ATLANTA, Aug. 16, 2012
/PRNewswire/ -- Covington Investments, LLC ("Covington") today
issued the following open letter to the shareholders of Advocat,
Inc. (NASDAQ: AVCA), (the "Company") regarding the Company's second
quarter 2012 earnings announcement and its high-premium all cash
offer of $8.50 per share:
Dear Fellow Shareholder:
We were disappointed by another quarter of lackluster results
reported by Advocat. Despite the continuing insistence by
senior management and the Board of Directors of Advocat that they
would finally begin to show some signs of delivering returns on the
significant expenditures of the past several years, we continue to
see little real evidence of positive execution relative to their
strategic plan. We do not think the Company's plans will
create the value anticipated by Advocat, or that Advocat has the
resources to successfully execute its plans in the face of the
current economic, industry and regulatory headwinds. We
therefore believe Advocat will continue to underperform and its
stock price languish, thereby denying shareholders the immediate
return and value that our premium all cash proposal represents.
On a year over year basis, revenues for the second quarter
declined 3%, adjusted EBITDA[1] declined by 62%, and funds provided
by operations – which up until the third quarter of 2011 was touted
by senior management of Advocat as "a valuable metric in gauging
the Company's performance" – declined by 67%. Furthermore,
despite purported on-going strategic initiatives to "grow [its]
skilled mix and occupancy" the second quarter results showed a
decline in skilled nursing occupancy from 77.3% in 2Q11 to 76.8% in
2Q12, a decline in Medicare census from 14.6% in 2Q11 to 13.4% in
2Q12, a 0.6% decrease in total average daily census, and a 6%
decline in Managed Care per day rates. Also, professional
liability expense increased 113% versus 2Q11. This is hardly
demonstrative of a company with a viable strategic plan or a Board
of Directors that is fulfilling the fiduciary responsibility it has
to its shareholders to thoughtfully consider all strategic options,
especially in the face of a clearly superior option for its
shareholders.
Management commented in the press release that the Company has
"reached the phase of [its] strategic plan where [they] are
actively seeking opportunities to grow [their] portfolio" – frankly
we see this next phase as unlikely, uncertain and, moreover,
premature at best given that the Company is yet to demonstrate any
ability to improve performance at its existing portfolio of
properties.
Looking beyond the Company's internal expectations and comparing
Advocat to its peer group of publically traded skilled nursing
providers, it further supports our belief that this Company is
underperforming. The table below highlights operating margins
for Advocat relative to its peer group based on latest twelve month
("LTM") results as of June 30, 2012.
We note that the operating income margin for Advocat is shown
as "NM – Not Meaningful" because the Company has negative operating
income for that period.
|
The
Ensign
Group,
Inc.
|
National
Healthcare
Corp.
|
Skilled
Healthcare
Group,
Inc.
|
Advocat,
Inc.
|
Operating
Income
|
11.2%
|
8.6%
|
NM
|
NM
|
Adjusted
EBITDA
|
15.0%
|
12.8%
|
13.4%
|
2.6%
|
Adjusted
EBITDAR
|
16.7%
|
18.0%
|
15.5%
|
10.0%
|
Source: company press releases and SEC filings.
The poor results of the second quarter do nothing more than
strengthen the premium value that our proposal to acquire the
Company brings to the shareholders of Advocat. Relative to
our proposal first publically disclosed on May 4, 2012 and relative to the recently
announced acquisition of SunHealthcare Group Inc., by Genesis
HealthCare, LLC, our $8.50 per share
proposal implies multiples of:
LTM June
30, 2012 (current multiples)
|
Covington
/ Advocat
|
Genesis /
SunHealthcare
|
Enterprise
Value / LTM Revenue
|
0.2x
|
0.1x
|
Enterprise
Value / LTM EBITDA
|
9.2x
|
3.5x
|
Adjusted
Enterprise Value / LTM EBITDAR
|
8.3x
|
6.5x
|
LTM March
31, 2012 (original multiples)
|
|
|
Enterprise
Value / LTM Revenue
|
0.2x
|
0.1x
|
Enterprise
Value / LTM EBITDA
|
6.0x
|
3.0x
|
Adjusted
Enterprise Value / LTM EBITDAR
|
7.3x
|
6.1x
|
NOTES: EBITDA and EBITDAR Adjusted for asset impairments,
provisions for self-insured professional liabilities and stock
based compensation only.
Adjusted Enterprise Value = market value of equity + preferred
stock + debt (excluding debt associated with West Virginia) + lease expense capitalized
using a 12.5% cap rate – cash.
We believe that these benchmarks clearly demonstrate that the
Board of Directors must explain to its shareholders how the it has
satisfied its fiduciary duties to thoroughly evaluate our proposal
– and how the Board has credibly done so without the advice of
outside financial advisors as is customary.
It appears that the Company is refusing to respond to
shareholder inquiries or to provide details on how its strategic
plans are financially superior to our proposal, even going so far
as to refuse to answer questions on its recent earnings conference
call. One must ask the question: who is the Company and the
Board running the business for, all shareholders or a few select
internal shareholders only? We believe that these actions
represent a serious failure in corporate governance, show an
unhealthy deference to the inside shareholders and indicate that
management is not confident enough in their own plans to even
answer questions about the Company's strategy.
From Covington's perspective, we remain consistent in our desire
to consummate a transaction with the Company at what is an
increasing premium value to shareholders based on customary
financial valuation metrics. We expect you are, in turn,
increasingly concerned and frustrated, as are we, with Advocat's
cavalier attitude about this matter and utter disregard for the
views and concerns of its outside shareholders. Your views
should be equally, if not more, important than Advocat's inside
shareholders. We continue to encourage you to reach out to
the directors and management to express your views and to urge them
to engage in meaningful discussions with Covington. It is
abundantly clear that Covington's acquisition proposal is the best
strategic alternative for creating immediate value for all
shareholders.
Sincerely,
/SIG/
John E. McMullan
President
Covington Investments, LLC
About Covington Investments, LLC
Covington's affiliates own and operate continuing care
retirement communities offering skilled nursing, assisted living,
independent living and home health services in Florida, Ohio, and Tennessee. The Companies'
combined campuses comprise over 1,000 skilled nursing and assisted
living beds as well as nearly 600 independent living units.
[1] EBITDA adjusted for asset impairments, provisions for
self-insured professional liabilities and stock based compensation
only; does not adjust for start-up costs or separation costs that
the Company started adjusting for in 2Q12.
SOURCE Covington Investments, LLC