Regional Health Properties, Inc.
Q3 2013 Earnings Call Transcript

Published: 15 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AdCare Health Systems, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Brett Maas with Hayden IR. Please go ahead, sir.

[Brett Maas:]

Hayden IR, no problem. Thank you, and good day. 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 the remarks, we'll open up the call for questions. We'd like to remind everyone that this call will be available to replay through November 21, 2013, starting later this evening. A webcast replay will also be available via the link provided on the company's web page -- or the company's press release, sorry, as well as available on the company's website at www.adcarehealth.com. I would like to mention this call is being simulcast on the website along with a slide presentation. If you have not already done so, now will be a good time for you to go to the website and download the slide presentation. In addition, the presentation should be available on today's webcast. If you do not have a copy of the presentation, please email me at brett, B-R-E-T-T, @hayden, H-A-Y-D-E-N, ir.com, and I will gladly send you a copy. Now please turn to Slide 2. 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 more complete discussions of factors that could impact AdCare's 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. Statements made during the call are forward looking, including, but 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 those -- I'm sorry, as well as the use of terms like we, us, our, and similar verbiage are not meant to imply that AdCare Health Systems, Inc. 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. But in other way, I'd like to turn the call over to Chief Executive Officer of AdCare, Mr. Boyd Gentry. Boyd, please go ahead .

[Boyd P. Gentry:]

Thanks, Brett, and good afternoon. Please turn to Slide 3. This is the first time we've done slides, so I'd like to go over the agenda for the call. I'll begin with the strategic and operational update, and then I'll turn the call over to Ron for a more in-depth review of our Q3 and year-to-date 2013 financial results. Finally, I'll provide a business update, and then we'll open the call up for Q&A. Please turn to Slide 4. We've made considerable headway in getting our financials in order and our accounting department realigned with the appropriate experienced personnel that are necessary to overcome the material financial systems weaknesses that we identified during last year's audit. But for our 2013 third quarter and year-to-date financials distributed, we've now timely filed both of the last 2 quarters. Throughout 2013, we've improved both financial and operational systems, thereby enabling our team to focus on improving and growing our operations in an efficient manner. Ron Fleming, our new CFO, is now on the second quarterly AdCare conference call. Ron and Sheryl Wolf, our new Vice President, Controller and Chief Accounting Officer, have stabilized and strengthened back-office functions over the last 2 quarters, and the efforts of the new finance group have given us the appropriate team to support our business model. We now have the systems and personnel in place to effectively and efficiently run this organization now and into the future. These improved back-office systems not only allow us to generate timely reports, they're also allowing us to better access unit level performance and cost structure. With the important corporate level financial controls in place, we now turn our focus to growing our census and with it our revenues. Our goal is to effectively leverage our infrastructure, adding incremental revenues, while controlling our expenses. As a result, we created a new position and brought on a new Senior Vice President of Strategy and Development, Barry Somervell. Barry will focus on growing our census and improving our skill mix. He is tasked with building and executing a sales and marketing plan that will accelerate the growth of our top line. Barry is an experienced leader with a strong history of success in growth strategy and infrastructure transformations, as well as sales and business development. Most recently, he was Senior Vice President of Growth for Baptist Health System in San Antonio. Additionally, his resume includes a significant concentration in the post-acute sector. Before I move to the next slide, I would like to say a couple of words on quality of care. While the company experienced some financial setbacks earlier in the year, I want to assure you that our quality of care has never been compromised. In that regard, I'm happy to report that an astonishing 40% of our facilities received quality awards at last month's industry-wide American Health Care Association Conference. I'm not aware of any other large chain operators that came close to this achievement. AdCare was awarded 5% of all the quality awards bestowed at the convention, which represents over 10,000 long-term care facilities. Please turn to Slide 5. Our fundamentals are already showing progress and we -- that we've made. We delivered 5% quarter-over-quarter revenue growth in our seasonally slowest quarter and increased revenues by 18.5% for the first 9 months compared to the same period last year. The growth is inclusive of a cut in Medicare reimbursements that began earlier this year in April, as well as both the loss of revenue from our assisted-living divestiture at the end of 2012 and arrangement to exit several skilled nursing facilities in Georgia. These operations are reported as discontinued ops in our third quarter financials. Due to seasonal pressures, since this was down sequentially, leading to the sequential revenue decline from $56.4 million in Q2 to $55.9 million in Q3. However, EBITDA was up. We generated our highest EBITDA and EBITDAR since the second quarter of 2012 for 5 consecutive quarters. We have -- as we've discussed in the past, we believe that this is a key metric in evaluating our operational performance. AdCare delivered adjusted EBITDAR from continuing operations of $5.4 million compared to $5 million in the third quarter of 2012. This is up on a sequential basis from $4.7 million for the second quarter of 2013, up approximately 36% on a sequential basis from $3.9 million for the first quarter of 2013 and up $2.5 million in the fourth quarter of 2012. This equates to more than 100% increase over the last 4 quarters. You can find the reconciliation table for this metric in the press release we issued this afternoon. Finally, we continue to streamline our corporate function with an ongoing review of our SG&A cost to eliminate redundancy at the corporate level. We reduced our corporate expenses by approximately $700,000 annually, beginning in the third quarter with the reductions taking full effect in this our fourth quarter. In aggregate, these initiatives will reduce our go-forward expenses by at least $1 million on an annual basis. Clearly, our financial metrics are improving. However, this progress is still overshadowed by the noise in our financials, specifically related to the noncash embedded derivative adjustment and the onetime expenses associated with our accounting restatement. In this regard, we booked a charge of $302,000 associated with the Audit Committee review during the third quarter. In addition, we recognized a noncash gain of $2.1 million from the third quarter related to the embedded derivative liability tied to our 2010 convertible notes. And this is the last quarter in which we will incur an adjustment related to this embedded derivative matter given the modifications to the convertible note issue that were finalized last month, including the successful extension of this debt instrument until August of next year. I'll let Ron speak more fully about this noncash derivative when he provides financial details later on the call. The restructuring of this convertible note was in part facilitated by our successful issuance of the 12.5 million of preferred stock at the end of October. This preferred deal puts us in a clear position of strength from a liquidity perspective and helps us eliminate the confusing embedded derivative that has been part of our financial statements since 2010. Looking forward, we're focused on additional steps to reduce our expenses, particularly our cash expenses. In this regard, we continue to make progress in our efforts to refinance our mortgage debt, most notably, using lower cost HUD programs. Decreasing our interest expense can have a material impact on our bottom line results. As you can imagine, these initiatives take time, but we expect to make good progress during 2014. In addition, we recently announced some positive changes in the compensation structure of our board and executives. I'll describe this in more detail later in the call. But the overarching goal is to streamline our overhead structure with the objective of reducing both expenses and cash costs. We made measurable progress on the quarter and believe we have stabilized the company so that we can focus our energies on operational growth and efficiencies in future quarters. I'd now like to turn the call over to Ron Fleming to step us through the summary of financial results for the quarter and 9 months. Ron?

