Diversicare Healthcare Services Inc. (Nasdaq: DVCR) recorded a net loss from continuing operations of $7.4 million, or $1.15 per share, in what president and CEO Jay McKnight described as “a challenging quarter.”

The loss was mainly attributable to a $6.4 million litigation contingency expense related to an open Department of Justice (DOJ) investigation into potential violations of the False Claims Act, related to the skilled nursing operator’s therapy practices and other issues, McKnight said on the company’s third quarter earnings call Thursday afternoon.

Net loss from continuing operations in the third quarter of 2017 was $600,000.

Diversicare is engaged in preliminary discussions with the DOJ about settling the investigation, though it denies any wrongdoing “and is prepared to vigorously defend its actions,” according to a Form 10-Q filed with the Securities and Exchange Commission on November 1.

“The Company’s ultimate ability to settle this investigation will depend on several factors, including whether the amount and terms of an acceptable settlement can be reached with the DOJ, the Company’s assessment of the risks of litigating this case and the effect of protracted litigation or settlement terms on the Company’s business plans,” the filing said.

McKnight stressed on the call that the ability to negotiate a settlement is unknown. He also emphasized that others in the industry are facing similar challenges, both in terms of FCA investigations and other headwinds, which have had an impact on the strategic and operational direction of Diversicare.

“As we’ve noted before, and as is the case with others in our industry, we’re subject to unresolved governmental investigations into our therapy practices, our practices related to the pre-admission evaluation forms required by TennCare, and the PASRR forms required by the Medicare program,” McKnight said, referring to similar pre-admission paperwork. “We also continue to have a substantial presence in certain jurisdictions that have some of the highest professional liability costs per bed in the country.”

Earlier in the quarter, the Brentwood, Tenn.-based Diversicare entered into a new master lease deal with Omega Healthcare Investors (NYSE: OHI) for 34 SNFs. In conjunction with that lease, it exited a standalone assisted living facility in Ohio. The operator currently provides long-term care services to patients in 76 nursing centers, with 8,456 skilled nursing beds.

The open government investigation is affecting the company in more ways than one; when Patrick Retzer of Retzer Capital asked whether the operator is looking to grow its portfolio of properties or focus on improving quality of care while stockpiling cash, McKnight noted “how hot the industry has been [in terms of] valuation as we look at acquiring facilities.” But he also noted the uncertainty of the investigation outcome.

“With this update we shared today related to our government investigation, we have to be mindful of that as we consider what portfolio growth can look like,” McKnight said.

Diversicare recorded $141.4 million in net revenue for the third quarter under the new Accounting Standard Codification; under legacy GAAP , the company’s revenue for the quarter was $145.1 million, compared to $146.4 million in the third quarter of 2017, a decrease of $1.3 million. On a same-store basis, however, revenue under legacy GAAP rose by $400,000 from quarter to quarter.

Written by Maggie Flynn