AdCare Health Systems, Inc. (NYSE MKT: ADK) Wednesday announced it has put a strategic plan in place to transition the company to a healthcare property holding and leasing company.
Through a series of leasing transactions, the operations of AdCare’s owned and operated facilities, which count more than 30 nationwide and are principally skilled nursing facilities, will be transitioned to third parties. Additionally, AdCare plans to sub-lease the properties it leases currently.
The announcement Wednesday arrives after months of evaluating several strategic alternatives to “unlock” long-term shareholder value, including a possible sale of the company, stated AdCare Chairman and Interim CEO David Tenwick in a release.
“It became clear that the company’s historical structure as an owner/operator was not conducive to maximizing the value of its assets,” Tenwick stated. “The Board identified several elements of the business model which inhibited the Company’s ability to maximize the value of its assets.”
Such inhibitions included high ongoing general and administrative expenses, execution risk and the fact that potential real estate investment trust (REIT) buyers would have to find operators to manage all of AdCare’s properties, Tenwick added.
“These factors reduced the number of potential parties interested in acquiring all or part of the Company, and resulted in valuations that the Board considered unacceptable,” he said. “After careful analysis and consideration, the Board unanimously agreed to exit the day-to-day management of our healthcare facilities and begin transitioning the Company to a healthcare property holding and leasing company.”
By doing so, AdCare expects it will require significantly less working capital, which will enable the company to begin returning cash to shareholders via an increasing quarterly dividend, while also enabling the company to pursue strategic acquisitions.
Wednesday’s announcement arrives a little more than a year after AdCare announced former Chief Financial Officer Martin Brew’s resignation in relation to extensive accounting errors that produced unreliable financial statements for each quarter in 2012, according to an audit of the company’s end-of-2012 financial statement.
In conjunction with its new strategic plan, AdCare has already identified and began discussions with regional operators to lease its facilities in Ohio, Oklahoma and Arkansas—representing 18 of the company’s 34 facilities, the company stated in a release.
Additionally, AdCare noted that certain regional operators in the Alabama, Georgia and South Carolina markets have contacted them to discuss leasing its facilities in those regions.
“This transition should immediately increase the visibility and predictability of our business and remove significant execution risk,” stated AdCare CFO Ron Fleming, who replaced Brew last year. “In addition, through refinancing efforts and the benefit of lower interest rates due to beneficial attributes of our new business model, we expect to lower our cost of capital over the next several quarters, improving earnings before income taxes.”
When adjusting its 2013 financial results to reflect what they would have been under the new model, AdCare suggests cash flow from operations would have been $8,500 in 2013 if all its facilities were leased, compared to the actual 2013 figure of $5,061.
Written by Jason Oliva