[Ronald W. Fleming:]

Thanks, Boyd, and good afternoon, everyone. Please turn to Slide 6. I'll review our financial results for the third quarter of 2013, and then the 9-month results. In the third quarter of 2013, our revenue increased to $55.9 million, which is up 5% in the third quarter of 2012. For the third quarter, cost of services decreased, as a percentage of total revenue, to 82.5% from 83.6% in the prior year third quarter, which reflects that our optimization efforts on recently acquired facilities are gaining traction. As a result, our gross profit for the third quarter increased to $9.8 million or 17.5% gross margin compared to $8.7 million in gross profit or 16.4% gross margin in the year-ago period. Income from operations in the third quarter 2013 was $1.2 million, which was unchanged from the income from operations of $1.2 million in the third quarter of 2012. This is up sequentially from a loss of $201,000 in our second quarter of 2013. The sequential increase in income from operations was due to a $1.4 million decrease in cost of services, as well as a $0.5 million decrease in professional services costs and other expenses due to the Audit Committee's review and the company's financial restatement process. As a reminder, the expense incurred in the third quarter 2013 related to the Audit Committee's review and the restatement process was approximately $302,000, a decrease from $848,000 in the second quarter of 2013. We're now focusing on careful management of our general and administrative expenses, which increased to 8.2% of total revenue in the third quarter of 2013, up from 7.4% of total revenue in the third quarter of 2012. This was primarily due to the increased expenses related to strengthening [indiscernible] and operations, additional salary wage and benefits, recruiting costs, and accounting and audit expenses, partially offset by purchasing rebate and a decrease in investor relations expenses. Our significantly improved systems have allowed us to institute cost reduction measures. New fixed price contracts to certain expenses, involving some of our supplies that were executed on late Q3 '13, will reduce our quarterly operating expenses by approximately $100,000 beginning in the fourth quarter. Boyd has already mentioned our adjusted EBITDA results as a key metric for management to evaluate the performance of management of the company. The adjusted EBITDA margins for the third quarter 2013 was 9.6% compared to 9.5% in the third quarter 2012. Again, a full reconciliation of this metric to GAAP net income or loss is available in the press release we distributed today. Please turn to Slide 7 for a review of our year-to-date financial results. For the 9-month period ended September 30, 2013, revenue increased 18.5% to $168.5 million from $142.2 million for the same period last year. Income from operations for the first 9 months of 2013 was $27,000 compared to income from operations of $4.3 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 and $2.3 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 total revenue increased to 83.8% from 81.3% in the same period in 2012. General and administrative expenses were 8.3% of total revenue for the first 9 months of 2013 compared to 8.6% 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 9 months ended September 30, 2013, was $2.2 million compared to a noncash loss of $1.3 million in the same period in 2012. Adjusted EBITDA from continuing operations for the first 9 months of 2013 was $14 million compared to $14.9 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 since 2010 and impacts the bottom line. The GAAP derivative gain or loss is always a noncash item. Third quarter 2013 results reflect a $2 million derivative gain compared to our Q3 2012 noncash derivative loss of $2 million -- $2.1 million. The noncash derivative expense is related to an anti-dilution provision and our subordinated convertible promissory notes that were placed in 2010, referred to as a ratchet provision. According to the terms of those notes, if the current issued 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 prior to issuance so as the holders of those notes would not bear that dilution impact of issuing that new common stock. Even though these notes, which has an original maturity date of October 26, 2013, were extended to August 29, 2014, the anti-dilution provision was eliminated, so there are no longer be a derivative gain or loss reported in our financial statements after Q4 2013. Please move to Slide 8. Moving to our balance sheet. Cash and cash equivalents at September 30, 2013, totaled $12.7 million as compared to $15.9 million on December 31, 2012. Total debt at September 30, 2013, was $166.7 million compared to $171.9 million at December 31, 2012. $2.2 million of aggregate principal amount of the 2010 subordinated convertible promissory notes were converted into shares of the company's common stock during the first 9 months of 2013. We believe there will be sufficient funds for our current operations. 