Earnings Transcript for RHE - Q4 Fiscal Year 2016
Executives:
Brett Mass - Hayden IR Bill McBride - Chairman and Chief Executive Officer Allan Rimland - President and Chief Financial Officer Clinton Cain - Senior Vice President and Chief Accounting Officer
Analysts:
Joshua Horowitz - Palm Global Ben Fass - Private Advisors John Davis - Bravo Realty
Operator:
Good day and welcome to the AdCare Health Systems Incorporated Fourth Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brett Mass of Hayden IR. Please go ahead.
Brett Mass:
Thank you. Joining on the call today are Bill McBride, AdCare’s Chairman and Chief Executive Officer; Allan Rimland, AdCare’s President and Chief Financial Officer; Clinton Cain, AdCare’s Senior Vice President and Chief Accounting Officer. I would also like to mention this call is being simulcast on the Company’s Web site at www.adcarehealth.com. 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 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 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. After management concludes their remarks, they will respond to questions except to those related to litigation matters. Now, I'll turn the call over to Chairman and Chief Executive Officer of AdCare, Bill McBride. Bill, floor is yours.
Bill McBride:
Thanks, Brett. Good morning, and thanks to, everyone for joining us today. In 2016 under the direction of the Board and with the support of an independent financial advisor, we evaluated and considered strategic alternatives for the Company, following the completion of our transfer from an owner operator to a healthcare property holding and leasing company. After a thorough and exhaustive review of all of our options, the Board concluded that the best path to increasing shareholder value would be to execute on a number of near term initiatives. I'm going to discuss each of those initiatives and provide you with an update on our progress against each of them since our last conference call and our annual meeting. The first of these initiatives is redeploying the net cash proceeds from the sale of nine facilities in Arkansan. We're continuing to build our pipeline of potential acquisitions and are pleased with our recent activities. We're generally focused on the skilled nursing sub-sector, looking at transactions with existing and new operators in the 9.5% to 10% lease cap area based on initial rent across the country; although, primarily focusing in on states where we already have some presence. Most recently, I'm pleased to announce that we signed a definitive agreement to purchase and at the submitting facility with 106 operational beds located in Alabama for $5.5 million or $52,000 a bed. We also executed an agreement to lease the facility to an affiliate of C-Ross Management, C-Ross and its affiliates operates 21 facilities in Georgia, Alabama, a very strong regional presence, including seven AdCare facilities. The facility is located adjacent to our Coosa Valley skilled nursing facility, which is also operated by C-Ross. We believe that by owning both of these two properties and leasing the two, the C-Ross, will provide operational benefits, both revenue and cost to C-Ross, which should translate into increased value for both properties overtime and importantly for us coverage ratios, which improved value. That is why we went and purchased an assisted lending property rather than a skilled nursing facility, because of the relationship with our existing nursing home. The terms of the lease agreement, include a 13 year initial term with initial annual cash rent of $450,000 in the first year and 2% are four years. We intend to finance the acquisition with a combination of conventional mortgage debt of approximately $4.4 million at an interest rate of 4.5% and the remaining amount with cash-on-hand. And that element already obtained a commitment letter for such financing under those terms. That provides a substantial return on equity of over 22% on our invested cash. As it relates to our previously announced letter of intent, we purchased a skilled nursing facility in Texas. We decided not to pursue this transaction; however, instead signed a letter of intent to acquire and lease 111 bed facility currently owned and operated by Skyline also in Tennessee. The terms of this NOI include a purchase price of $6 million for the lease, a 15 year initial term, initial cash rent of $600,000 with annual rent escalators of 2%. We’re in the process now of obtaining mortgage financing for that property. We’re in active discussions with several of our other operators about additional acquisition lease opportunity, as well as we expect to announce progress on those shortly. Another of our near-term strategic initiatives is continuing to work with our existing operators, including making selective investments in certain facilities at attractive returns on capital to immediately increase rent and/or improve the credit profile of our facilities, especially our rent coverage ratios. For the three month ending December 31, 2016, our portfolio occupancy rate was approximately 82.6% and skilled mix was 23.1%. Rent coverage, before management fees, was stable at 1.53 times in the fourth quarter as compared to the