Earnings Transcript for RHE - Q4 Fiscal Year 2017

Executives: Brett Maas - Hayden IR Brent Morrison - Interim CEO & Director Clinton Cain - Interim CFO, CAO, Senior VP & Controller

Analysts: Christopher Doucet - Doucet Asset Management

Operator: Good day, and welcome to the Regional Health Properties Fourth Quarter and Year-End 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brett Maas. Please go ahead, sir.

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 and Chief Accounting Officer. I would also like to mention, this call is being simulcast on the company's website at www.regionalhealthproperties.com. I'd now like 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's business and the environment in which the company operates. These statements are subject to risks and uncertainties that could cause actual results to differ materially 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?

Brent Morrison: Thanks, Brett. Good afternoon, and thanks to everyone for joining us today. The fourth quarter was marked by changes that were aimed at minimizing nonoperational distractions and stabilizing our business. As you may know, I stepped in as Interim CEO to manage the company on a day-to-day basis upon the departure of our former CEO. As a long-standing director of the company, the direction we need to take and the tactical move that we need to be -- that need made were clear to me. Our team worked diligently during the fourth quarter, and sequentially, we are beginning to realize concrete outcomes as a result of our efforts. There are a number of operational and nonoperational challenges that remain, but I'm encouraged by our process and the near-term next steps we have identified and are proactively addressing. I believed and still do that it was the upmost importance to take action that would reduce near-term cash constraints while we work to resolve nonoperational issues. As such, we took actions in the fourth quarter that reduced cash outflow and provided additional flexibility. The board made a difficult decision to suspend the quarterly dividend on our Series A preferred stock, which has freed up approximately $1.9 million of cash per quarter. This, along with new financing that we closed subsequent to year-end, provides the company with enough financial runway to significantly address a number of noncore challenges that have been an overhang for the business for some time and provide us with the flexibility to make investments that we believe will improve our core operations. One of the primary nonoperational challenges had been to resolve legacy issues related to the company's former business as an owner-operator. Resolution of open professional and general liability action against the company has taken an inordinate and disproportionate amount of management time away from the core business. However, we made significant progress a few weeks ago. On March 12, 2018, the company entered into a mediation settlement agreement with respect to 25 individuals suits subject to the satisfaction of certain specified conditions. Under the terms of these agreements and upon approval of the court, the company has agreed to contribute an aggregate of approximately $2.4 million in settlement of the lawsuit and will be released from all and any claims that may arise while the plaintiffs are residents at the company's facilities. This significantly reduces the amount of management time spent on legal matters and provides certainty around a portion of our exposure despite the 12 lawsuits that remain. From an operations perspective, performance of our portfolio properties was consistent with industry trends in the fourth quarter. For the 3 months ending December 31, 2017, our portfolio occupancy rate was approximately 80%, down slightly from 81.8% for the third quarter of 2017. And the quality mix was 26.3% compared to 27.6% sequentially. Rent coverage was 1.32x before management fees in the fourth quarter of 2017 compared to 1.45x in the third quarter of 2017 and 0.93x after management fees in the fourth quarter of 2017 compared to 1.05x, also a sequential comparison. These metrics exclude 3 Georgia facilities previously operated by affiliates of New Beginnings Care and 3 managed facilities in Ohio. The decrease in rent coverage, a metric we watch very closely, is attributed to a few isolated facilities, which we are paying close attention to rectify. Our overarching operational goal is to increase rent coverage over time by working with our operators to identify and address improvements that keep our operators healthy and the facilities at/or above industry standards for optimal occupancy. In an effort to streamline that process and evaluate the operating performance of the facility, we established an asset management group within the company reporting directly to me. This group, which serves in a single point of contact for the operators, is working directly with the operating partners to identify and implement operational improvement for the mutual benefit of the company, the operators themselves and the patients and residents of the facilities. Together, we have visited roughly 70% of our facilities that we