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 September 30, 2013, to holders of record at the close of business on September 20, 2013. The Series A preferred stock is listed on the NYSE market LLC and trades under the symbol ADK.PA. And finally, subsequent to the end of the quarter, we closed a public offering of 500,000 shares of its 10.875% Series A Cumulative Redeemable Preferred Stock, which is listed on the NYSE market LLC under the symbol ADK.PA. The net proceeds to the company from the offering were approximately $11.2 million, which the company intends to use for general corporate purposes. From a liquidity perspective, this offering solidifies our balance sheet and allows the company to operate from a position of strength. This completes my summary report on our results. For a more detailed analysis, including a reconciliation of non-GAAP measurement, 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. Please turn to Slide 9. As many of you know, most of our growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into market leaders and clinical quality staff competency and financial performance. 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 facility, with a total of almost 4,800 beds and units in service. Of these 47 facilities, 26 are owned, 9 are leased, 11 are managed for third parts and 1 is a consolidated variable interest entity. We intend to continue to grow our revenue and earnings by focusing on efficiencies in our operations and internal growth. Increasing the proportion of sub-acute patients within our skilled nursing facilities, expanding clinical programs within our existing facilities, continuing to acquire facilities in existing and new markets, as well as evaluating and potentially targeting the acquisition of complementary businesses, which provide services to our patients and residents. Our criteria for an acquisition typically include identifying facilities that are not operating at optimized Medicare census or reimbursement rates. We have assembled an operating team, with a proven track record of providing the highest quality of health care services to the elderly. The resources, systems and controls that we have in place over the last 9 months bolster our scalable foundation and our newly expanded team. I'm confident that this combination of people and processes will support our future growth. On the right-hand side of this slide, you can see 2 charts that demonstrate our progress. The top bar chart shows that we've increased our Medicare and Managed care census over 30% from the point of acquisition. As I've discussed in the past, these post-acute patients are more profitable than traditional custodial care residents. The bottom bar chart shows that the average daily rate for these patients has also increased 11% despite several reductions in Medicare reimbursement. Please move to Slide 10. Finally, as you can see on Slide 10, the Board of Directors has taken specific steps to improve the company's corporate governance, and our board is committed to building shareholder value. Let me elaborate on some of these changes. First, we've scheduled our Annual Shareholder Meeting for Thursday, December 12 in Atlanta. Recently, we added Michael Fox to the board. Mike is a significant shareholder currently controlling approximately 750,000 AdCare shares. We've announced that we have accepted the resignation of 3 legacy directors effective January 1, which will decrease the 2014 board to 7 directors. Finally, as I mentioned earlier, yesterday, we announced changes in the compensation structure for our board and certain executives. Beginning in 2014, the continuing independent directors, as well as the Chairman and myself and certain key executives will substitute options for a portion of our cash compensation. Specifically, board members will be receiving half of their pay in options. Myself and our Chairman will take $50,000 worth of our pay in options and 3 of my top executives will substitute a total of $60,000 of their salary for options. The net result is an approximate $350,000 reduction in cash expenses. Note that the Form 4s that were filed earlier today on behalf of management, directors inadvertently listed the Black-Scholes GAAP value of the options at the strike price for the options. The options were priced, at Tuesday's close, at $4.06 a share and the Form 4As that have been filed to correct this administrative error went on file later this afternoon. I'm sure several of you have already done the math. Those of us that agreed to take options in lieu of cash are making a bet that AdCare's common stock will be worth more than $5.80 a share, or we've essentially taken a pay cut. I think that these steps are positive and will help to reduce the expenses at the corporate level, and especially reduce our cash expenses. We have a smaller, more appropriately sized Board of Directors and both the board and the executive leadership team will be more directly aligned with the interest of our shareholders. When combined with our efforts to grow revenues, cut operating expenses and reduce interest expense, we expect these initiatives will materially benefit our future operating results. At this time, I'd ask our operator to open the call for your questions.

[Operator:]

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

[Jeffrey S. Cohen:]

So I guess, firstly, clarify for me 3 board members are gone and 1 is added. Congratulations, Mike. So is that -- was that 10, so it goes to 7, then you added Michael, so you're now at 8? Or you're now at 7?

[Boyd P. Gentry:]

We're now at 7.

[Jeffrey S. Cohen:]

So there were 9 went to 10?

[Boyd P. Gentry:]

That's correct. That's correct. We're 9, went to 10, dropped by 3 to 7.