third quarter and rent coverage after management fees was steady at 1.12 times rent for both periods. I am generally pleased with the results as the fourth quarter is generally a difficult operating quarter for the industry due to the holidays affecting admissions and labor prices; so a flat quarter third to fourth with the largest jump that we saw in the third quarter, is very positive news for the Company. And I expect further improvement in the coverage ratios to begin again in the first quarter of 2017. We anticipate continued improvement in coverage ratios as a result of continued operational improvement at the tenant level in both in revenues and cost; again, as I mentioned in the first quarter. Overtime, we expect that these improved rent coverage ratios will result in lower cap rates as we’ve talked about a number of times, and ultimately increase shareholder value of our Company. Recall that last year one of our operators New Beginning declared bankruptcy and in course of the bankruptcy allowed of our facilities to be decertified by Medicare Medicaid services. We've identified a new operator Peach Healthcare Group, who has significant experience in recertifying facilities in the State of Georgia, and we leased three buildings two to certified buildings and one additional one to them. We've been working closely with Peach over the last several months identifying a physical plan improvement over $1.8 million to our Oceanside and Jefferson facilities. As a result, the two facilities will recertified by CMS in December of 2016 and February 2017, cleaning the away for us to again generate rental revenues from these facilities. These facilities have been filling up rather quickly, and have a strong skilled mix. The current number of patients at our Jefferson facility, which is renamed now Twiggs Rehabilitation Center is 38 residents already out of bed capacity of 117, and we up 30 patients out of 85 capacity at Oceanside. So, given the shortages treaty have been open where we're very pleased with this fill operates on these facilities. And I think it indicates choosing Peach as an operator there in order to do this recertification. We steadily reduced also quarterly G&A as we talked about, excluding stock-based compensation throughout 2016 from $2.3 million in the fourth quarter of 2015 to $1.2 million in the fourth quarter of 2016, which is nearly 50% reduction; as a direct result of headcount reductions and lower non-compensation expenses. Management is comfortable with our quarterly cash G&A target of $1 million, which includes G&A related to our facility management business, and we expect to obtain that target by the end of the second quarter of 2017. And finally in terms of our strategic initiatives, one of the Company's remaining facility operations issues involved professional liability losses. Management is working diligently to resolve on an expedited basis the remains matters resulting from legacy operations. The current number pending professional liability matters is 44, of which 28 have been filed in the State of Arkansan by the same claim of attorney that we set in 24 cases with in 2015, referred to as the Cleveland matter. These actions generally speak unspecified compensatory and intuitive damages with a former resident of the Company's facilities. The statute limitation for these types of lawsuits is two years. And since the majority of our facilities transferred operations in 2015, the risk of additional patients is diminishing quickly. Now, I’ll provide additional details about the financial impact related to these matters. In February 2017, we formed a wholly-owned subsidiary to Company and filed a registration statement to begin the process of reorganizing our corporate structure. The reorganization, if approved by the shareholders, ensures the effective adoption of certain charter provisions restricting the ownership and transfer of our common stock to allow the Company to meet the continued listing requirements of the NYSE and better position the Company for a potential re-tax selection sometime in the future. The reorganization also allows us the opportunity to continue our business under a new name, Regional Health Properties, which better reflects our business model as a healthcare property holding and leasing company and our alignment with strong regional operators that have the operational, clinical and financial expertise in the area where our facilities are located. We anticipate holding a special meeting of the shareholders sometime in the second quarter of 2017 for the purposes of voting on the proposed merger. We may and are considering at that time to possible make that an annual meeting as well, so we wouldn’t have that future cost later on in the year. And finally, in November of 2016, Company approved 1 million share common stock buyback program and 100,000 shared preferred stock buyback program. To-date, we’ve repurchased 250,000 shares of common stock for approximately $400,000 and 2, 300 shares at preferred stocks for approximately $50,000. We have since suspended all repurchases due to the proposed reorganization of our corporate structure. With that, I’ll now turn the call over to Allan Rimland our President and CFO.
