Kelly Gill - President and Chief Executive Officer James McKnight - Chief Financial Officer

Dana Hambly - Stephens Will Settle - Woodmont

Good morning and thank you for joining us this morning to discuss Diversicare’s third quarter results. This has been another solid quarter for us.

I am pleased with our accomplishments over the third quarter and the results of the year as a whole, particularly to see how far we have come. This quarter marks a year after we initiated our restructuring activities in 2013.

As you recall, we began those activities in the third quarter of last year with the exit from Arkansas and concluded with the expense recognition in the fourth quarter. Since that time, we have seen significant leverage in our platform, which I will discuss later.

Our EBITDA performance has been much improved and our revenue growth has been impressive and that a record level. Before I discuss our third quarter performance, I want to first highlight once again that our quality metrics continue to improve and demonstrate industry leading performance.

I am generally proud that 90% of our centers score in the 4-star or 5-star categories in terms of quality measures as compared to our for-profit peer group averages of 78%. We remain pleased that we continue to drive our quality delivery metrics, while at the same time grow our portfolio by adding new centers through acquisitions.

I believe this is a true reflection of the viability of our operating platform and the ability of our operations team to remain focused on our core mission to improve every life we touch by providing exceptional healthcare and exceeding expectations. Now, I would like to share some of our financial accomplishments from the quarter which continue to demonstrate our substantial momentum.

Most notably, we posted record level Q3 revenue of $90.3 million, which is an increase of 40% year-over-year. This continues our trend of sequential revenue growth and further validates that our strategic initiatives have taken hold and are yielding shareholder value.

At this time last year, we commented on our overarching goal to double the size of the company over 5 years. Today, we are pleased to report again that this year we have made significant progress towards accomplishing that goal.

Facility level operating margins are 19.2% in the quarter, an increase of 300 basis points compared to 16.2% in the third quarter last year and are fully reflective of the following positive operating metrics. First, our skilled mix and occupancy continued to improve as a result of our investments in our operating platform and implementation of best practices throughout the organization.

Across the senior housing industry, the third quarter tends to be the lowest of the year from a seasonality perspective. However, this quarter our skilled mix was at 15.7% compared to 13.7% in the same period a year ago.

In addition to improving our skilled mix, we also improved SNF occupancy year-over-year, which was 77.2% compared to 75.1% a year ago. Finally, we continue to see solid rate improvements in all of our major payor sources.

During the quarter, we further leveraged our overhead with G&A at 6.2% of revenue compared to 7.7% a year ago. The third quarter represents our fifth consecutive quarter of improvement in G&A as a percent of revenue demonstrating the scalability of the company during this high growth phase of the business.

We now believe we are approaching a level of normalization in G&A expenses as a percent of our revenue. All of these areas of focus led to EBITDA of $3.1 million in the quarter a year-over-year increase of $4.3 million.

As for our portfolio development activities I have reported over the past couple of years that we have been actively pursuing opportunities to enhance our portfolio through acquisitions, divestitures and renovations. On the second quarter call, I touched on a number of new developments which were completed during the third quarter, so I will take a moment to recap those and some of our other key developments to provide valuable context.

First and most notably, we exited all three of the West Virginia facilities, including the sale of Rose Terrace with the realized gain of $7.5 million. We also assume leases of three skilled nursing centers in Missouri a SNF and a small standalone ALF in Ohio for a total of five in the quarter, thus expanding our portfolio account by two after the divestitures.

And as further evidence of our platform momentum, on October 1 we also announced our assumption of operations of an additional skilled nursing facility in Kentucky. In all, we have added 20 new centers to our portfolio during the past three years.

This represents roughly a 65% increase in our portfolio after divestitures. We have also increased our revenues by 55% since the beginning of 2013 through a combination of acquired centers and organic same store growth.

With our improved cash position related to these activities, we are also able to favorably respond to Omega’s right to redeem the preferred stock for $5 million thus saving the company $350,000 in annual preferred dividends going forward. Our record revenue and considerable improvement in profitability in the quarter are a direct result of the development initiatives we have successfully accomplished.

We have implemented best practices in our clinical and sales capabilities, centralized key business processes where possible, created a scalable operations platform and continue to upgrade and renovate our facilities. As a result, we firmly believe Diversicare is now far better positioned than ever to continue on the path we have demonstrated over the past 2 years.