[Jeffrey S. Cohen:]

Okay, got it. Could you talk a little bit about the cost savings, that $700,000 number you used? Is that coming directly off of G&A, or where might we expect to see that?

[Boyd P. Gentry:]

Yes, that $700,000 is a little bit of a carryover from our last call. That is specifically in our G&A line. Ron and I have -- Ron and I are actually going to be able to make, I think, a little more progress in that over the next few months. So kind of stay tuned. But virtually, all of that $1 million is G&A and is really spread across the spectrum underneath -- within the corporate categories.

[Jeffrey S. Cohen:]

Okay. So current G&A of about 8.2% should be tops, it should be at that point or lower going forward?

[Boyd P. Gentry:]

On a percentage basis, I think that's a fair statement. If we kick up growth again, it may go up. It will continue to go down on a percentage of revenues.

[Jeffrey S. Cohen:]

It will continue to go down on a percentage of revenues. Okay, got it. And while we're talking about that, cost of service, 82.5% looks a little bit on the low side, which is a good thing for the quarter. But how might that look going forward? I think I'm looking at about 83.8% for the year. Does that sound reasonable? Or can it actually be sustained down around 82.5%?

[Boyd P. Gentry:]

Yes, the one thing that will probably kick up a tad bit in the fourth quarter is the cost of holidays are high in the fourth quarter, right? You've got Thanksgiving and the year-end holidays. So I think your number is probably okay. Now we do continue to make progress across our cost structure. But I would expect cost to be a little higher on a percentage basis during the fourth quarter for those -- for the reasons I just mentioned.

[Jeffrey S. Cohen:]

Okay, but we shouldn't expect to see any number around Q1, which is 85.1%?

[Boyd P. Gentry:]

No.

[Jeffrey S. Cohen:]

Okay, got it. Okay, could you talk a little bit about goals and aspirations, not just for EBITDA and EBITDAR, but could you also talk about net income maybe, just a question for Ron.

[Boyd P. Gentry:]

I'll tell you -- I'll take it relative to the kind of future guidance piece. What we said on the last call was that we -- as we looked out, we believe that we would continue to improve on a profitability basis as we go forward. And I'd like to kind of, I guess, commit to commit to give guidance. As I've said in my comments, we've just brought on Barry Somervell. He's been working for the last couple of weeks. We're in the process of finalizing our budget for '14 now. And so clearly, by the time we have our next call, if not before, I'll commit to give guidance for '14. So it will be no later than our next call that I'll give guidance. And we -- I can clearly tell you that we believe fourth quarter -- we've got strong census into the holidays right now. It's a little bit of a crapshoot always between Thanksgiving and the end of the year, with respect to elective surgeries and what happens, but we actually feel good about where census is today. So my expectation would be flat off the third quarter or better. Clearly, we're hoping for better, but it really will come into that census scenario at the end of the year. First quarter and second quarter are the strongest quarters of the year. So we would expect continued improvement. And as Barry's programs begin to take hold, and clearly that's kind of a transformation of our process, really looking market by market for specific clinical needs, and then training our resources in the field to frankly sell those programs and services primarily into the acute care environment. So we think that will take a little bit of traction. So by the time we get to our next call, we'll be prepaid to stick a little better stake in the ground. So I appreciate I didn't exactly answer your question. But hopefully, I gave you a sign of things to come.

[Jeffrey S. Cohen:]

Okay. Could you talk a little bit about the convertible notes as far as what is left? And I understand from what you said previously that the mark-to-market Q4 will be the last quarter. But what's left on the preferred stock?

[Boyd P. Gentry:]

Good question. So if we talk about the converts, we had a convertible maturity that matured at the end of October. And that -- we also had a preferred, which we were trying to get off that frankly, I don't know if it got stuck with the shutdown of the government at the FCC. But in essence, we were delayed kind of getting approval in the FCC, which caused that issuance to truly be issued kind of 2 days in advance of those converts. So we were actively in negotiation with the convertible noteholders about extending the 2010 notes. And so by the time kind of all the dust settled, we made a decision to extend those notes, as well as doing the preferred. So I would tell you that kind of came together over the weekend before the converts were due to be paid. And so now that we've sorted out our liquidity resources and, I mean, the company is sitting right now with over $20 million in cash. If you take the quarter end cash and you add to it the $11 million off the preferred deal, the company is now sitting in a very nice liquidity situation. And frankly, this has been the first time we've been able to access what I would call kind of public capital since the year-end audit issues. So now that we look at that, there's 7 -- I think, Ron, $7.2 million...

[Ronald W. Fleming:]

$7.7 million.

[Boyd P. Gentry:]

$7.7 million of that particular convertible issue, it's convertible $3.73. It's largely concentrated in 2 holders, and I would expect -- and we extended it by the way, until August of next year. And because it's priced at $3.73, I think, some of that will convert. And we have the ability to call it in advance under certain situations. So as we continue to evaluate our cash and liquidity situation, we may call for the early redemption of that particular convertible issue. So...

[Jeffrey S. Cohen:]

What was the total now -- it's $7.7 million currently, what was the total originally?

