Covington Issues Open Letter To Shareholders Of Advocat

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.       

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:

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

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