REIT leases to have 2.5% or even 3% annual increases in them. And while that doesn't sound like much, over a 10-year period or a 15-year period, it ends up being a substantial increase in rent. So the only real difference from a financial impact standpoint is if you own it, you're subject to interest rate fluctuations if you have a floating-rate interest rate. But you typically don't have an increased cost of operation in the term in the form of annual rental increases.

[Michael Fox:]

Right. I guess that's why the REITs can afford to pay so much at least what we've seen.

[Boyd P. Gentry:]

I think that -- I think you're probably right.

[Michael Fox:]

And then one last question, when you look at the performance over the last couple of years and what you guys have had strength at and what you guys have had weakness at, would you say that you've been better at identifying good homes to buy and making good acquisitions and paying good prices, or actually operating the facilities?

[Boyd P. Gentry:]

I'd like to think that we've done a pretty good job of both. I would tell you that the upside for us in the future is really tied to revenue growth. And that's what's going to create disproportionate amount of value outside of an acquisition program. So the cost side of the business, I think we've done, frankly, a really good job at. On the growth -- on the revenue side of the business, if you look at the absolute numbers, they look good, right? I mean there are significant increases in skill mix, but we can do better, and we need to do better. And that's the -- we've talked about it in the past. I mean, we're buying facilities that have a 10%, 12% skill mix. And if you look at top in class in our industry, those companies that have very mature portfolios are running low 20s. And that's the value creation is that increase in census. So if I grade us on the acquisition front, I would -- I'd tell you I think the pricing has probably been right or not far off. If you look at our average price for acquired bed, I think folks probably would give us the credit for it. But we're paying prices for facilities that aren't yet running at their potential. I will absolutely admit and I think I've probably done this with you in the past, Mike, we picked up a couple of buildings last year that were operational challenges. And the good news is, is that we've now kind of gotten those largely in order. But our performance through the last half of last year and early this year clearly impacted by a couple of buildings that I would suggest to you we bought last year that had we -- frankly, we probably couldn't have bought some of the good buildings we bought without buying the 4 performing ones, but they've been a challenge, but I feel much better about where we are today than I did even 3 months ago or 4 months ago.

[Michael Fox:]

Right. Can you give us an update on West Markham?

[Boyd P. Gentry:]

Sure. In fact, I'll -- David, do you want to give it or...

[David Rubenstein:]

I'm happy to.

[Boyd P. Gentry:]

You go ahead.

[David Rubenstein:]

Okay. West Markham has been making a lot of progress over the second quarter. The census has, from first quarter to second quarter, has increased by almost 50%. And we were running close to 80 ADC [ph]there, most of that is Medicare. The Medicare rate also has increased pretty dramatically. In the first quarter, we were running in the low 400s. In the second quarter, we got up to mid 400s to high 400s. And overall, the building EBITDA in the second quarter was positive EBITDA for making, give or take, around $100,000 EBITDA. The facility is -- the issue that we're having now with that building, because...

[Boyd P. Gentry:]

That's 100k a month. We've actually gone over $100,000 on that building on a monthly basis. It's varied a bit. Late summer with the Medicare drop-off, it's going to fall below that. But...

[David Rubenstein:]

Yes, I mean -- and so the big problem that we have with that building is that we're focusing on now is the churn of the residents, where almost every resident in that building is Medicare, they're all short term, so keeping that high census is what we've been focusing on. And the sense that we could have 20 discharges in a day and we could have 25 admissions the next day. What we recently have done is engaged an expert in setting up these preferred provider ratio type arrangements with hospitals to come in and specifically focus on West Markham and the relationships with the hospitals in that Little Rock area. And we feel like -- that his involvement with the building can get that census, that skilled census where we really expect it to be, which is in the triple digits. And so he has begun work with that facility and will begin working in that market with the referral sources over the next few weeks.

[Operator:]

Our next question comes from the line of Mike Petusky with Noble Financial.