[Boyd P. Gentry:]

$11 million and change, I think, $11.6 million is what -- is off the top of my head. So the difference in $11.6 million and the $7.7 million did convert up -- as we're approaching up to the original maturity date, which was the end of October. We do have a -- we have an issue, another convertible issue that is scheduled in, was it, April. And that particular issue, the strike on it is what, 5?

[Ronald W. Fleming:]

$4.80.

[Boyd P. Gentry:]

$4.80. So right now, we are expecting that we will redeem that for cash. I mean, the stock price was not in that range. We clearly hope that the stock price will go up, and we're taking steps to increase shareholder value. But in our planning purposes, we're expecting that -- we're planning on holding back liquidity that would retire that for cash. Clearly, if we do that, that will avoid a future dilution event for our common shareholders. So I would...

[Jeffrey S. Cohen:]

[indiscernible] in the $4.1 million?

[Boyd P. Gentry:]

Correct, that's correct And we're -- we've got a couple pieces of mortgage debt that are -- we're actively working with the lenders to extend. Don't see any issue there. So we believe that we'll continue to have -- we'll be well positioned from a liquidity position as we go through the year. So right now, I think I would suggest to you that the issue we just extended, given where the stock price is and given clearly the direction of the stock price, we'd expect that, that will convert to equity. Because it's a convertible that may wait until we call it, but it should convert to equity, and the issue that subsided there on April, we're planning on it to be cash and to take it out of the market, so it's not dilutive to our common shareholders. But obviously, that will depend on, to some extent, as to what ADK common is trading at. The management team has made a bet that the stocks can be worth mid $5s, at least, or we've taken a pay cut. So if it gets there, maybe that converts as well.

[Operator:]

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

[Michael John Petusky:]

Who are the 3 board members that are no longer board members?

[Boyd P. Gentry:]

They are Jeff Levine, Josh McClellan and Gary Wade. And I would tell you that I believe that 2 of them were up to be -- they would have been up at the end -- they would have been up in '14, Josh and Gary; and Jeff, I think was '15. But we heard a number of shareholders, I received comments, Dave Tenwick received comments, several others of us that the board had grown to be large, specially for our size company. So we thank them, Mike, for their service, and they were gracious enough to resign.

[Michael John Petusky:]

Got you. Okay. And then I guess, in terms of M&A, is there anything still out there that you're trying to close or is the, I guess, the pipeline at this point, everything you have is what you have and there's nothing necessarily about to be closed? Can you just speak about that?

[Boyd P. Gentry:]

Yes, good question. And we really kind of stepped back from the market for several months there. So the pipeline was not actively being pushed. We have one deal that we've not announced and our practice is to announce transactions once we have a definitive agreement. We're in negotiation on that definitive agreement with a hospital-based SNF, excuse me, a hospital regarding purchasing their skilled nursing facility. And our experience is that the hospital community, especially the not-for profits, are things, kind of move at their own rate. So there's a possibility that, that gets signed and announced. The closing would be -- at this point, would be '14, an early '14 closing for that deal. And until it's signed, it's certainly not certain. It would fit into -- it would be backfill on an existing market, similar to what we did actually one very similar transaction in 2012, which has been one of our best performers. So that deal would be early '14. And Chris has got a couple of things. And our arrangement with him, we have a right of first refusal on things that he generates and originates. And we're kind of early stages at looking at a multiple facility opportunity. I think it's 4 or 5 facilities that would also be backfill on an existing market, but we're very early on that deal. So if that gets some traction, it's probably first half of '14. We clearly are feeling like we can turn on that pipeline a bit. For planning purposes, we're kind of thinking we could do similar number of facilities as we did in '12, call it, kind of evenly spread across '14. Given where we are with the pipeline, it probably be a little more back-end loaded if we could -- assuming that we could generate that. So we've got almost half that number kind of in the pipeline right now, but it will take a little ramp to pick up again. Does that makes sense?

[Michael John Petusky:]

Yes. I'm sorry, Boyd, how many did you close in '13?

[Boyd P. Gentry:]

I think we closed 12 facilities.

[Michael John Petusky:]

Okay, right. And all these are skilled nursing buildings?

[Boyd P. Gentry:]

Correct. That's correct.

[Michael John Petusky:]

All right. Can you -- and I'm sorry, Boyd, but you spoke really fast. Can you walk through the comp changes for the board in the exact -- can you just break that out again, and I'll try to write faster this time?

