Earnings Transcript for RHE - Q3 Fiscal Year 2017

Executives: Brett Maas – Head of Investor Relations Brent Morrison – Interim Chief Executive Officer Clinton Cain – Interim Chief Financial Officer & Chief Accounting Officer

Analysts: Jeff Jonas – GAMCO Investors David Rothchild – Private Investor

Operator: Good day, everyone, and welcome to today's Regional Health Properties Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this call may be recorded. I will be standing by, should you need any assistance. And it is now my pleasure to turn the conference over to Brett Maas with Hayden IR.

Brett Maas: Thank you, and good afternoon. Joining me on the call today are Brent Morrison, Regional Health Interim Chief Executive Officer; and Clinton Cain, Regional Health Interim Chief Financial Officer, Chief Accounting Officer. I'd also like to mention this call is being simulcast on the company's website at www.regionalhealthproperties.com. I'm going to read the forward-looking statements. Any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about Regional Health business and the environment in which the company operates. These statements are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied on this call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review Regional Health's SEC filings for a more complete discussion of factors that could impact Regional Health's results. Except as required by federal securities laws, Regional Health 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. After management concludes their remarks, they will respond to questions except for those related to litigation matters. Now I'd like to turn the call over to Brent. Brent, the floor is yours.

Brent Morrison: Thanks, Brett. Good afternoon, and thanks to everyone for joining us today. As most of you know, our prior CEO resigned on October 17 for personal reasons, and I was appointed interim Chief Executive Officer. Simultaneously, the board established a strategic finance committee to assist and advise management with respect to financial strategy. Obviously, we are only about three weeks into that process, but this initiative represents an important strategic review of capital allocation, our expenses specifically related to the ongoing defense of legacy liability lawsuit and our strategy going forward. The determinations made by this select committee of the board will significantly influence future decisions, including our search for permanent senior leadership, and will help us drive strategic directions. A range of options will be considered as a part of the continuing efforts to allocate resources and capital to best maximize value for our stakeholders. The board expects any further discussions regarding strategic financial alternatives would be made early in calendar 2018 and does not plan to make any further statement about the reviewed process until the review is concluded. In addition, we will not – I will not be commenting any further on management transition as I am unable to provide color regarding the timing or other specifics regarding the board's search efforts. I will note that Clinton Cain has ably served and acted as Chief Accounting Officer for several years, and Regional is fortunate to have him as the interim Chief Financial Officer during this transition. Our primary focus today is on the resolution of legacy issues that have hampered our progress and commanding a disproportionate amount of management's attention. Specifically, we are working in earnest to resolve these liability lawsuits. The number of open unsettled lawsuits stands at 42 as of today. Of the remaining 42 lawsuits, 28 have been filed in the state of Arkansas by the same plaintiffs attorney who we settled 24 cases in December 2015. The actions generally seek unspecified compensatory punitive damages from former patients of our company's facilities. Nearly all the matters are either in mediation, scheduled for arbitrational trial or in active settlement discussions. Because these are ongoing legal matters, I am not able to provide additional color regarding the situation on this call. Subsequent to the end of the third quarter, we completed our merger with the company's former parent, AdCare Health Systems, Inc. This corporate restructuring enabled us to adopt charter provisions that position the company to regain compliance with certain NYSE American continued listing standards, which we have done, and better positions the company to comply with certain U.S. federal income tax rules that qualifies the company for REIT status election if the board determines that it's best to do so. The underlying performance metrics of our operators remain solid. However, a modest decline in rent coverage ratio is observed for the current quarter when compared to the year-over-year quarter, caused by flat facilities profitability compared to escalating rent payments. For the three months ending September 30, our portfolio occupancy was approximately 84%, up from 82.6% for the third quarter of 2016 , and the quality mix was 28.8%, up from 23.7% for the third quarter of 2016. Rent coverage decreased to 1.45x before management fees and 1.05x after management fees in the third quarter of 2017 compared to 1.53x and 1.12x in the third quarter of 2016. These metrics exclude the three Peach facilities, which are still in buildup mode. We expect the upward trend of these metrics to continue over time albeit more slowly. Our focus is to resolve these legacy issues and get back to the original strategic purpose of the company, which is to own and acquire health care real state facilities. With that being said, the board has elected to postpone the preferred dividend to conserve cash and improve the cash flow situation of the company. With that, I will now turn the call over to Clinton Cain, our interim Chief Financial Officer.