[Michael John Petusky:]

Boyd, could you explain kind of what's occurred in the last 30 days relative to the number -- the restated numbers you put out 30 days ago, relative to the numbers that you guys are presenting today on the past 4, 5, 6 quarters?

[Boyd P. Gentry:]

I'm -- help me fill them just a little bit more.

[Michael John Petusky:]

Well, the numbers are different.

[Boyd P. Gentry:]

I think -- or I'll tell you what, I believe it's probably dis ops. Do you want to address it?

[Ronald W. Fleming:]

Yes, I don't know your specific question, Mike, but if you could hear the results today.

[Michael John Petusky:]

All the quarters that were restated a month ago are now being presented differently.

[Ronald W. Fleming:]

Right, and the biggest change is going to be the discontinued operations, primarily there's 2 locations that Boyd referred to on Tybee Island. Those are now reflected at discontinued operations in the documents we filed today. They were not in the restated document.

[Boyd P. Gentry:]

That's the only change historically that's pushed back is dis ops.

[Ronald W. Fleming:]

That's the one only thing that would have changed those restated things you wrote[ph].

[Michael John Petusky:]

Okay, that's it. Okay, fine. And then the margins going forward, Boyd, you didn't put a number on it obviously, but you said better. I mean is your expectation that third quarter improves upon second quarter and that fourth quarter is an improvement from there. Or I know fourth quarter obviously have some seasonality. I mean can you just talk about how, just generally speaking, I mean, better could mean a lot of things. But I mean how much material progress are you hoping for in the near term and the longer term, I guess?

[Boyd P. Gentry:]

We haven't closed -- we're in the process of closing July right now, so we've seen the top line. We really haven't seen the bottom line. I'd like to get -- certainly, our internal forecast is improvement in third quarter and even if not flat in the fourth, maybe even a little bit of improvement in the fourth. But I'd rather -- before we stick the stick in the ground, I've gotten -- appropriately, I've gotten criticism in the past of maybe getting out a little bit ahead of my skis. But I'd like to put a little of this in the rearview mirror before we actually stick a number on it. But our internal forecast is for actual improvement in each of the next 2 quarters. And I've said in the past, I mean the only thing that's different about our company versus, I appreciate it's an ever-shrinking set of public comps out there that you can look at. But really, the only things that are different are we built an infrastructure to continue to grow this company, so our overhead cost are a little disproportionate to our competitors. But at the building level, there's not a reason that we can't achieve similar results as certain of our competitors out there. So I think -- I believe that we'll continue to improve the bottom line margin and we expect to do so in both third and fourth quarter.

[Michael John Petusky:]

Okay. And then on the M&A comment, you said more selective, but then you said you're evaluating overall. I mean, what would be kind of a reasonable way to think about how active you guys are going to be in the back half and then into '14? I mean, is kind of 3 to 5 deals, that type of activity on an annual basis, is that an appropriate way to think about it? Is that too conservative? I mean, I understand that you can't necessarily put a hard number on it, but can you just give a general sense of how maybe things change under a more selective model versus what has been here the last couple 2 or 3 years?

[Boyd P. Gentry:]

Yes, and I would suggest you selective means we're going to look a little harder at some of the things that came down the pipe. So I'm not so sure that it means less. I hope it means better. And that might mean that the price per bed that we pay is more because they're further along the curve. We did -- I will tell you by the way that the 3 facilities that we took on right at the beginning of the year, 2 South Carolina, 1 in Oklahoma, all 3 of those have actually performed as a group. They have exceeded our expectations. And I tell you that's a welcome surprise and gives us some comfort that the South Carolina buildings especially have come on very nicely. We did really close down the program beginning in late January and so we are kind of spooling it back up. And I did mention we've got a couple of it are under consideration, but we're somewhat early in that process. So I would hope that we can spool something up and close something before year end. And that's -- I would tell you that's really based on kind of turning the program back up. Even after we announced the deal, we've -- it's typically taken 90 to 120 days to close. So if I take that, we -- it's difficult to predict that we're going to have anything before potentially right at year end just given the traditional closing. And we've done things in as short as 45 or 60 days, but. It really depends. And if I look forward to next year, I mean last year, we did 8 facilities in kind of 5 deals. I don't -- I think -- not I think, I know that our team has the capacity to do at least that. But we're going to do them more from a quality perspective. So I'm not worried, especially if we can spread those out through our existing infrastructure where could we do 8 facilities in 1 marketplace, I mean we could, but that would put a big operating strain on that particular region. So I don't want to necessarily send a signal that, especially as we get into '14, that we can't grow at the same top line pace that we did in '12. I think we can. But we're not going to compromise profitability essentially the way that we did with couple of the facilities we took on last year. Does that kind of make sense or give you a perspective?