operate. The initial visits with our operating partners has been encouraging, and the follow-on conversations regarding various projects has been promising. With fewer distractions, a shored-up cash position and energy focused on operations, we believe we'll be able to expedite operational improvement that will further stabilize our financial performance. From a corporate structure and governance perspective, during the fourth quarter, we completed the 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 continue listing standards, which we have done, and better positions the company to comply with certain U.S. federal income tax rules that qualify the company for REIT status election if the board determines that it's best to do so. In addition, the Board of Directors appointed Kenneth W. Taylor as Director of the company. Mr. Taylor's appointment was effective February 1, 2018, and he has served as the Chair of the Audit Committee. Since 2013, Kenneth served as the Chief Operations Officer and Chief Financial Officer for Cellairis, a leading supplier of mobile device accessories and repair services through 500 domestic and international franchisees operated company leased stores. Kenneth's experience working with franchisees is similar to Regional's working with our operating partners. We're excited to leverage Ken's tremendous operational knowledge as well as his finance and business operations experience. 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 fourth quarter of 2017 was $6.4 million compared to $6.0 million in the year ago quarter. The increase in revenues is attributed mostly to the acquisition of the Meadowood facility located in Alabama. Leased revenues are recognized on a straight-line rent accrual basis in accordance with GAAP. General and administrative expenses were $981,000, which is a decline of 31.8% compared to $1.4 million in the fourth quarter last year. G&A for the fourth quarter of 2017 was below our stated target of $1 million per quarter. As a reminder, G&A includes overhead expenses related to our management contract services business of approximately $150,000 per quarter or $600,000 per year. Interest expense decreased 33.5% in the fourth quarter of 2017 to $1.0 million, down from $1.6 million in the fourth quarter of 2016. The increase was primarily attributed to an immediate expense incurred in the prior year period associated with the October sale of 9 facilities located in Arkansas. Income from discontinued operations, net of tax, was $370,000 for the current quarter compared to a loss from discontinued operations of $6.9 million for the prior year period. The change is mostly attributed to adjustments in our accrual for professional and general liability. Net loss attributable to Regional Health common shareholders for the fourth quarter of 2017 was $1.2 million or a loss of $0.06 per basic and diluted share compared to a net loss of $420,000 for the fourth quarter of 2016 or a loss of $0.02 per basic and diluted share. Now for a review of our full year financials. Revenues for the full year 2017 were $25.1 million compared to $27.6 million in 2016. The decrease was driven by the sale of the Arkansas facilities offset by the acquisition of the Meadowood facility in Alabama in the current year. General and administrative expenses were $4.5 million for the full year 2017. G&A declined 41.8% or $3.2 million compared to $7.7 million in the prior year. Net interest expense decreased 42.7% from $7.1 million in 2016 to $4.1 million in 2017 due to the sale of the Arkansas facilities in late 2016 as well as repayments of convertible debt at the beginning of 2017, partially offset by the Meadowood acquisition. The net loss attributable to Regional Health common stockholders for 2017 was $8.6 million or a loss of $0.43 per basic and diluted share compared to $14.8 million or a loss of $0.74 per basic and diluted share in 2016. Income from discontinued operations, net of tax, was $1.7 million in the current quarter compared to a loss from discontinued operations of $13.4 million for the prior year period, and it's mostly attributable to adjustments for the accrual for PL/GL in the current -- in prior years as well bad debt expense incurred in prior year. Turning to a review of our balance sheet. Cash and cash equivalents at December 31, 2017, totaled $1.8 million compared to $14.0 million at December 31, 2016. Restricted cash and investments at December 31, 2017, totaled $3.5 million compared to $5.5 million at December 31, 2016. Total debt outstanding at December 31, 2017, was $73.1 million compared to $80.0 million at December 31, 2016, net of $2.0 million and $2.2 million of deferred financing costs at December 31, 2017 and 2016, respectively. Current debt maturities inclusive of current portion of convertible debt totaled approximately $1.8 million at December 31, 2017, compared to $13.2 million at December 31, 2016. Our current maturities consist primarily of scheduled debt amortization as well as one loan on our Quail Creek facility for $4.3 million. I'll now turn the call back over to the operator.

Operator: [Operator Instructions]. And our first question will come from [indiscernible].