Allan Rimland:
Thank you, Bill and good morning everyone. As a reminder, the presentation of our fourth quarter and full year financial results includes the reclassification of our operating results and facilities that were transferred to discontinued operations in the prior year period. Therefore, comparative period may not be indicative of our financial performance, given our change in business model. Revenues in the fourth quarter of 2016 were $5.9 million as compared to $6.3 million in the year ago quarter. We recognize our revenue in accordance with GAAP, which for most leases, is on a straight lined rent accrual basis. We did not recognize revenue for our Jeffersonville and Oceanside facilities during the quarter, because the buildings were not recertified during that time and paying de minimis rent. The decline in revenues in the fourth quarter was driven primarily by the sale of nine of our facilities in Arkansas, early in the quarter. G&A expenses were $1.4 million for the quarter of 2016 inclusive of approximately $200,000 of stock-based compensation as compared to $2.5 million for the fourth quarter in 2015, inclusive of 300,000 of stock-based compensation. As a reminder, G&A includes the overhead expenses related to our facility management services businesses or approximately $175,000 in the quarter. G&A declined 43% compared to the fourth quarter of 2015. More importantly, G&A declined $200,000 from the third quarter of 2016. The decrease in G&A was primarily driven by planned headcount reductions, as well as non-compensation related expenses. As Bill mentioned, we continue to expect additional reductions in G&A in the next few quarters. Interest expense declined in the fourth quarter of 2016 to $1.5 million due primarily for the sale of our Arkansas properties to Skyline. Our loss from discontinued operations, net of tax, was $6.9 million for the current quarter as compared with $2.4 million for the prior-year period. The loss was primarily due to an increase in our self insurance reserve. The Company self ensures against professional liability gains after the transfer of its operation, and as in self insurance reserve for the estimated cost associated with any claims. The amount of the reserve is evaluated quarterly as to its adequacy based on a number of factors, including the number of cases with severity and value indications, estimated legal and related costs and the status of any settlements or mediation discussions. As part of the quarterly evaluation, the Company determine in consultation with our accounts and auditors that it was appropriate to increase the self insurance reserves to $6.9 million at year end. The Company believes most of the cases and particularly many indications recently filed are defensible and attains to defending claims vigorously to the final judgment. Net loss attributable to common stockholders for the fourth quarter was $420,000 compared to $10.2 million for the fourth quarter of 2015 for a loss of $0.02 and $0.50 per basic and diluted share respectfully. Turning to our year-end results, revenue for the full year was $27.3 million compared to $18.4 million in the year ago period, or an increase of 49%. The increase in revenues is driven primarily by an increase in rental revenues reflecting our transition to the healthcare property holding leasing company. G&A was $7.7 million for the full year of 2016 inclusive of $1.1 million of stock-based comp. G&A declined 27% or $2.8 million compared to the full year in 2015. Net interest expense decreased from $8.5 million for the full year in 2015 to $6.9 million for the full year in 2016, reflecting lower average debt during the year, primarily the lower debt related to the Arkansan asset sales. Net loss attributable to AdCare common stockholders for the full year was $14.8 million compared to $28.7 million for the full year in 2015 or a loss of $0.74 and $1.46 per basic and diluted share. Turning to review of our balance sheet, in 2016, we secured long-term financing in two of our facilities; sold non-core assets and improved our capital structure by reducing near-term debt maturities. We are in a much stronger financial position today than we were just 12 months as it relates to our balance sheet. Cash and cash equivalents at year-end totaled $14 million compared to $2.7 million at December 31, 2015, and restricted cash at December 31, 2016 totaled $5.5 million compared to $12.7 million in the prior year. Total debt outstanding at year end was $80 million compared to $122.8 million at year end 2015, including liabilities of disposal group held for sale of approximately $1 million in 2015. Both announced are net of deferred financing cost of $2.2 million and $2.7 million in 2016 and ’15 respectively. Debt was significantly lower because of the sale of our Arkansan assets in the fourth quarter. Subsequent to year end, we completed a cash tender offer for apportion of our 10% convertible subordinated notes. Of the $7.7 million in notes that were outstanding in the issue, $6.7 million was standard and is subject for repayment. As a result, $1 million in aggregate principle of these convertible notes remain outstanding, which we intend to pay out the cash on hand next month. We saved approximately $200,000 in cash interest expense in the transaction. In addition, this week we were successful in netting $1.5 million of restricted cash of this collateral against two mortgage loans, thereby reducing outstanding loan balances by an equivalent amount. The result will be lower interest expense over the life of the loans. As Bill mentioned, we've been taking proactive steps to strengthen our financial position by extending debt maturities and lower our cost of debt. By refinancing existing mortgage debt on two of our properties, our sub-tier and Georgetown facilities with HUD guaranteed debt, we lowered our overall custom mortgage debt on these facilities by over 100 basis points, and extended maturities significantly. We have approximately $1.2 million of mortgage debt and $2.5 million of convertible debt due over the next 12 months. The convertible is then adjusted for the convertible debt tender and the near-term debt maturities exclude normal debt principle amortization. Permanent debt maturities relative to a few years ago are much more manageable. We are evaluating all of our mortgage debt underlying our own property portfolio for potential refinanings to lower interest cost, extend maturities and provide cash out refinancing. We haven’t used any net proceeds from cash or refinancings for general or corporate purposes including acquisitions. During 2016, we completed the sale of non-core assets, primarily office buildings that were no longer necessary to support our business. In all, we sold three office buildings and one parcel land. In addition to these asset sales, we also subleased our bucket offices, which reduced all overhead cost. As discussed in the past, we are focusing on improving the structure and efficiency of the balance sheet, due in part with the release of low return non-core asset -- low returning assets, such as restricted cash and non-core assets side for the balance sheet. With that, I would now turn the call back over to Bill.