Clinton Cain: Thank you, Brent, and good afternoon, everyone. Revenues for the company in the third quarter of 2017 were $6.3 million as compared to $7.2 million in the year-ago quarter. Revenues were lower in the current period due to the sale of the Arkansas facilities in October 2016, which was partially offset by rental revenues from the Meadowood acquisition and increase to rent from the three Peach facilities. Lease revenues are recognized on a straight-line, rent-accrual basis in accordance with GAAP. General and administrative expenses declined 33.5% to $1.1 million compared to the third quarter of last year, inclusive of $0.1 million of stock-based compensation, as compared to $1.6 million for the third quarter of 2016, inclusive of $0.2 million of stock-based compensation. Cash G&A of $0.9 million for the third quarter of 2017 was below our stated target of $1 million per quarter. As a reminder, G&A includes overhead expenses related to our facility management services business of approximately $150,000 per quarter. Interest expense decreased 44% in the third quarter of 2017 to $1.0 million, down from $1.8 million in the third quarter of 2016. The decrease was primarily due to the repayment of $36 million of debt in connection with our Arkansas properties due to the sale of Skyline Healthcare in October 2016, as well as a $7.7 million principal repayment of our 2015 convertible notes paid in January and April of 2017, partially offset by $4.1 million of new refinancings for the Meadowood facility. Our effort to extend maturities in lower interest rate continues with maturities we extended at three facilities during the third quarter and an option to extend the maturity for a fourth facility. In July, we extended the maturity date of a $1.2 million credit facility we entered into in September 2012 in association with our Northwest Oklahoma facility from December 31, 2017, to July 31, 2020. In August, we extended the maturity date of a credit facility we entered into in April 2015 with an aggregate of $500,000 of indebtedness from October 2017 to August 2019. Also in August, we extended the maturity date of our Quail Creek credit facility to December 31, 2017, and retaining the option to further extend the maturity to September 2018. Our loss from discontinued operations net of tax was $1.0 million for the current quarter as compared to $2.2 million for the prior year period. Our year-over-year improvement was primarily due to lower bad debt expenses related to legacy patient care accounts receivables. Net loss attributable to Regional Health common stockholders for the third quarter of 2017 was $2.7 million compared to $3.9 million for the third quarter of 2016 or a loss of $0.13 and $0.19 per basic and diluted shares, respectively. We generated positive cash flow from operations and anticipate positive cash flow from operations through the remainder of the current year. Now for a review of our year-to-date financial results. Revenues for the first 9 months of 2017 were $18.8 million compared to $21.4 million in the year ago period. The drivers are the same as for the third quarter and includes the sale of the Arkansas facilities, which was partially offset by rental revenues for the new Meadowood and Peach facilities. G&A expenses were $3.5 million for the first 9 months of 2017, inclusive of $0.3 million of stock-based comp. G&A declined 44.1% or $2.8 million compared to a total of $6.3 million for the first 9 months of 2016. Interest expense decreased 43.3% from $5.4 million for the first 9 months of 2016 to $3.0 million for the first 9 months of 2017 for the same reasons mentioned earlier. The net loss attributable to Regional Health common stockholders for the first 9 months of 2017 was $7.4 million compared to $14.4 million for the first 9 months of 2016 or a loss of $0.37 and $0.72 per basic and diluted shares, respectively. Turning to a review of our balance sheet. Cash and cash equivalents at September 30, 2017, totaled $1.1 million compared to $14.0 million at December 31, 2016. Restricted cash and investments at September 30, 2017, totaled $3.5 million compared to $5.5 million at December 31, 2016. Total debt outstanding at September 30, 2017, was $73.8 million compared to $80.0 million at December 31, 2016, net of $2.1 million and $2.2 million of deferred financing costs at September 30, 2017, and December 31, 2016, respectively. The reduction of debt in the third quarter of 2017 is due primarily to principal amortization and normal monthly payment of debt. Current debt maturities inclusive of current portion of convertible debt totaled approximately $8.3 million at September 30, 2017, compared to $13.2 million at December 31, 2016. Our current maturities consist primarily of scheduled debt amortization plus the full balance of the Quail Creek facility. We are working to refinance our spend to $1.5 million convertible debt due October 31, 2017, and hope to have this complete in the near term. Now I'll turn the call back over to the operator and open the call for questions. Operator?