[Boyd P. Gentry:]

Sure. And there's an 8-K that was filed yesterday that has, I think, most of this detail. But the independent directors of the board have agreed to take half of their compensation in options in essence. And so their comp is outlined in the proxy. But it's approximately, I don't know, a little -- their total comp is something less than $100,000. So I don't know, call it, $40,000 worth of their comp would be in the form of options. I have agreed to take $50,000 of my existing cash comp and convert it to this option method. And Tenwick has agreed to take $50,000 of his comp, which his base as a chairman is a little more than $100. So it's about 50% of his comp. And then of my team, they've all agreed to take, what is approximately 10% of their comp in -- 10% to 15% of their comp in this option-based formula. And the way that the formula was established was we had a board meeting earlier this week. It was Tuesday. Tuesday's close was $4.06. And so what -- the way the math works is just to maybe keep it easy, for myself, we took what -- if you've just kind of back into using Black-Scholes, what would $50,000 worth of Black-Scholes valuation be at $4.06 vesting over next year? And that happened to be $1.80. As the GAAP charge for that, that translated into 27,000 -- roughly 27,000, 28,000 shares. So I've been granted 28,000 shares of options at Tuesday's close of $4.06, that will vest ratably over '14. And this was established by the board as a program. So this is not just expected to be '14. It will roll forward. So next year, we'll kind of do the same thing. So that saves rough and ready, I don't know, I think it's about $350,000 worth of cash. And just doing the math on it, if the stock is less than $5.80, we take a pay cut. If the stock is worth more than $5.80 with the time that the folks exercise, we've -- we get some upside. So the view is we kind of heard comments out of the investor community, and the directors have taken a significant piece and us on the management side have -- it's not inconsequential, and it's not incremental, we've taken a cut in our cash comp and pushed it into options.

[Michael John Petusky:]

Okay. All right, great. That's helpful. The Medicare census didn't look great in the third quarter. Can you just speak about, I guess, that and what you're doing there to get that going?

[Boyd P. Gentry:]

Sure. And that's -- I would tell you that's seasonal, right? It's the -- what we experienced, especially as you get -- especially August -- July and August are -- what happens is it's kind of a -- it's a variation of what we see between Thanksgiving and the year-end holidays in that -- elective surgeries -- well, first off, it's good weather, right? So you don't have flu, you don't have lice, those sorts of items. But also, you have orthopedists that are at the beach. So the medical community is taking vacations with their families. And therefore, elective surgeries are not happening in the late summer. And it's an annual event from a seasonality standpoint. We had a very nice recovery in September. Census has come back nicely in October and November. I'll give you, just an example, and you haven't asked for it. But West Markham that we've traditionally kind of talked about at the -- during that time period, and David's here in the room, what was -- in August we're 60 total in that facility.

[Ronald W. Fleming:]

I think at the end of August, we were at a total of 74 ADC.

[Boyd P. Gentry:]

Okay. So 74 ADC in West Markham at the end of the summer. Today, it's 108. West Markham by the way, last month closed, September. So this was in the quarter was -- it closed, for the first time ever as a profitable month. It's been positive EBITDA for some time now. But actually, it had roughly $1 million in revenue, $125,000 EBITDA, $21,000 net income, so 12.5% margin in that facility. And during that month, it's was 87 ADC. And since October, today, we're at 108 in that building. So we're up 25% in census in that building alone. So the experience we experienced in the third quarter is a seasonal experience. The recovery that we've started is -- recovery we've seen in the past. And then our expectations with Barry is how do we make the low -- how do we get higher lows, right? So there'll still be seasonality in the business, but how do we get more predictable levels and stronger levels of census? And we'll really do through a more sophisticated and targeted programs and selling process.

[Michael John Petusky:]

Okay, great. What was the Medicare census of that 108?

[Boyd P. Gentry:]

108, 75-ish of the 108 is Medicare. We've taken the top floor of that facility, and we are accepting some Medicaid in that building. Because of the cost structure of that building, with it being large in Medicare are right on the Medicaid side at West Markham, somewhat uniquely across our portfolio is relatively high. I think it's roughly $200 a day, $180, $185, sorry, in that facility, which is a great Medicaid rate.

[Michael John Petusky:]

Yes. Okay, and last question, Boyd. I just want to make sure. Are you saying for fourth quarter, your expectation is both revenue and EBITDA will be higher than in the third quarter? Is that essentially what you're saying, both revs and EBITDA?

[Boyd P. Gentry:]

We're saying that on the EBITDA side, we would expect flat or better. So our goal clearly is to show a sequential improvement. But that will be a little bit of a push. Our projection are -- we closed. We know where October's revenues are. And clearly looking at October's revenues, we think we could achieve increased EBITDA. But the key will be just what happens in the seasonal low piece. So I think our worst-case expectation is flat. Our best expectation is up sequentially, a little bit, say in a similar range as we showed sequentially this time. That's our hope, but no worse than flat. And we think -- as Barry's stuff kicks in, and I would tell you, that's a -- seasonally, that would be a good performance, right, because we should be seasonally -- the fourth quarter is typically -- arguably it's third or fourth is the worst of the year.

[Operator:]

[Operator Instructions] Our next question comes from the line of Kevin Casey with Casey Capital.

[Kevin Casey:]

Question on the million-dollar cost savings, is that just in the corporate side? And then, I was wondering how much more improvement can you do on actually the individual locations?