[Michael John Petusky:]

Yes. What about additional or potential divestiture? I mean, some of your buildings, I mean, some of your lower performing buildings, I mean would it be fair to say that those may go the way of Tybee or in some -- a straight sale or whatever?

[Boyd P. Gentry:]

It's -- I think one of the things that our industry has not done a good job of its portfolio management. And I think that -- and let me tell you what I think the root of it is, if you really, at the operation side, I don't want to suggest that David's like this. But a lot of our folks that operate facilities, they're caregivers. They're about fixing things that are broken, i.e. patients, right? And so they are loathed to say, hey, we can't do that, or that facility, it doesn't make sense. And I'd like to be a little more proactive and pro-thinking on that. I will tell you of the rest of the portfolio, we don't have anything internally which we have identified as an exit. There are a couple of facilities that we are expecting and we will hold our teams and ourselves accountable to making financial progress with those facilities over the next 3 to 6 months. And if we don't, I have no qualms of putting something on the divestiture list and move it off. And because of where we purchase most of these buildings, I also don't think that we would have losses. I would tell you that on the dis ops, these 2 facilities that we just moved off, I was frankly surprised at what was on our books for those. And I think the finance and accounting team that's in existence today is not going to let -- I mean there's probably some significant, I don't know, goodwill that was associated with that lease -- those leaseholds that I was kind of a gap[ph] at given the performance of those buildings. So nothing on the list. We will keep an eye out from just an operational perspective and portfolio management. And if we do put something in the list, I don't have any reason to believe that it would bring with it necessarily significant GAAP losses to divest.

[Michael John Petusky:]

Okay. And then just last question, if you already spoke of this, I just missed it, did you give a same-store revenue result? I assume it was probably slightly negative, but can you speak to that if you have that figure?

[Boyd P. Gentry:]

Ron, I don't think we have that.

[Ronald W. Fleming:]

I don't have that with me, Mike.

[Michael John Petusky:]

Well, is it fair to say it was negative?

[Boyd P. Gentry:]

I'm not sure honestly that we know. And we're -- what the new team is actually in the process of doing is -- previously, the way that we defined same store was unbelievably convoluted, and actually I -- both Sheryl and Ron had conversations with me that have helped kind of look at how are we going to truly define same store because theoretically, the year that's in the past would have to be there for 12 months. Do you have any other thoughts or is there maybe some disclosures that we can point him to?

[Ronald W. Fleming:]

Yes, there's disclosure in our 10-Q, Mike, that we do have -- there was a reduction period-over-period, both the 3 months and the 6 months on the same facilities.

[Michael John Petusky:]

Okay, is the Q out now?

[Boyd P. Gentry:]

What's the schedule of that?

[Ronald W. Fleming:]

It's in process.

[Boyd P. Gentry:]

Has it cleared? And I apologize too, as the reason that we delayed the call is, it sounds like everything is just -- the 8-K has cleared, but the -- our Q has not showed up yet even we filed it at like 4

[Ronald W. Fleming:]

This is in the MD&A section, Mike, Page 35 of the document.

[Michael John Petusky:]

Okay. And the reason you're not giving that is because it hasn't hit, is that it?