Unidentified Analyst: When do you plan to reinstate the dividend on the preferred stock? Any idea?

Brent Morrison: Robert, this is Brent Morrison. The board looks at that quarter-by-quarter.

Unidentified Analyst: Okay. So no predictions yet.

Brent Morrison: Not today.

Operator: And our next question will come from David Lenxon [ph], a Private Investor.

Unidentified Analyst: I'm just curious on your -- in your travels and the asset management group, the state of the facilities, how are things looking with those facilities at the current time?

Brent Morrison: Thanks for your question. It's just like any portfolio. Some facilities are doing very, very well, and then some facilities have some issues. So what we do is we try to concentrate on the facilities that have some issues, identify them with the operators, understand their state surveys, understand their competitive mix and the potential of that facility and work with the operating partner to bring those facilities to their potential.

Unidentified Analyst: So I mean, I don't know, let's make an assumption that some of that cash on hand is going to be used to maybe take care of the updating of some of those facilities, and this might prevent you -- the board from authorizing further payments under purchase for, I guess, the foreseeable future.

Brent Morrison: Yes, the thought process was -- the assets -- our facilities are the lifeblood of this company. And if some of them need CapEx to be competitive in their markets, if they need some -- a little facelift, paint and wallpaper, maybe some new carpet, that's -- can bring those facilities from operating at their potential. We thought that the cash would be best used for that to increase the operational performance of those facilities because then we can refinance at a higher valuation using the same loan-to-value and build shareholder equity that way.

Operator: And our next question will come from Jay Bloom [ph], a Private Investor.

Unidentified Analyst: My question was answered already.

Operator: And our next question will come from Chris Doucet of Doucet Capital.

Christopher Doucet: First of all, couple of quick comments and then a couple of questions. First of all, thanks for making the difficult decisions that the previous administrations haven't made with this company, and also, I think it's a great idea that you guys have come up with this asset management group. That's something that should have happened a long time ago. Couple of quick questions, Brent, I guess these are for you. How much of your 2018 or 2017 G&A was related to PL/GL issues and other legacy issues? Do you have a number?

Brent Morrison: Yes, Clinton will take this.

Clinton Cain: Chris, I'll take this one. So we have roughly about $600,000 or so that we ran through as far as legal fees associated with the legal settlement. This is for litigation, for mediations and various claims.

Christopher Doucet: So about $150,000 a quarter on average last year, do you think?

Clinton Cain: That's pretty close.

Christopher Doucet: Okay. And Clint, and this is probably for you also then. What percentage of your G&A is cost related to being publicly traded?

Clinton Cain: It's a big percentage. It's several hundred thousand dollars a year, at least.

Christopher Doucet: Okay. So do you think 20% or 25%...

Clinton Cain: Yes, probably 30%, at least 1/3 probably.

Christopher Doucet: 30% of G&A. Wow. Okay.

Clinton Cain: [Indiscernible] a lot of it has to do with this -- the audit fees that come along with that, the attorneys that get involved with this, and there's a lot of just overhead that comes across from the fact that we're publicly traded.

Christopher Doucet: No, I understand. And Clinton, I didn't see a number in the 10-K, maybe I missed it. Did you guys have a new reserve amount or noncash reserve amount since the Arkansas suits were settled? I know it's subsequent to the quarter being filed or the quarter ending. But have you guys done that?

Clinton Cain: Yes. So it's in the Form 10-K. We have $5.8 million accrued. Now there's a couple of places with that on the balance sheet, but that's what the number is. It's accrued. Now that does include the $2.4 million or so that's left for Ludwig that we haven't paid out yet.

Christopher Doucet: Okay. And I don't know if -- and then how many cases did you say were left, Brent?

Brent Morrison: 12.

Christopher Doucet: So there were 42, and now there are 12. Okay.

Clinton Cain: Well, that's excluding the 25, though.

Brent Morrison: So Chris, we should probably make this clear. So the cases that were settled aren't removed until the money goes out, so there's a court process. The court has to read the case and approve it. So once all that money goes out, then we'll have 12 cases. But assuming that the courts don't have a problem, that both parties came -- agree to the settlement, we assume that they shouldn't be an issue. And they're probably about 6 or 7 have already gone out of the 25.

