Kelly Gill – President and Chief Executive Officer Jay McKnight – Chief Financial Officer

Will Settle – Woodmont

Thank you, Stephanie. Good morning and thank you for joining Diversicare's Third Quarter 2015 Earnings Conference Call.

Also with me this morning is Jay McKnight, our Chief Financial Officer who will provide the financial details from the quarter. To begin my comments this morning, I am pleased to report another strong quarter on both the clinical and financial fronts as we continue to build upon our increasing momentum.

First and most importantly, we are demonstrating industry leading metrics in our quality measures and we are very proud of this achievement. I'll expand on this again in a moment that these results are the principal driver for every decision we make as an organization.

Additionally, we once again set new financial performance milestones this quarter reporting record revenue and facility level operating margin as well as posting our 6th consecutive quarter of positive net income from continuing operations. One of the most gratifying elements of our financial results is the fact that our performance was driven by improvements at both our newly acquired and same store centers.

Now, back to our quality of care outcomes. As I mentioned, Diversicare continues to demonstrate industry leading quality metrics outcomes as measured under the national CMS five star ranking system.

Our most recent QM composite score is 4.06, compared to our industry peer group of 3.40. We are pleased to report that as of this last reporting update, Diversicare now ranks number one in the country in our peer group.

Likewise under this ranking system, 71% of our facilities are now either four or five stars in QM outcomes compared to 51% of our peer group. These metrics are a testament to our over 6,000 caregivers who strive to provide the highest quality of care for each and every one of our patients and residents.

As we continue to grow, we remain committed to the quality of care we deliver by maintaining a patient centric focus. Now, I'd like to provide you with some detail on our financial performance.

Revenue in the quarter grew to $98.1 million, which represents an 8.6% increase year-over-year. This includes revenue growth in both our same-store and newly acquired centers.

While our occupancy and skill mix were seasonally affected for the quarter, our reimbursement rates generally trended favorably in aggregate across our portfolio. Our facility level operating margin for the third quarter continued to improve and was 20%.

It's worth noting that this is now the third time our facility margin has been at this level in the last four years. These metrics demonstrate the diligence and professional expertise of our operations team who are displaying their ability to effectively manage our business, despite industry wide softening of occupancy.

So, overall, the profitable revenue growth at both newly added facilities in our same-store group together generated meaningful year-over-year improvements in our earnings. Our operating profit for the quarter was $2.1 million, versus $1.3 million last year, and our earnings per share from continuing operations improved to $0.11 compared to $0.03 last year.

To further build upon the good news of our quality and financial results in the quarter, this past Monday, we announced our most recent acquisition of a skilled nursing facility in Fulton, Kentucky. This 60 bed center represents our third acquisition during the calendar year.

Our percentage of owned buildings is now 27%. Last quarter, I spent some time discussing the current overheated industry evaluation trends as it relates to the pricing for potential acquisitions.

At that time, I expressed our philosophy of staying the course and only targeting those acquisitions that meet our investment criteria, while our pipeline of deal volume has never been stronger, we continue to see exorbitant valuation multiples which are being fuelled by several factors, including low interest rates which drive increased buying demand and higher prices. Notwithstanding this, we're confident that our investing and prospecting strategies will enable us over the long-term to manage these market conditions.

We continue to evaluate new and improved prospecting strategies to deal with these valuation headwinds and remain fully committed to accretive growth. An example of the success of our approach is evident in the Fulton acquisition.

Now with that, I'll turn the call over to Jay.

Thank you, Kelly. In the third quarter, our revenue increased by $7.8 million, or 8.6% to $98.1 million.

The facilities we added during 2014 and 2015 contributed $4.7 million of this increase. Revenue at our same-store facilities increased $3.1 million or 3.8%, primarily driven by favorable rates.

At the operating expense line, our facility level operating margins as a percentage of revenue were 20% compared to 19.2% in third quarter of 2014. Total operating expense increased by $5.5 million or 7.5% compared to last year.

This increase was commensurate with overall revenue growth. Our professional liabilities expense for the quarter was $2.1 million, an increase of $326,000 compared to the third quarter of 2014.

General administrative expenses increased by $800,000 to $6.4 million in the third quarter. Total G&A as a percentage of revenue increased slightly to 6.5% in the third quarter compared to 6.2% last year.

Our lease expense in the quarter increased from $6.9 million in 2014 to $7.2 million this quarter. Lease expense as a percentage of revenue, however, continued to decline and was 7.3% in the quarter compared to 7.6% during the third quarter last year.

The absolute increase can be primarily attributed to the incremental lease expense for a number of our newly leased nursing centers and the acquisition of the Hutchinson center. EBTIDA increased $1 million dollars or 31% to $4.1 million, compared $3.1 million in the third quarter of 2014.