[Boyd P. Gentry:]

No, I don't mind if -- you can give it to him if it's in the numbers.

[Ronald W. Fleming:]

Yes. Specific numbers, yes, just a second. Looks like for the 3 months, it was lower by approximately $1.7 million.

[Michael John Petusky:]

You said 1.7%?

[Boyd P. Gentry:]

No, that's $1.7 million.

[Operator:]

Our next question comes from the line of Jeff Jonas with GAMCO Investors.

[Unknown Analyst:]

I was hoping you could comment first on the 2014 Medicare reimbursement rates and maybe add in what kind of increases you might be getting from commercial insurance and Medicaid as well?

[Boyd P. Gentry:]

Do you want to take it, David? Do you want me to try to -- there's no -- there is a -- there's an annual rate increase that we expect in the fall of every year. Has that been posted yet? It's 1.3%, but that will kick in on October 1. So that's the annual increase in the kind of Medicare basket that's out there. I'm not aware of anything outside of that on Medicare. I mean, obviously, there's continued focus always in the Federal programs. As David -- David talked about -- David already talked earlier in the call about our internal programs, which we believe will continue to help us increase our rates pretty much across the spectrum. And we always, on the Medicaid front, we have both increases and decreases associated with those, with our reimbursement at the facility level. I'll tell you there is nothing that we have on the radar screen that, I don't know, that at least I'm not sleeping about. David, are you...?

[David Rubenstein:]

We have -- and Georgia is one of our biggest states. We have not heard what Georgia is going to be doing next year yet, but we did have a -- they did roll the base year last year. So -- and that was the first time, I think, in at least 10 years, I think, from the last time they rolled the base year. Georgia's an acuity-based system, so it's pretty similar to Medicare. The more -- the higher the acuity of the residents, your rates will adjust up or down. We haven't really heard about any regulatory or statutory changes in rate that would be -- that would affect us negatively. Some of our states are cost-based. So as we become more adept at controlling our cost, our Medicare rate will go down appropriately as we spend less. So we will see some of that. On the Medicare side, we are -- as I said before, we're really focusing on making sure our documentation is as accurate as possible. The other problem that we had last year was as we entered new markets, we owned the rehab side. We partnered with some vendors who were new to those markets, and they were having trouble staffing therapists in our buildings. And that affected the -- their ability to provide therapy services in some of our key markets. But what we did at the end of last year was we brought in a vendor in some of those markets that had an established base of therapists. And we have seen some real improvements in the therapy portions of the rate, because they have more therapists, they're able to provide therapy to the residents who need it when they need it. And so we have seen some of that and we anticipate seeing more of that as that get more streamlined.

[Unknown Analyst:]

Okay. And I guess the other question, the opportunity here has been to refinance some of the mortgage and other debt. And I just wonder if you could give an update on where we are at that? And maybe a little bit more specific about how we handle the $30 million or so of debt that's coming due in the next few quarters?

[Boyd P. Gentry:]

Yes, Jeff, thanks for that question. It's Boyd. We've just filed our first HUD loan for refinance in the 10-Q. For a HUD mortgage, we've got 4 more behind that, that we expect will get into the Q before year end. And frankly, we were on -- we were kind of on a standstill status as we were getting the Qs restated. So now that's -- that we're back in line from a reporting perspective, we're hoping to turn up that process. So on the mortgage finance side, we're now officially in line and have started the process. It'll be -- obviously, that -- it'll be a long process to go through our portfolio, but we're started on it. On the refinancing side, the debt that is out there right now, which is, I guess, most prominent is a convert, which our expectations are that's going to convert at the end of October. So we anticipate that those holders will take stock. But we're preparing to stand by with cash if we need to refinance that. That's the most significant piece that's in the near future. There's some smaller pieces that come due in '14.

[Operator:]

Our next question comes from the line of David Furstenberg, private investor.