Bill McBride:
Thanks, Allan. So we are continuing to execute on the strategic and operational initiative that we’ve discussed in our last call, and at the annual meeting, which the Board believe are imperative to increase shareholder value. As I’ve discussed with you, many of you, on the call individually, the real-estate portion of our business is doing quite well; the tenants are paying; our coverage ratios on these underlying properties are improving. The inherited tenant that Allan and I got new beginnings; we’ve cleaned that up; put a new tenant in; recertified the buildings; those buildings are filling up nicely. We’ve announced two acquisitions; our pipeline is building; we expect further announcement and acquisitions to come; and we’ve made significant progress in reducing overhead. That’s the key ongoing Company or what will be regional health properties; that real-estate investment business. The balance sheet is much stronger, as Allan mentioned, we’ve restructured the balance sheet so that we have very little short-term debt other than normal principle amortization. We have almost exclusively fixed rate long-term debt with very little covenant and no covenant issues any more, covenant issues have plagued this Company for many years. The issue that we still have left is to resolve the remaining legacy issues relating to when we operated the facilities. As I mentioned previously, the statute of limitations from medical malpractices two years, it's rapidly approaching in many buildings. So we see it and these suits being filed. We need to resolve the remaining suites. Obviously, the Board, myself and Allen want to resolve these as quickly as possible. The faster we can put this issue behind the Company, the better we can move on to just talking about our underlying real-estate business and not about the legacy issue. However, we need to settle these in a way that make sense for the Company. And we are working diligently to do that. We have settled a large number of these already. And I'm hopeful that we will be able to do something relatively quickly on these, but it takes too, and it has to make sense. So, we understand the importance of getting that done and we're focused on that, as we are in all the other initiatives. So anyway, with that, we look forward to providing you additional updates as our progress continues. And at this time, I'd like to open it up for any question, operator?
Operator:
Thank you [Operator Instructions]. And we'll take our first question from Dimitrius Alexander.
Unidentified Analyst:
Leasing the reverse split, maybe necessarily in the future just to get more institutional investments?
Bill McBride:
That’s something that we will consider. We have considered it already. Again, as I mentioned, we may make the meeting in a combined annual meeting that we have for the vote on regional health properties. It's something that the Board would discuss, and we'd also discuss that with our large shareholders to get there, dealing on that. It's not that -- we don't believe it's necessary in order to meet listing requirements. So, it wouldn't be done out of that, it would be more done for other reasons, but something we would consider. But I don't think, at this point in time, we consider it necessary.
Unidentified Analyst:
The burden for your -- rents for your facilities have been recertified. I know that the population is building those facilities. Does the rest escalate as it gets more build out or is the rate -- at 100% right now that we will receive?
Bill McBride:
Allan, do you want to address that?
Allan Rimland:
The rate for Jefferson and Oceanside facilities is currently at $1 per month. Both of them are on a structure where one month after recertification in this case, January and March, the tenant then has three months of free rent and then the five months of 50% before they start to take full rent. It's synthetically really creates a sharing in the fill-up losses -- fill-up rest in the business. So from September-October, both of those facilities would be paying full rent. And as Bill talked about earlier and the sell with those facilities are filling up nicely, especially Jeffersonville which from a payer mix perspective, is fairly strong in terms of non-Medicaid mix.