For the quarter, net income from continuing operations was $669,000 or $0.11 per share, compared to $219,000 or $0.03 per share last year. Finally, I'd like to make a couple of brief comments on our balance sheet before Kelly's closing remarks.

Receivables grew $3 million to $44.3 million at the end of the third quarter compared to $41.3 million at the end of 2014. The increase is largely a result of the change of ownership process for the buildings we assumed operations form, during 2014 and the two buildings we've added so far in 2015.

Accordingly, we had $8 million outstanding on our revolver at the end of the quarter, compared to $6.4 million of outstanding CHOW receivables. That concludes our review of the quarter's financial results.

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

Thanks Jay. I'm very pleased with the trend of our results, which indicate a fundamentally solid organization.

Finally, as I reflect on the results of the past several quarters, it's evident that the performance of our operating platform is exceeding our expectations. Our operations team is utilizing our tools effectively and demonstrating their professionalism by achieving balanced financial results, while simultaneously attaining industry-leading quality outcomes.

While we would have liked to have seen more growth through strategic acquisitions for the year, our hope is that our shareholders will take comfort in the fact that we are displaying control and discipline in our approach to acquisitions and not reaching for deals with short term gains, but with poor long-term prospects. In summary, we can see that our operations performance is improving markedly with forward momentum in our financial and clinical results and we're not getting ahead of ourselves by making bad deals.

As our financial position continues to strength, we believe we will be well-positioned to take advantage of a corrected acquisitions market when it arrives. This concludes our prepared remarks today.

With that, I will now open the call for questions.

On the -- could you repeat what you said about the quality metrics where you were rated number one among your peer group? What was that for?

That's impressive. I'd love to hear more about that.

Yeah, so under the five-star ranking system, CMS five-star rating system, there are several components but the one component that we look to that measures specific patient care outcomes is referred to as quality measures metrics, and our peer group is roughly a size of the 30 largest providers in the country, and with that this past reporting cycle, we were ranked number one out of that peer group.

That's great. Have you thought about ways to disseminate that information or use it I guess, to drive -- help drive patient volumes?

Yes, very much. The results just came out.

So, we're still formulating that.

Okay, that'll be great, and one place, just help me understand, I know Texas -- it's not a [indiscernible] little tougher with the supply but is there an opportunity there to -- I guess the Medicare mix at 8% lower and occupancy lower in general, what's the upside there or is it just going to unfortunately always be kind of at the bottom of the portfolio, so to speak?

Yeah, so you've got to look at Texas as a state wide level sort of an ambient opportunity. It is a state that is well known to have a -- we call it the Wild West, but it's been a state where there's been a lot of building and new construction, increasing the supply of beds in the state and a lot of that growth in new the new centers has even been in tertiary markets, including the major markets and so, and then you've got the ambient Medicaid rates there as well.

So, with that being said, we think we're competing well. We've renovated several of our facilities, two of our major facilities in Houston.

Now their renovations have been completed. We're seeing good results from that.

We've just recently finished phase 1 of renovation of our large facility in Dallas and just had the ribbon-cutting on it, maybe a month and a half ago and so we're taking aggressive action as we can to improve our competitive positioning in the market, and then, likewise, I want to come back and speak to the importance of quality outcome. So as we move into, an increased prevalence of managed or Medicare Advantage patients as well as bundling opportunities, we think that these quality of care measures not only meeting our expectation of serving our clients but also will position us well with payers to be a preferential referral source for them.

So, I think we're taking all the right steps to be prepared for the future and to remain competitive.

Right, and I would agree and as you go to hospital discharge manager or a family and point to that number one rating and a large company with infrastructure you have in place, that's got to be compelling on the admissions front. I'm excited to see what you can do there.

Then last one for me on the acquisition front, I appreciate your patience. Certainly no reason to get in a hurry.

Did notice you acquired the facility in West Kentucky, and I think a couple of years ago you acquired another one close to that. Is that -- did you see an opportunity to kind of consolidate the market up there?

Is that what is going on?

That's a perfect question. We appreciate that and actually the answer is very much a solid yes.

So, the Fulton Kentucky facility, if you were to look on a map. It is on the extreme far west border, actually right up against, far west border of maybe the southwest border of the state.

So, it's on the far west side of Kentucky and just over the Tennessee border, and what's notable is that we have two of our existing facilities Martin and Clinton are equidistant, North and South from the center by about 15 miles to 17 miles. So, it fits perfectly in our footprint on that side of the state and we already have pre-existing regional coverage there.

So this facility wouldn't represent any additional G&A associated with operating the center.

Thank you, operator. I just want to once again, thank all of you for joining our call today.

We appreciate your interest and we look forward to sharing our results with you in the future. Thanks so much and have a great day.