[Unknown Shareholder:]

I've been a shareholder for a long time, have a really significant position. I've seen the proposals of a couple of AdCare's largest institutional shareholders, and for the most part, I agree with their models. Given the fact that there's a lot of companies in the skilled nursing care sector that are very profitable and AdCare's been producing losses quarter after quarter, why as shareholders -- should we be content to continue down the same course as opposed to following some of the suggestions of the large shareholders and breaking up the company, selling assets up sale-leaseback transactions, which could create significant value to shareholders, perhaps in the double-digit area?

[Boyd P. Gentry:]

David, we've been -- with the kind of restatements that we've been in, we've really been in, in a way, a standstill mode for the first 2 quarters. Some of the transactions that have been floated out there are items that the board, obviously, it has in the past and will continue to consider. So I would not suggest to you that we have decided not to go certain of those directions. It's just until we can get ourselves back into a position of compliance, obviously, that limited what we could evaluate.

[Operator:]

Our next question comes from the line of Andy Carruthers with Bagley Securities.

[Unknown Analyst:]

This is the first call we hadn't heard from Chris. So 2 questions are what's Chris' involvement in the company and will he be as active on either showing new deals? And the second question is on financing. After going through a lot of hoops to get the SBA loan, that window closed, and is it still closed and do you expect it to open next year? And what about financing on some of the rural facilities that you've been able to get very cheap financing for those?

[Ronald W. Fleming:]

Sure. Chris, I think I would suggest to you that Chris is as active as he's ever been on the traditional front from an acquisition perspective. We kind of tweaked the form of that involvement at year end, and there have been filings out there and the like. But we've formalized a consulting arrangement with him rather than his role as Chief Acquisition Officer, so the reality of the situation, though, was identical. So we still have a right of first refusal on anything on the skilled nursing side that he teased up, and we continue to have flow from Chris in that regard. And I expect that as we really kind of gear up the program again, but not expect, he's been incredibly involved from that perspective. So I would suggest you know, no changes with respect to Chris' involvement. On the financing front, the SBA market did close for us. The kind of rural USDA markets are available to us, so there's nothing about our status that keeps those unavailable. The USDA program is a -- it's kind of generated at the state level but administered at the national level. And we've seen in the states that we operate, it's a little bit of when are they going to get their allocation. But USDA takeout financing, which frankly, we're waiting on right now in South Carolina is subject, to some extent, the political whims of really, I'm being told right now, it's a U.S. -- it's a national allocation issue. So as an example, we are preparing that we've got to have some backup for that. But there's no reason for us not to continue to be able to do USDA. For the non-rural facilities, it pretty much puts us in a bank financing mode, bank or finance company financing mode as a bridge to HUD. And we're actually out there right now with the facility that we're refinancing in that marketplace. And I think we'll have that done in the next couple of months. So the -- on the financing side, we've -- I don't believe that we're going to see a kind of a squeeze that will keep us from executing our M&A program. So right now, I don't believe that -- really, the limits of what we're going to be able to do on the M&A side will be can we generate good leads and opportunities, not will we be able to finance them when they -- when we do latch onto them.

[Unknown Analyst:]

Have those rates gone up and what are the current rates? I don't see a rural area in the HUD rates.

[Boyd P. Gentry:]

HUD is going up, but it's still a great rate, right? So executions are high 3s is where we're being kind of positioned for, which would be on the stuff that we're refinancing would be over 200 basis points cheaper, 200 to 250 cheaper than where they're financed right now. So there's still solid savings in the HUD marketplace. And while I think generally, people think that rates are going up, I don't think that, that disparity will change. On the bank financing front, obviously there's increases in short-term rates. We are subject to floors in most of our bank financing arrangements. And so we've not seen any rate increases. And frankly, short-term rates would have to increase pretty significantly before we would see increases on the bank side. The other thing I'm seeing from some of our lenders is they're kind of lowering their floor at the same time that rates are going up. So we've actually seen a reduction in a couple of bank deals. I mean, it's not material, but it's a little bit, even though rates are going up. So the minimums are going down, rates are going up. And yet we still had a slight decrease in some of the bank arrangements we've seen. But clearly, the objective and the goal is to methodically move as much as our portfolio as we can to HUD over the next -- I think we'll make significant progress in '14, and we'll probably still have some left to do in '15.