Now I will turn the call over to Jay, who will review our third quarter results in more detail.

Thank you, Kelly. As Kelly said we continue to be very pleased with our quarterly results.

This morning I am going to take some time to walk through those financials and provide you with some additional detail on these positive results. Revenue of $90.3 million increased 40% year-over-year.

This included $18.6 million from acquisitions made in 2013 and $10 million from acquisitions made so far in 2014. On a same-store basis, revenue increased 7.3%, driven by Medicare and Managed Care census as well as general rate increases.

We provided specific revenue and operating expense growth data for same store and acquired centers in yesterday’s press release and our filed Form 10-Q. Operating expense of $73 million increased 34.7% compared to the year ago period and was driven by expenses associated with our recent acquisitions.

However, operating expenses declined as a percentage of revenue to 80.8% compared to 83.8% last year. Professional liability from continuing operations was $1.7 million compared to $1 million for the year ago period.

Overall, we believe the changes and enhancements we made to our portfolio have improved the inherent risk profile. G&A expenses in the quarter of $5.6 million increased just 10% over the last year compared to our 40% revenue growth.

As Kelly mentioned we are seeing leverage in operating platform SG&A as a percentage of revenue was 6.2%, a decrease of 150 basis points year-over-year. Continuing down the income statement, lease expense of $6.9 million in the third quarter increased $2.1 million compared to third quarter of 2013, a result of our growing portfolio.

All of these items together drove EBITDA of $3.1 million for the quarter, a meaningful improvement from the $1.2 million loss we generated a year ago. Finally, in the third quarter we produced $226,000 of net income from continuing operations or $0.03 per share, compared to a loss of $2.3 million or a negative $0.41 per share in the third quarter of 2013.

In addition to our improved quarterly financial results, we took several meaningful steps toward strengthening our balance sheet over the last few months. We repurchased $8 million of debt with the proceeds from the sale of Rose Terrace.

We also redeemed the $5 million of preferred equity, which allowed us to avoid paying approximately $38,000 of dividends in the quarter and we will save about $86,000 per quarter going forward. As of September 30, 2014, we had accounts receivable balance of $42 million, an increase of $10 million since year end 2013.

CHOW accounts receivable of $8.3 million compares to $5.1 million at the end of 2013. That concludes my review of the third quarter financial results.

I will now turn the call back over to Kelly for some concluding remarks.

Thank you, Jay. As you can see, the strategic initiatives we have put into place over the past 2 years are beginning to yield solid results, including quarterly revenue in excess of $90 million, $4.2 million improvement in EBITDA over the prior year, and earnings per share of $0.03 from continuing operations for the quarter.

As of today, we operate 52 facilities in 9 states comprised of over 6,300 licensed beds. Finally, by keeping in mind, we continue to demonstrate industry leading quality metrics.

I want to close this call today by thanking our over 6,000 Diversicare team members for all of their hard work and dedication. Without whom, none of these results would be possible.

With that, operator, will you please open the call for questions.

Hey, good morning. Good quarter.

Could you just help me out, I am not familiar here, just the adjusted EBITDA of $3.2 million this quarter versus $4.6 million in the second quarter, was there something going on in the second quarter or the third quarter? Is that more of a seasonality issue?

Hi, Dana. Good morning.

Thanks for joining us this morning. It’s more of a seasonality issue.

Okay.

It’s kind of the most distinct answer on that.

Okay very good. That’s fair.

And then Kelly, just the big SNF REIT acquisition announced recently, I believe that you have relationships with both of them. Does that change anything for the existing relationships or anything in general for the outlook?

Nothing significant to report. We have had an excellent relationship with both organizations and this is actually a good opportunity to congratulate them both and there is wonderful strengths from both organizations and we look forward to continuing to work with both of them.

Okay. And then last one for me, on the Texas UPL I don’t believe that you guys are involved in that and correct me if I am wrong, but I think it was just extended at least through May 2016, is that something that you would pursue at some point or is there something you just want to stay away from and if it’s the latter, why is that the case?

Well, great question. And there is a lot of fluidity going on in Texas right now, particularly with – I think with just the state legislature just convened.