Operator: Thank you. [Operator Instructions] We can take our first question from Jeff Jonas with GAMCO Investors. Please go ahead your line is open.

Jeff Jonas: Hi, I was looking, I guess first, for an update on the cash out refinance program for some of the various mortgages and specifically the timing of when we could see that. And is about $5 million still the right number to be thinking of?

Brent Morrison: Jeff, this is Brent Morrison. Since I started about three weeks ago, we've been working on talking with some of our current lenders as well as opening that relationship with new lenders to look at refinancing about four facilities. We don't have anything to announce today, but we are definitely in talks with these lenders about refinancing. About $5 million, I don't want to quote $5 million, but it's being within reason.

Jeff Jonas: Okay. And I guess I just had another question about discontinued operations. Just can we get a little more color on what that $1 million loss was and what's left there in terms of accounts receivable or other potential charges?

Clinton Cain: So all of our patient care accounts receivable with the exception of a few small balances has been fully allowed. So most of that $1 million has to do with settlement reached during the quarter for QLCL, [quick liabilities, current liabilities].

Jeff Jonas: I'm sorry. Is that actual settlements or just legal fees for the ongoing?

Clinton Cain: It's both. There is legal fees associated with the settlements that were made during the quarter and – but most of it are settlement costs.

Jeff Jonas: Okay. And I guess do you have any – maybe explored any options for repurchasing preferred shares at a substantial discount to start to clean up the balance sheet?

Brent Morrison: Jeff, since we postponed the payment of the dividend, we are restricted from purchasing any preferred or common stock.

Jeff Jonas: Okay. That’s it from me for now.

Brent Morrison: Thank you.

Operator: Thank you. And we can go next to David Rothchild with – he is a Private Investor. Please go ahead. Your line is open.

David Rothchild: Thank you for taking my call. On the preferred stock where you deferred the dividend, I assume that's a cumulative dividend. And I guess the question related to that is, do you anticipate this not getting paid for a long time or just till you maybe get a new CEO and everybody onboard?

Brent Morrison: Thanks for your question, David. So we – the board decided to postpone the fourth quarter dividend and look to revisit the dividend in the first quarter.

David Rothchild: You said looks to resume it?

Brent Morrison: Looks to revisit.

David Rothchild: Oh, revisit. Okay. All right. So no indication whether that's going to be a long-term thing or just quarter by quarter, it sounds like.

Brent Morrison: Yes, quarter by quarter, exactly.

David Rothchild: Alright. Thank you.

Operator: Thank you. And we can go next to Josh David [ph]. Please go ahead. Your line is open.

Unidentified Analyst: Hi guys, I was wondering if you could clarify on the dividend suspension. I know that you wanted to conserve cash, but would you have had the ability to pay the dividend in December? Meaning is there enough cash to pay the dividend, or you're simply choosing to conserve that cash that would've been sufficient?

Clinton Cain: I think we're choosing to conserve the cash for various other uses that we find more beneficial for the company at this time.

Unidentified Analyst: Okay. So it would have been around $1 million – $1.9 million to pay?

Clinton Cain: That's about right.

Unidentified Analyst: Okay. And then the second question, if you can provide any further color on Allan's departure other than the press release that'd been put out, that'd be nice. And do you expect any decreased G&A due to Allan's departure in the near term?