[Unknown Analyst:]

Are those 30-year fixed?

[Boyd P. Gentry:]

They are. 30-year fixed, non-recourse to the parent.

[Unknown Analyst:]

And FDA is even longer?

[Boyd P. Gentry:]

No, the -- a HUD can be even longer than 30. It really depends on the underlying length of your building, but we're -- the underlying age of your building. But we're, in essence, moving to HUD, we'll move to at least 30-year fixed, no parent guarantee, fully assumable, that's the -- but at very complex program that can take 6 months to clear the queue once you're in to actually fund after you get in to the approval process.

[Unknown Analyst:]

That's great, get more of those.

[Boyd P. Gentry:]

Yes, sir.

[Operator:]

Our next question comes from the line of Robert Mahoney with GHM Investments.

[Unknown Analyst:]

Just a follow-up question on the -- it's sort of transparency issue from my standpoint on the Chris Brogdon tender, non-tender, the status of that. This is not a third party. This as an affiliate and a director of the company, made some statements in April we're out there in limbo. And I don't really mean to be a gadfly or to -- I'm not a short seller or anything like that, but I just find it a little disconcerting about your initial comments. I don't know if we can draw any inference from your no comment. Is there a tender offer that he intends to pursue? Or if not, will he make a disclosure? That's all I'm asking for, is a fair transparency, maybe you could comment on that, please? I don't mean to put you on the spot, but I think it needs to be addressed on the heels of all it leads, the problems with the restatements and the ambulance chases[ph] that are out there with the lawsuit. You want to clean up your image on the street, you're at this stocks under value[ph], maybe you could just be forthright with the shareholders, they appreciate that.

[Boyd P. Gentry:]

Robert, I absolutely appreciate your questions. But in all honesty, we do not know the status of his tender. I mean, I -- you could reach out to Mr. Brogdon directly, but we cannot...

[Unknown Analyst:]

No, I have reached out. I mean I spoke to him. He cut off communications for some reason and stopped talking 60 days ago. I don't want any inside information, I just want fair disclosure. I think we're entitled to that. That's all I have to say.

[Boyd P. Gentry:]

I appreciate your question. I don't have -- we don't have information regarding his tender.

[Operator:]

Our next question comes from the line of Bruce Schindler with Stockbridge Associates, Inc.

[Bruce Schindler:]

First, I have several questions that I'd like to hear some. And that is the first question is when is the annual meeting this year?

[Boyd P. Gentry:]

Yes, Bruce, we're -- I believe that the annual meeting will be -- we've not set the date, but we're looking at dates that are -- would essentially correspond with the release of third quarter. So I think those dates are what the -- probably around the 14th of November.

[Bruce Schindler:]

Okay. And where is the annual -- where are your corporate offices today?

[Boyd P. Gentry:]

Corporate offices are in Roswell, Georgia.

[Bruce Schindler:]

And where is the annual meeting?

[Boyd P. Gentry:]

Final selection has not been made, but as you know, we've done the annual meeting in Ohio in the past. We are considering doing it one last time in Ohio, but we haven't kind of inked it all down yet.

[Bruce Schindler:]

I can't imagine why you'd want to have this in Ohio considering that your corporate offices to the last, I guess, 2 years have been in Atlanta. And the only reason I can think that it's back in Ohio is you don't want certain people to be there, but everybody will be going. The next question I have is you mentioned before that you're cutting the overhead about $1 million, is that correct on an annualized basis?

[Boyd P. Gentry:]

I think I said $700,000.

[Bruce Schindler:]

Right. Has there -- but before I -- just keep that in mind, can you tell us what our liability is or what our potential losses in the Tennessee deal that went bad?