[Boyd P. Gentry:]

Yes, Kevin, great, and good question. On a percentage basis, we have some opportunity on the facility side, but not a whole bunch. We did enter into recently a new program on our medical supplies. And so we've got a much -- we'll pick up several hundred thousand dollars on an annualized basis and that cost will be much more predictable, and there's always opportunity on the fringe relative to the cost -- relative to labor. But I would tell you, at the facility-level cost, we believe that we're certainly competitive out there. And so the opportunity for us is that there's overhead opportunity and the process that we went through early in the year, in essence, kept us from grabbing any of that, and frankly, increased a fair number of our, what I would call, external consulting cost. So on a percentage basis, it's obviously, a smaller spend category. But we would expect a real overhead cost savings, and that $1 million is all in that category. But Ron and I are -- we're able to spend more time and push diligently at -- pushing down overhead. So I think on a percentage basis, you're going to see that cost come down. Recall though, it's -- as a public company with top line less than $300 million, there's only so much we're going to able to do on the corporate side. We know we won't be adding cost, but what -- there's a significant drop-through on the overhead side as we grow the top line. So overhead should not grow much at all. But there's some cost-saving. So hopefully that -- does that help a little bit?

[Kevin Casey:]

Yes. So when you look at your overhead or your current corporate structure, how much more revenue can it take? And then I have a question on the refinancing. What percent of your debt can be refinanced and how much lower could it be?

[Boyd P. Gentry:]

Yes, let me answer the second one first. We have 26 owned facilities. 13 of those right now are in some phase of kind of a HUD pipeline. I should step back, 2 of them are HUD financed and 11 are in various stages of a HUD pipeline. Some of them -- some of the debt under that program has to season, and so we're in the midst of a 2-year seasoning cycle with it. And then, we've got, I guess, over half of those facilities, which are with third parties that help us put them into the queue. So half of them are actively under kind of a process that should reduce the cost there. On average, those -- the cost saves -- so if we just went to just mortgage debt, so it will be half of our mortgage debt is kind of teed up for HUD in a definitive manner. And on that half, we should be able to save 200 to 300 basis points, all in, given where recent HUD pricing has come out. And then the other half of those facilities, we think, will kind of mature sufficiently, that they could begin to get into the HUD pipeline next year. So hopefully, that gives you some guidance along those lines. And then what -- your other question was?

[Kevin Casey:]

Your current corporate part, how much more in sales, could you get with your current infrastructure? And could you actually break out the corporate number?

[Boyd P. Gentry:]

We break it out according to GAAP, and you can see it as an SG&A. Our competitors -- the public companies probably all have a little bit different definition of that number. So we're not sure you get apples-to-apples across the -- across all of the other filers. But the benchmark, let me tell it to you -- give it you this way. The very large operators on our space, so I would put like a kindred and a skilled and I guess, also like an ensign into this group. They have corporate overhead, which is approximately 5% of their top line. And when I say corporate overhead, that's all cost outside of the 4 walls of a facility. And so that -- they're doing 5%. We're -- Ron, help me, we're a little under 8%?

[Ronald W. Fleming:]

8%, 8.2%.

[Boyd P. Gentry:]

So we're 8%. And that is -- we're 8% because a big chunk of our cost for public costs that probably don't vary very much from a skilled health care as an example. So when we're looking at future acquisitions, we believe that's -- as we're modeling them, the incremental cost, assuming they're backfill, and that the -- and everything we're looking at right now is within an existing region. So we would add no new field personnel to take on any of the kind of 5 buildings that are in the pipeline today. So the only incremental overhead we would take on is if the volume of those acquisitions would require us to hire, as an example, another AP clerk or folks that are within the back-office operations of Ron's group. So if you had a -- if your payroll department had to go up a person or your AP group had to go up a person, and so for modeling purposes, we're kind of saying that maybe that's 2% of the future revenues. And so roughly 3/5 of what might be considered an overhead burden is a drop-through so that 8.2% comes down. Does that kind of help?

[Kevin Casey:]

So like at $400 million, you would be at close to that 5% there?

[Boyd P. Gentry:]

I would say more like $500 million to $600 million, we get to the 5%.

[Operator:]

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

[Bruce Schindler:]

I think that it's very interesting to hear about all these details. And as you know, we've been listening to details for quarter after quarter after quarter. I'm trying not to be negative, but what really gets me that certain board members, Mr. Tenwick, in particular, and certain directors that resigned, that after they've robbed the company year after year after year, they've resigned because they hear the foot beats coming or they're taking stock in lieu of cash, and what a wonderful thing they've done when they're raping the company at $100,000 a year in being an outside board member. And now, they're only going to take 50%, which is still too high. But they're going to take stock in lieu of, and their bet is at $5.80. But if you read all the proxies, in 3 years, Mr. Tenwick went from 200,000 and something shares, sold 800,000 at much lower prices and never exercised one share. So all I'm saying is let's not try to fool the shareholders who are on here, because I think a lot of the major shareholders understand. So this is a very weak stroke coming into the annual meeting. Now I'm very happy to hear about what the operating people are willing to do and someone's got some faith in the company. But I'm not impressed with the old inside board group, and we'll get to that at the meeting. It seems like we're going in the right direction, but we have -- we're like on the 10-yard line, and we got 90 yards to go. And I hope there's going to be a lot more things coming out from this new board, very positively, for the shareholders. And that's all I wish to say at this time, and I appreciate the efforts you're making.

[Boyd P. Gentry:]

Thanks, Bruce. And we did have our first board meeting that included Mike Fox this week. I think it was productive. So we're making progress. I appreciate that we aren't where you'd like us to be at, but we're -- we've begun the process.

