AdCare Health Systems: NOLs, REIT Conversion, Cash Allocation

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Perhaps due to pressure from some 13d filers, AdCare Health Systems, Inc. (NYSEMKT:ADK) recently announced a Strategic Plan which should create significant shareholder value. AdCare Health Systems has historically struggled to profitably operate its 34 senior living facilities so the company has decided to lease these properties to third party operators . This de-risks the business, significantly reduces (historically high) g&a, improves free cash flow, increases visibility, enables the company to utilize its sizeable NOL and will lower its cost of capital. It also better positions the company to ultimately be sold to a REIT, which we believe is a matter of when not if.


The company will use its increased cash flow primarily to pay significant and increasingly quarterly cash dividends to shareholders beginning late this year.

As the stock is repriced for the increasing dividends, we believe there is a clear path for the stock to appreciate over 60%, not including appreciation that will result when the company is ultimately sold to a strategic buyer (which we believe is highly likely).

The plan was developed with the input and approval of 2 large shareholders who are board members and 13d filers, Chris Brogdon (10%) and Park City Capital (5%).
The company is far down the road implementing this Strategic Plan. The Company has commenced discussions with regional operators to lease 18 of the Company’s 34 facilities. Furthermore, certain regional operators in other markets have contacted the Company to discuss leasing the Company’s facilities in these regions.


For more information on the Strategic Plan see the press release and presentation.

The company has given guidance for dividends payments it will make:

At today’s stock price, this would imply a dividend yield of:


Since this stock will trade off of its dividend yield, we believe the stock will trade up significantly as the dividend increases. If we assume the stock should trade at a 5% dividend yield, the implied stock price appreciation would be:

Adk implied stock price appreciation

More appropriately, the total return you will get (which includes dividends received) would be:

ADK total return

The company had provided Run-Rate financials for what it expects the company to generate under this new model. Net cash flow from ops is projected to be $8.5 mm and preferred dividends are $2.6 mm and capex is minimal. Cash flow from ops will increase over time as the leases will have escalating annual pricing. AdCare Health Systems, Inc. (NYSEMKT:ADK) expects to refinance a significant amount of debt (the company will be a far better credit) which will reduce its annual interest expense by $2 million. In addition, the company assumes $1.7 million of interest on its convertible debt (which we assume are converted). So our pro forma free cash flow is $9.6mm (8.5-2.6+2+1.7).

We assume 26.5 mm shares which assumes conversion of all converts and exercise of all options and warrants. Thus the $9.6 mm of free cash flow (which conservatively and unrealistically assumes no price increases on the lease) covers a dividend of upto 9c per quarter (which is the expected dividend by q1 2016). (9c*4 quarters*26.5 = $9.5mm annual dividend payments).

After the company utilizes its NOL (and completes its Strategic Plan), we expect it to convert to a REIT.

Eventually we expect AdCare Health Systems, Inc. (NYSEMKT:ADK) will be acquired by a larger REIT. There is no reason for a company this small to remain public, especially given the consolidation occurring in the industry. Furthermore, the company has several large shareholders who are focused on creating shareholder value (not on empire building). If/when the company is sold, a purchaser could largely eliminate $2.5 million of G&A (meaningful considering free cash flow is $9.6 mm) and further reduce the cost of capital.

Disclosure: The author of this article has a long position in ADK


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