Bill McBride:
One other comment though, if those facilities reach 80% rent, we’d say very well may prior to those deadlines that Allan mentioned, they go to full rent at 80% occupancy.
Unidentified Analyst:
In terms of, if you were to be a REIT today, I know with your cash flow would allow buildings. When you think you will be at a cash flow perspective or if you were already be able to pay something out and you may not be able to answer that or maybe give some color as to just cash flow in the future, if you think you’d be able to pay anything?
Bill McBride:
I'm not able to really give a timeline as to when the Company would be able to payout some sort of a common stock dividend, primarily because one of the major things we have to resolve is that the legacy suites. And I don't have a number exactly as to what we're going to be able to do relative to that. But I will say this, it's important as a REIT, whether you’re a REIT or a property holding company, that's really a tax designation. And we don't have to elect that tax designation, because we have significant NOLs. So, because of the NOLs, we don’t have to elect restates. And as a matter of fact, our shareholders, on the preferred side relative to the dividends and once we reinstitute them common dividend almost better, not having to reach status and having the NOLs and the way those dividends are treated. All that said, it's important for a holding company to have some form of common dividend; we understand that; we are working diligently to get there; we believe that’s an important part of shareholder return for the investors that invest in real-estate stocks; and we know for this Company to grow and attract additional investors that, that need to happen. It's on our list as quickly as we can; we’d like to do some sort of dividend; we like it to be sustainable, and consistent; and we want to make sure that the Company is at a point in time when we redo that and we’ll reinstitute those that we’re very comfortable it’s the long-term sustainable and can only increase as we do more deals.
Operator:
We’ll take our next question from Joshua Horowitz with Palm.
Joshua Horowitz:
When you look at your pipeline and your balance sheet, can you give us some sense of the size of the opportunities in the aggregate that you have the opportunities to do?
Bill McBride:
Well, let’s take the pipeline first; so we have a number of risks upon letters in interest ion where we get a package; we talk to an operator; operator is interested in the facility, or operator brings in the facility that this is going to be coming on the market or this is on the market, being marketed. We kind of do a preliminary due diligence on it to make sure it's something that we’re interested in or would be interested in; discuss terms with the operator in terms of a lease; so again, putting a letter of interest that we’re interested in getting involved in buying the facility. There’re a lot of facilities out there right now, which we are at that stage on. Some of those deals are multi-facility deals, the 30 plus million dollar packages of facilities. Some of them are ones and twos, et cetera. Then, assuming we are at the price that we think we’re comfortable with, assuming that we get selected to buy it, then we do a letter of interest or letter of intent. At that point, we sort of lock up the fact that we’re the potential buyer; we have the right to spend the time, effort, money that start to do more significant due diligence on the properties. We’re at that stage already on a couple of facilities and then we go to purchase agreement, and where we’ve completed a purchase agreement on the one at just the living property already, and expect to close that soon. So, there are a lot of opportunities out there. There is lot of exchanges of nursing home, sales-buys going on, particularly in the world markets, also in the urban markets out there right now. Lot of the large operators are divesting of facility for whatever reason and our regional guys are looking to pick up some of those where it makes sense. So, we see a lot of opportunities. We build opportunities, generally, we want and are getting 20ish plus returns on our equity invested in the facilities, which is our threshold for any deal like that. So, see a lot of opportunities. We have with existing cash which we can reinvest. We also can look to, at some point, do another convert potentially. We have no convertible debt on the balance sheet now other than a small piece to do later on this year. We could do another convert with a package, a larger package deal in order to lever up and improve the cash flow of the Company. So, that's certainly how we're looking at it. As far as the specific number on the pipeline, I mean I don’t know you kind of accumulate these up, but it's a huge number.
Allan Rimland:
I would say, Josh, if anything the limitation is; one, capital; and two, portfolio structure and design, and doing deals that we think make sense and not chasing deals. So we don't -- that don’t make sense. And there are situations in the marketplace where people are pricing up assets and those are assets we're now particularly interested in in-conjunction with our operating partners.
Joshua Horowitz:
Let me just switch gears to the insurance piece. How many individual claims still remain that you were actually talking about?
Allan Rimland:
44.
Joshua Horowitz:
And where is that number say six months ago?