[Operator:]

Our next question comes from the line of Chris Doucet with Doucet Asset Management.

[Laura Vaughn:]

This is actually Laura Vaugh for Chris Doucet. My first question, what is your overall cost of capital now? And is it safe to say that if you think with this HUD financing on 13 of the 26 facilities, you can get your financing costs down 200 to 300 basis points? Is it safe to say that over the next year or so, you can get your total cost of capital down by about half of that or 100 to 150 basis points?

[Boyd P. Gentry:]

Yes, Laura, it's a great question. Let me give you a couple of data points. And maybe offline, you and Ron, tomorrow can teed up because I know you've done some work. And we're -- the equity piece of the cost of capital, I'll defer to you guys relative to capital asset pricing model. But just looking at kind of costs of debt, if we -- my number is kind of back of the envelope for third quarter. So if I just -- if I go back to the third quarter on a GAAP basis, the total cost with the preferred, so I guess, this would not have the last preferred deal that we did. So I apologize for the answer there. I guess; it's low by that. But the GAAP cost of debt for last quarter was 8.3%. And that it did include preferred stock and it included the -- it did include the convertible notes that were there. If you -- and this is probably something that's more difficult for you as an outsider to look at. But the cash -- so 8.3% of GAAP, on a GAAP basis, was 6.7% on cash. For better or worse, with our admittedly fragmented financing structure, there's a lot of upfront cost that get for GAAP capitalized and then amortize -- those costs get amortized over the life of those underlying deals. So our calculation for the last quarter with preferred was 8.3% on a GAAP basis and 6.7% on a cash basis. And admittedly, that needs to be adjusted for what happened with the converts and the -- so it will be higher, right, with the converts and the preferred. So on the -- to answer your specific question, there's no reason that 100% of our over mortgage debt can't be HUD. It will -- so project financing, it will be project by project. And those deals are being currently executed, 35-year, 30 to 35 year fixed-rate financing in the kind of 4% to 5% range. And there's -- over time, there's no reason that the entire mortgage portfolio, which is large, large predominance of our debt, can't be there. Of course, it will take us 2 years, and I appreciate that we've got some upward pressure on rates during that period. Does that help a little bit? And I would absolutely encourage you to -- we'll connect you with Ron and he can walk you through the details.

[Laura Vaughn:]

Okay, sounds good. And my other question was from the time you acquire a facility, you buy it in order to optimize it and get it kind of to the market run rates for EBITDA, EBITDAR margins. What is that timeline? Does that take a year? Does that take 2 years? And are you kind of where you want to be with that timing? Or are you trying to speed that process up?

[Boyd P. Gentry:]

That is maybe the best question that's been answered -- asked on the call. What we've traditionally -- what the board has looked at, and when we've looked at acquisitions, we have -- we've committed to the board, so our model, if you will, is that it takes 18 months. We're, right now, in the, as I mentioned, in the process of doing our budget. And because the portfolio was fairly stable this year, we're -- as part of our budget review process, we're actually grading ourselves on where we are in that optimization process. And I will certainly be in a better position on the next call to totally reflect upon it. But I would tell you that, overall -- and there's only a portion of the portfolio, obviously, that's made it to 18 months now, right? So I'll take a rought stab for where I think we're falling right now, which is we're probably achieving that 18-month optimization in half of the deals that are, at least, 18 months old. There's a -- and if I take out some of the -- early on, we did some larger deals that kind of required us to, "Hey, if you want to take these 2 great facilities, you've got to take this dog to your facility." We've done -- in more recent acquisitions, we've kind of done 2Zs and 3Zs [ph] where we've controlled the kind of gift-with- purchase piece of the acquisition a little more. If I take those out, I think our score improves a bit. But we're actually looking at it right now. I would also tell you that, as an example, 2 of the 3 facilities that we acquired, they're our last acquisitions that we acquired on January 1, the 2 South Carolina facilities are actually overachieving. I mean, we're obviously, only 9 months in, but we're further along in that 9 months than we thought we'd be. The Oklahoma City facility that we took on in January needed significant CapEx that were spent on it. And given the liquidity issues that we faced earlier in the year, we delight on that CapEx and we now just turned on that CapEx over the last 4 months, 3 months. And so we think that will catch up pretty quickly. So our progress, we're behind, but our momentum seems to be picking up a bit. And the key element there, I would tell you, if we look at it cost versus expense, the expense side of the equation we're largely hitting, and we're hitting on time and within expectation. And it's frankly, the revenue side that we've fallen short on. When I say revenue, really skilled mix. And we have some great success stories out there. But if we look overall, that's where we've suffered a bit. And there's no epiphany out there, but we believe that the recent strategic hire we've got will help us get back on track there over time. But that's where we need to do a little better work is on the programmatic side of skilled census.

[Operator:]

And I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Mr. Gentry for closing remarks.

[Boyd P. Gentry:]

Thank you. In closing, we continue to focus on providing quality care and optimizing performance of our facilities, which will accelerate our growth and position us for long-term sustainable profitability. This will increase shareholder value. 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 does conclude our conference for today. Thank you for your participation. You may now disconnect.