[Boyd P. Gentry:]

Pardon me?

[Bruce Schindler:]

Can you tell us what our potential liability is when the Tennessee deal, I can't remember the name of it, did not close? I assume we had up earnest money, and that earnest money was kept by the seller. So I'd like to know the status of that and what our liability potentially is?

[Boyd P. Gentry:]

We don't have future liability. You'll see in the Q that the charges associated with not completing that transaction are in the neighborhood of $0.5 million.

[Bruce Schindler:]

Okay. So we have $0.5 million there. And to be quite honest with you, and I understand about the accounting problems and situation, and I doubt that, that was discovered on January 1 of '12. The long too many people, to be very honest with you, that don't -- that knows you do not change accounting firms in the middle of the fourth quarter because the accountant -- accountants are going to eat your lunch. And that cost us a substantial amount of money, whereas I'd like to know who was responsible. Was it the board, if that was a board decision? Was it an individual who decided to make that change so late in the year when KPMG or whoever it might have been, probably were licking their chops like a tiger because they know that they would kick us[ph] at their job and that's what they do. And it's a known fact, you don't do that. So we've had millions of dollars of losses to manage this poor decision. I was wondering if management and Board of Directors were taking outstanding fees, to managing this company for several years which is to contribute as the shareholders have never participated in giving back money or cutting salaries for a period of time while we're "reorganizing" and getting our "act together". And then I have one last question.

[Boyd P. Gentry:]

I guess, I'm not sure exactly of your question.

[Bruce Schindler:]

The question is, I would like to know is there any thoughts on behalf of the Board of Directors to cut their substantial fees and of certain management fees that are paid in light of the very obviously management flaws. Obviously, not, okay? So I'll skip to the last question. There's a gentleman before on the phone, David, I think his name was and I'm sorry, sir, if I don't remember your last name, he mentioned a long-time shareholder well so am I, and a substantial shareholder. And where you could be going through rough times, in which I'm sure you did, with the accounting situation and we might not have been prepared for all the problems that existed or when they clean this stuff up, involved with a lot of public companies over the years. This -- what we have to do to bring shareholder value is not rocket science. There's only 2 or 3 choices. And I -- obviously, shareholders are getting very discontent with management. It's very clear, it's very obvious, and I would be surprised that between now and the annual meeting, more people come forward. And I think that it would be a good consideration by management to not have excuses about why they can't figure out what to do to bring the shareholder the value while management has been skimming off the top huge salaries, huge options and management has never bought 1 share. Not a share. In fact, you have a Board of Director member, I believe, who own 300,000 shares, you were going to then put them on the board, right before going on the board, dumped 200,000 on the market, which I commend him for, okay? Now 270,000 [ph] here, it's my understanding, have been checking into this, he very rarely comes to meeting, I consider this outrageous belief, outrageous. I don't have any more things to say except I hope that the managed Board of Directors and management understand what their real problem is. The real problem is shareholders are getting very, very restless.

[Boyd P. Gentry:]

Operator, is there any further questions?

[Operator:]

There are no further questions in the queue. I'd like to turn it to back over to management for closing remarks.

[Boyd P. Gentry:]

Thank you. We're focused on optimizing our facilities, which will accelerate our growth and position us for long-term sustainable profitability and increasing shareholder value. We could not execute this strategy without the dedication of our 4,500 employees who are the face and the heart of our company as we care for the needs of 5,000 patients and residents. I want to thank them for their ongoing commitment. And I also want to thank you, listening on the call and we appreciate your interest in AdCare, and I look forward to updating you on our next call. If you have any further questions, please reach out to Ron or myself. Thank you, and good evening.

[Operator:]

Ladies and gentlemen, this concludes the AdCare Health Systems Inc. Second Quarter 2013 Earnings Conference Call. If you would like to listen to a replay of today's conference, you may do so by dialing 1 [phone] with the access code 4635683. We thank you for your participation. And at this time, you may now disconnect.