Allan Rimland:
It would be smaller than that, probably in the, I don't know, 20. Now, what's happened though is as you approach the statute limitations -- so 28 of the 44 are in Arkansan, and they’re by one lawyer; the lawyer that actually we settled the 24-cases with through the insurance company last year. So the statute in Arkansan for medical malpractice ends on May 1 for us, for all but one facility and that one facility is not a facility where we’ve had really any significant issues. So prior to the statute of course he filed everything he could. And so that's why you’ve seen this jump up of recent times, because he knew that post May 1 he wasn't going to be able to file anymore in med mal.
Joshua Horowitz:
So, if there were some way to look at what could potentially -- I'm just trying to get to an ultimate number. So, based on the former facilities I mean where they were located, could the 44 -- and I would say when the statute and for these revenues in rural states. Could the 44 be 54 by next quarter, or pretty much leveled out here?
Bill McBride:
That's really hard to say. I think -- I’ll make general comment without predicting a specific number. So on one hand, you've got to statute approaching. So you could have them try to beat the statute. So, that could result in some increases. However, the way these cases go, in general, is the more egregious actions tend to get filed earlier. So, without specifically talking about any particular case that we have or could have, this picture; so, if you have an issue with your mom or your grandmother in a facility and you are very unhappy with accompanying that we’ve done in that facility, you're not going to wait to go call and find some lawyer to file an action against the company; the company that's been out of operational business for two years. You're going call somebody right away or reasonably right away, and they're going to be on it. So, what tends to happen is -- again, and I'm speaking generally not specifically. But egregious cases get filed and then the cases that get filed later are more -- well, let's say if we can come up with something for there. So, we can put something for that on them or whatever. And those cases also get muddy or relative to who operated the home during that period, because now we're out of there for two years. So some period of time maybe a subsequent operator within that facility, and then who does that really relate to. So, you could have a spike up because of the approaching of the deadline but also those cases tend to be not as significant in general.
Joshua Horowitz:
So, if I look at your reserve, what percentage of that was there that is attributable to potential settlements versus the actual cost to defend?
Bill McBride:
It really consists of both, and I’d rather not, for a variety of reasons, I’d rather really not break that out…
Operator:
[Operator Instructions] We’ll take our next question from Ben Fass with Private Advisors.
Ben Fass:
Hey guys, another question on the reserve. Did you say that you increased reserve this quarter by $6.9 million?
Bill McBride:
Yes.
Ben Fass:
So that’s a $400,000 increase from the 8-K filling two weeks ago?
Bill McBride:
Yes, that’s correct. If you recall, the 8-K was in anticipated reserve amount. Since the filing of that 8-K and really the registration statement with RHA, we’ve had one additional case and one arbitration result. So, those numbers are reflected in the reserve at year-end.
Ben Fass:
And then with respect to the guidance that you provided, I think in December, we’re in a presentation. For $30 million of run rate revenue beginning on July 1st of this year, are you still comfortable with that number?
Bill McBride:
I think that approximately we are -- we’re not really release that number out there. For now, we’re comfortable with that. I mean, our acquisitions pipeline is going reasonably well. We’re not prepared to make an adjustment on that right now. We’re comfortable with that. Obviously, the settlement and how that ultimately pans out where the Company is going to impact the net cash flow from operations. But as far as the revenue run rate, we’re comfortable with that.
Ben Fass:
And what is, I know this is asked earlier, I guess I’ll ask it a bit differently. But what is your outlook for cash flow for the year, assuming let’s take the accrual aside for the liability. But just from an operational perspective, what are you anticipating for cash flow for the year?
Bill McBride:
Allan, do you want to address that?
Allan Rimland:
I think it’s a difficult question just because of the timing of the redeployment of the capital. I think the bet is to really look at that. I think we talked about the run rate guidance on AFFO of $0.20 or roughly a nickel a quarter. The unknown that I think Bill talked about when you think about the key drivers of the model; it's the pace of acquisitions; it's the cap rate of those acquisitions; and the financing thereof, which I think we both feel very good about on those thesis, G&A continues to decline and as Bill said I think we’re heading towards that target. The last unknown is really the cost on these professional liability claims and the financing they are up. I think in terms of cash flow, or true cash flow as you think about it, are some of the big jumps so you see the difference between FFO and cash would be Q3-Q4 when the Peach facilities begin to pay full rent, and that’s the really the only differential.
Ben Fass:
But we expect to use cash over the next six months prior to the acquisitions coming onboard and then those facilities being fully up and running…
Allan Rimland:
Yes.