They are contemplating among many things related to healthcare, but they are contemplating managed Medicaid, converting to managed Medicaid in the state and there – which could potentially affect the existence, our ongoing existence of IGT in the state. So, for us, we continue to evaluate it.

We are staying close. We just saw maybe 4, 5 weeks ago, just paid a visit to the Texas State Association.

The new CEO there, I had a good conversation with him. So, we are tracking it closely and we understand the mechanics of it pretty well.

And I think we are taking a good balanced view of what its opportunities are and risks.

Okay. Are you involved in any IGT programs in any other states?

Not that we can report on.

Okay, thank you.

Thank you and good morning.

Good morning, Will.

I liked the slides you included as part of the 8-K, that’s helpful back there. So, thanks for doing that.

You mentioned on this discussion on the seasonality question, the fourth quarter, I know you have the holidays in the future setting this day and age people meet their deductibles, they see a pick up an activity a lot of times from that. What about skilled nursing, remind me of how the fourth quarter nearly tracks from a seasonal standpoint?

Will, I mean, that’s getting towards guidance and as you know we don’t offer…

I mean, this is just historically, I am not asking anything about this coming fourth quarter, is it – you said to start your remarks that the third quarter is seasonally weaker for nursing homes, I am just – is fourth quarter historically stronger than first, I mean, just general…

Sure. You bet.

So, let me give you non-company thoughts here just as my observations over my career in the industry that fourth quarter generically tends to be stronger than third, but with health trends and seasonality and flu events, you can see from year-to-year that those trends are somewhat unpredictable, but in the most generic terms, I would say that third quarter is one of the most challenging from a sense of standpoint fourth improves. Of course, the holidays affect that going into first quarter.

And second quarters are probably generically considered to be the strongest.

Yes, okay. That’s very helpful.

Thank you. And then on the accounts receivable, it looked like they are balanced, stayed flat Q2 to Q3, despite the incremental acquisition.

So, does that mean we are finally starting to collect on some of those early acquisitions where we are filing working on the Medicare authorization etcetera?

Yes. That is accurate.

We did start to collect on some of those from the – some of the later acquisitions from last year in the second quarter. And then moving into the third quarter, we saw some good cleanup there.

And we have actually just to give you a heads up and we have already started saying a little bit of flow through and some activity as it relates to some of the acquisitions earlier this year since the third quarter ended as we continue to get those approvals.

Good. It would be nice to get that cash back.

And then on the lawsuit front, I think you said 48 versus 54 (indiscernible), I can’t remember what that number was. Are you – because as you continue to get further way from Arkansas, are you seeing a different climate in the new markets you are in and somewhere we can fix back that number to continue to trickle down?

I mean, obviously, with our exit of Arkansas and West Virginia that we are strong drivers of our decisions there. So, we are – we like the states that we are going to, but in terms of the incubation process of you just can’t, you never know.

And but with internally the investments we have made, we hope that we are making a positive impact, but you just do the best you can and hope for the right outcome.

Then on the CapEx through the first nine months, the $4.2 million, is there any – as you required new facilities, it seems like at times you negotiated for some improvements or commit to some capital upfront. Is that all $4.2 million pure maintenance or there is some kind of some one-time items in there or unusual events?

It’s a little bit of both. So, there is – so when we do go into a new center, if it’s in a least situation, there will be some start-up capital that where we implement our systems.

And Kelly has talked a lot about on our on-boarding process and we implement a lot of times we are ringing in EMR and other things that they don’t have and we will make some general significant improvements, which caused some CapEx dollars that are kind of one-time in maintenance, but then there is also some maintenance CapEx, where we are making sure that all of our centers, we are doing the right things from a maintenance perspective there as we move forward. And then you kind of hinted us to whether or not some of it comes through with the lease that CapEx number that you see doesn’t include anything that is being paid for by the REIT in a least situation.

So, still thinking about your portfolio, what – how much this nine months would be what you view as maintenance CapEx of the $4.2 million?

Well, I apologize I don’t have it in front of me. I’d have to go do some digging, I am not really and I hate to just throw something out off the top of my head.

Okay, I think that is it for me. Nice work on the quarter and we look forward to the next update.

Thank you.

Great. Thanks Will.

Thank you, operator. Thanks to all of you for joining our call today.