Clinton Cain: You may remember that Allan is from New Jersey, so he flies down into Atlanta every week, on Mondays at least, I believe at the end of week. So he's away from his family every week. And after several years of doing that, I think he just felt like it was better for him and his family to go back home, and be closer to them. I think that was a lot of it.

Unidentified Analyst: And then do you expect decreased G&A in the near term as a result of Allan's departure? Or will that be made up by...

Clinton Cain: Yes, we definitely expect a decrease in the near term. As far as long term, with the replacement of the CEO and CFO positions, that's not easy to determine at this time.

Unidentified Analyst: Okay. And then for the Peach facilities, did the full rent come on in September?

Clinton Cain: No. The two– 1 facility is in full rent. The other two will start January 1 with their payment (inaudible) both of them.

Unidentified Analyst: And what's the impact of that again?

Clinton Cain: It's...

Brent Morrison: The impact.

Clinton Cain: Yes. So those two facilities have about $25,000 a month or so.

Unidentified Analyst: Okay. So in January, we will start to see around $50,000 a month additional or $25,000 total?

Clinton Cain: Usually, that's $25,000 a month additional.

Unidentified Analyst: Okay. Great. Thank you. That’s all from me.

Operator: Thank you. [Operator Instructions] We can go next to John Davis [ph]. Please go ahead. Your line is open.

Unidentified Analyst: Thank you. Has management considered selling any facility?

Brent Morrison: We've looked at that, definitely not quarter by quarter, but we have looked, and some of our operators have been interested about maybe purchasing a facility or 2. But that wasn't the topic of conversation this quarter. But we have talked about it.

Unidentified Analyst: Well, it seems to me you're running out of cash. I don't know if the company's going to – is of a size or creditworthiness to be able to generate additional capital. It seems to me that sort of the logical step is to look at selling some facilities similar to the transaction that was completed in Arkansas.

Brent Morrison: The problem with that is it's reversed scale, right? As we sell facilities and G&A doesn't proportionately drop, we end up in a worse situation a few quarters down the road. So I see what you're saying, but we would refrain from doing that unless G&A would at least drop or more by the amount that revenue does.

Unidentified Analyst: Well, you got a company that's got a common, I guess, market value of right around $8 million, and you're running G&A of $4 million a year. I don't think you're of a size and a scope to be public and to be efficient. It seems to me that the cost of being public, you need to have probably around $500 million of assets. Have you considered going private?

Brent Morrison: We haven't talked about going private, but you are correct. The public structure is weighing on the company. It's over 20% of the G&A cost just to be public, and all the workload and the employees that we need to do the reporting and work with the auditors, but we definitely feel it.

Unidentified Analyst: How much on the balance sheet have we reserved for these lawsuits?

Clinton Cain: $8.9 million at September 30.

Unidentified Analyst: I'm sorry. Could you repeat that?

Clinton Cain: The QLCL is $8.9 million at September 30.

Unidentified Analyst: How did that number arrive?

Clinton Cain: Well, we've taken an estimate of the number of cases that we have outstanding, and we multiply by the number of cases, and we come up with a basic legal reserve per case. And as we've tried those cases, so we go through the settlement negotiations, we – as we go through the settlement negotiations, we either reserve to the larger of the settlement or the legal reserve above. So if we don't settle and take it to court, we basically spend those reserves through the legal reserve. If we come up with a settlement that's greater, then we just settle out of court and the accrual is paid.

Unidentified Analyst: Has there been any discussion among the board or among management? I mean, it would seem to me that that's just a big pile of money that these plaintiffs attorneys are potentially just targeting. Any thoughts about that?

Brent Morrison: Sorry. What pile of money?

Unidentified Analyst: Is there not – is there restricted cash on the financial statements for that?

Brent Morrison: No. That's just the liability reserve that we've taken the hit to expenses, but the cash is not held.

Clinton Cain: And I just want to clarify. It's not $8.9 million. It's $6.9 million. I misspoke.