Christopher Doucet: Okay. But that's down from an original 42 that you had last time you reported, is that correct?

Clinton Cain: That's correct.

Brent Morrison: That's correct.

Christopher Doucet: Okay. And I don't know if you guys can comment on this, but you mentioned your rent coverages before and after management fees and your occupancies for the third quarter and fourth quarters of 2017. Can you give us some color about those numbers in the first quarter of 2018?

Brent Morrison: We don't have them readily available. We can take it offline, and we'll definitely report it with the first quarter numbers.

Operator: [Operator Instructions]. Our next question will come from [indiscernible], a Private Investor.

Unidentified Analyst: Yes. The question I had related to the preferred stock, and part of it has already been answered that you don't know when it will be assumed to be paid at some point in the future, I hope. Are there any provisions on the preferred stock that there's a requirement that it can only be delayed for a certain number of quarters?

Brent Morrison: Not necessarily. It can be delayed indefinitely. One of the protections that -- it is a little bit of an echo. One of the protections that shareholders have is after 4 quarters of nonpayment, they can -- they get voting rights, and they can elect 2 members to the board.

Operator: And our next question will come from Bruce Tefnet [ph], a Private Investor.

Unidentified Analyst: Yes, Brent, can you hear me okay?

Brent Morrison: Yes, I can hear you.

Unidentified Analyst: I had a couple of questions. I know that the -- one is on the preferred. I know it's a cumulative preferred as well. And I'm curious, you -- when you don't pay on the dividend on the cumulative preferred, do you actually pay interest on the dividend that hasn't been paid? Do you know what I'm saying? Do you pay interest on the dividend that hasn't been paid if it is accumulative? And it is accumulative preferred, I believe, isn't it?

Brent Morrison: Yes, it is cumulative preferred, Bruce. And the dividends that aren't paid increase -- increases that liquidation value of the company. But the accrued dividends not paid do not accrue at the rate, I don't believe.

Unidentified Analyst: Okay. I have another question. I'm quite familiar with real estate and net-net leases. Are most of the properties on a net-net lease basis? And if that's the case, do you do -- on account, the -- isn't the lessee responsible for updating the facilities? And in the event that he doesn't, I was just thinking that I've had situations where people have defaulted on leases and I can rent them out at a higher lease amounts if he's a -- if they're a poor operator or a poor tenant? I'm just curious to -- I guess you have to take those on a point-by-point or one-by-one basis. But would you have situations where you can actually -- if someone isn't taking care of the facility like they're supposed to under the lease that you can get a new tenant at a higher lease rate? Does that make any sense to you?

Brent Morrison: Yes, it makes perfect sense, Bruce. Let me give you a little kind of color on the facilities. These are skilled nursing facilities. So the triple-net lease, as you say, the operator is required to put maintenance CapEx, so if the washer breaks. They need to fix it. They need to put it back in working order. But that doesn't mean they have to put a new washer, that just means they have to fix the washer. So what happens in these facilities is if it needs to be fixed, they'll have the repairman fix it. But they don't elect to put CapEx dollars in the facility. They like to take money out of the facility. So it's this working relationship that we're trying to build where we want them to put money in the facility because then that means that facility will compete better in its market. And if we need to contribute a little money to show that the real estate company is on the same page, we're willing to do that because a lot of our facilities are old, 30, 40 years old, and they need some tender loving care, some CapEx dollars. But yes, the operators will fix the washer, replace broken windows, wax the floor, that kind of thing. But if they're building a new facility down the street, a 100-bed facility, how are you going to compete with a brand-new facility that costs $10 million to build? You've got to put some fresh paint. You have to provide good quality care. That's how you compete, and that's what we're trying to do, is we're trying to get in front of these operators and get them to compete with the facilities because there's a lot of markets where a $10 million facility is being built or has been built not too far down the road, and the hospitals get wind of that, and that's where the fresh referrals are going to.