Operator:
And we'll take our next question from Jessie Vance, Private Investor.
Unidentified Analyst:
I'd like to complement you and the Board on doing a tremendous amount of positive strategic positioning that you've done. I have one simple question, short term, what are your plans to reward shareholders?
Bill McBride:
Well, I think one of things we've done so far with the stock buyback program; we mentioned that we bought 250,000 shares at the weight of really reinvest the capital with shareholders, payback shareholders. So, that's on hold right now until we get the -- filing completed and of that meeting. But we would expect to take -- that program is still available for the Company and an option as soon as we can utilize that capacity again with something we would look to do.
Unidentified Analyst:
And my final question is, has there been any discussion amongst the Board for a special dividend, or one-time special dividend, to the shareholders of record?
Bill McBride:
We’re always looking at every option; however, right now, the return on invested capital in our acquisitions pipeline is significant. And one of the issues that AdCare faces or Regional Health Properties will face, obviously going forward, is once we get all the legacy stuff put behind that sooner, hopefully rather than later. We're still also small for a standalone public company. And so redeploying that capital in terms of doing deals at 22% like we're doing in the assisted living property, significantly enhances cash flow per share; and it allows us to take the cost of just being a public company and spread it over a wider base of facilities, which is something that we need to do which will have a dramatic increase on our earnings and our growth. So, that's something that right now you would take into consideration; obviously, wanting to do something for the shareholders. But right now, we think if we have deals that are that accretive and attractive to do right now, I believe the Board would say let's reinvest that get larger spread or overhead out over a larger number of base of facilities and that will have a more significant impact on our earnings on a short term basis. Also I might add that our existing portfolio, we talked about a lot about the coverage improvements which we've had and expect to see to continue. But our base properties have increases of 2%, 2.5% 3% in some cases on their underlying revenues. So, even if the $20 million run-rate before we do the acquisitions, if you stay at 2.5% increase that's $500,000 a year going to the bottom line, improvement over 20 million shares. So that in it-self grows our FFO significantly, because we're small; and so that spread out over a small number of shares. So, you’re going to see just underlying growth in our FFO irrespective of acquisitions that will help grow the Company over the near term.
Operator:
We’ll go next to John Davis with Bravo Realty.
John Davis:
I wanted to piggy back on some of the earlier comments. The stocks at a buck 30, it seems like an excellent-excellent opportunity for buyback is very large since the stock, especially with our liquidity. Why would you not accelerate buybacks rather than to spend at this time?
Bill McBride:
Allan?
Allan Rimland:
Sure. I guess currently, as Bill said, it’s suspended because of the proposed merger with our affiliates. And we’re talking with counsel about the specifics on that. But at least for now, it's suspended because of essentially merger into a subsidiary of our self. As Bill talked about, I think the Board also looks at return on capital all the time. And I think we look at the current price of stock essential reacquisition of shares as opposed to new acquisitions. And whether it’s a dividend or whether it’s a share repurchase, it’s a similar philosophy in the sense that we’re small and buying back stock or paying special dividend, just perpetuates that view that we just get smaller and smaller. What we have done in the past and when you look at the redeployment of that capital, one of the things that we’ve done with that capital is set aside that cash to pay up all of our convertibles that are due, or essentially deleveraging the balance sheet. But it's something that as you suggested, we will be speaking with council on those issues ourselves. Obviously, given the average price that we repurchase the 250,000 shares or so, it's something we would revisit and potentially consider it to be set we can.
John Davis:
Thank you, guys.
Bill McBride:
Look, the Company has had two buyback programs since I’ve been there. We have a million share that exist, we bought 250,000 shares. When and if legal says, that’s not an available option for the Company. I can guarantee you that the Board is going to look very closely at that versus the acquisition, and look to -- what maximizes shareholder value.
Operator:
And that will conclude today’s question-and-answer session. I would now like to turn the call back over to management for any additional or closing remarks.
Bill McBride:
Thanks everybody for joining us today. Thanks for the questions. We look forward to updating you during in our next conference call. And again, we’ll probably be having an annual meeting sometime or rather a special meeting of the shareholders for sure in June, and potentially the annual meeting combined with that as well. So, look forward to seeing many of you there if you can attend. Thanks again, and talk to you later.
Operator:
And that will conclude today’s conference. Thank you for your participation and you may now disconnect.