Unidentified Analyst: Okay. Okay. Thank you.

Operator: Alright and we can go next to Gary Griffin. Please go ahead. Your line is open.

Unidentified Analyst: Yeah, I've got two questions. First of all, so there is no $6.9 million satisfied, so to speak, is that correct?

Brent Morrison: Not in cash, no. But in the accrual, yes.

Unidentified Analyst: Which begs to my question, we can pay it, correct?

Brent Morrison: Well, we can't pay it and pay the dividend. So one of them needed to go. So that's why we postponed the dividends...

Unidentified Analyst: My question, back to the interest of the shareholders, why wouldn't we pay the dividends and not worry about the suit? Because if you pay the suit there won't be a dividend going forward anyway. [Being] cumulative, you're going to have to pay at some point unless you dissolve, correct?

Brent Morrison: Well, we think the assets less the liabilities are – have value, so we're working with the settlements sometimes getting terms. We don't have to pay all of that money out at once, and it's 42 different settlements. So we're trying to stagger them over time to pay the $6.9 million, if that's what they actually come out to be, over time. Now we didn't say that the lawsuits will aggregate to $6.9 million. That's just what we reserved against.

Unidentified Analyst: I've just not had an experience where lawsuits were not what they were planned to be. They're never coming out less in my experience. Thank you.

Brent Morrison: Thank you.

Operator: And we can go next to Josh David. Please go ahead. Your line is open.

Unidentified Analyst: Hi guys, thanks again. Do we expect a dramatic increase in legal fees in the fourth quarter and beyond? And I guess, how does that compare to historical?

Brent Morrison: We do not expect a big increase in legal fees. What we're trying to do is reduce the legal fees going forward, but we don't know exactly – it's hard to forecast legal fees. What we're trying to do is budget for legal fees and have the cash ready to settle claims when they arrive.

Unidentified Analyst: Got it. And would you say the legal fees will be consistent with the past year or so?

Brent Morrison: Sure.

Unidentified Analyst: Okay. And then the settlement from December 2015, I believe that was fully covered by insurance. These remaining lawsuits, what is the insurance coverage, if any, on those?

Brent Morrison: We're self-insured.

Unidentified Analyst: Okay. So no third-party insurer will buck up for those?

Brent Morrison: No, not now. The company elected to self-insure going forward.

Unidentified Analyst: Got it. Thank you.

Operator: And we can go next to Chris Doucet. Please go ahead. Your line is open.

Unidentified Analyst: Thanks for taking the call Brent. And I want to commend the company on making the hard decisions to make sure this company survives and actually thrives in the future that past administrations couldn't make. So my opinion, obviously, is very different from anybody else on this call. The questions I have though are – and we've never gotten a straight answer to this, but what is the actual G&A per quarter now that Allan is gone and now that he's not traveling back and forth from New Jersey, if you exclude legal settlements and you exclude legal costs associated with the litigation? What's the number?

Brent Morrison: So Chris, thank you for your question and your comment. We budget for $950,000 per quarter, but with only three weeks in, I'm still rolling up my sleeves and looking at the expense structure of the company. So give us a little bit of time, and I'll definitely answer that for you and be more transparent.

Unidentified Analyst: Now I was dropped off the call, I got back on, and you may have answered this. But were you positive cash flow on an operation basis – operational basis for the third quarter?

Brent Morrison: Yes.

Unidentified Analyst: And do you expect to pay for the fourth quarter?

Brent Morrison: Yes.

Unidentified Analyst: Okay. Hey good work with what you are doing and I agree with what you are doing. You are doing the right thing to make sure this company survives. Thank you.

Brent Morrison: Thanks Chris.

Operator: Thank you. And it appears we have no further questions at this time. I can turn it back over to you, Brent, for any additional or closing remarks.

Brent Morrison: Well, thank you all for joining us today. We look forward to updating you in the future. And see you – and hear you on the next call. Thank you.

Operator: And this does conclude today's call. Thank you, everyone, for your participation. You may disconnect at any time, and have a great day.