Unidentified Analyst: Okay. I had another question. In regard to the future of this company. I mean, in my mind, I guess, there are several alternatives. One would be a merger with another company if that makes any sense or if that -- is that something that you would entertain or sign the company? Or I guess, do you feel that you can get it to, I guess, solvent or operationally much better and just have it become a good operating company? Or do you think it's -- the future portends that you would sell out some of the properties to raise cash? Or I don't know, is there a vision for the company? Or let me just say that, what is your vision for this company? Because it's -- financially, it's a little disturbing. But maybe it's on the mend, I don't know. It's hard for me to ascertain that. But do you have a -- could you give as an opinion on that?

Brent Morrison: Sure, sure. The vision for the company is to get scale. When we sold off the 9 buildings in Arkansas, we lost a lot of scale. For example, the public company costs are $1 million, if not $1.1 million per year. That's not helping. All of that regulatory work that our team has to do just to stay public it's not helping us at all to be public. So looking yes, at mergers, looking at acquisitions, that all works, because that provides operating leverage or scale to our business. If we can't do that, getting smaller, maybe we need to sell a facility to raise cash, but that's not optimal because that's going the wrong way. By no means, are we trying to run this company for the next 5 years subscale? That makes no sense. So I'm open to telling you how much public company costs are, but you can't merge or you can't sell or you can't do anything strategic when you've got these PL/GL lawsuits with a question mark as far as the value raising over your head. No one wants to touch you.

Unidentified Analyst: Right. Well, that would beg the next question.

Brent Morrison: Go ahead, go ahead, Bruce.

Unidentified Analyst: No, that begs the next question. Of the remaining 12 lawsuits, do you feel confident that you can get those resolved?

Brent Morrison: I think so with some time, sure. I spent almost all of my time getting the 25 worked out. We needed to get those away. Now that we have that, that frees up a lot of time to go visit the facilities, to talk to our operating partners, what do they want to do.

Unidentified Analyst: Right. Are you there?

Brent Morrison: Yes.

Unidentified Analyst: Okay, okay. Well, that -- no, that's -- you've answered that question.

Operator: [Operator Instructions]. Our next question will come from Tom Berkowtiz [ph], a Private Investor.

Unidentified Analyst: Yes. On your press release, I see that you said that you had some new financing, new secured financing to provide additional liquidity. Could you talk about that?

Brent Morrison: Sure. We refinanced three of our facilities with the first lien mortgage. We did that to free up cash to pay the $2.4 million in the settlements of the 25 individual cases.

Unidentified Analyst: So the cash that we see on the balance sheet in your most recent SEC filing is still pretty accurate? The subsequent action really hasn't changed your liquidity situation?

Brent Morrison: It's enhanced, it but it's not -- we're still, I wouldn't say tight on cash. But we don't -- we're not -- we don't have a ton of cash. That's why we haven't reinstated the dividend.

Unidentified Analyst: No, I understand that, but I guess it -- on your 10-K, it shows cash and equivalents of $1.8 million. Is that pretty much still what it is after the refinancing? You didn't get more cash out than you needed to pay for the settlements, in other words.

Brent Morrison: That is true. That is true.

Unidentified Analyst: Okay. So you're still pretty much at the same liquidity situation after these refinancings? Although...

Brent Morrison: Tom, we don't have any -- Tom, we also paid off $1.5 million of convertible notes, so we don't have that maturity just a month away.

Operator: And our next question will come from Gary Griffin [ph], a Private Investor.

Unidentified Analyst: You may have mentioned this, and I didn't hear it. But what was or is the cost to pay the preferred dividend on a quarterly basis?

Brent Morrison: $1.9 million, Gary.

Unidentified Analyst: $1.9 million, okay.

Operator: And with no further questions in the queue, I would like to turn the call back over to management for any closing remarks.

Brent Morrison: Thank you to you all for joining us today. We are encouraged by the process we are making on nonoperational challenges that have plagued the company for some time. We have a clear road map on how to resolve these challenges and are taking actions necessary to stabilize the company, provide financial flexibility and remove uncertainties. We look forward to updating you during our next conference call.

Operator: And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.