Gen Digital Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Good morning. My name is Debra and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Please note that today’s call is being recorded. Thank you. Ms. Mayer, you may begin your conference.

[Lori Mayer:]

Hi, good morning and thank you for joining us today. We issued our earnings press release last evening. This announcement and an updated slide deck are available in the Investor Relations section of our website at genesishcc.com. A replay of this call will also be available on our website for one year. Before we begin, I would like to quickly review a few housekeeping matters. First, any forward-looking statements made today are based on management’s current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities law, Genesis Healthcare and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes that arise as a result from new information, future events, changing circumstances or for any other reason. In addition, any operation we mentioned today is operated by a separate independent operating subsidiary that has its own management, employees, and assets. References to the consolidated company and its assets and activities, as well as the use of the terms we, us, our and similar verbiage are not meant to imply that Genesis Healthcare has direct operating assets, employees or revenue or that any of the [technical difficulty] same entity. Our discussion today and the information in our earnings release and in our public filings include references to adjusted EBITDAR, EBITDA, adjusted EBITDA, which are non-GAAP financial measures. We believe that the presentation of non-GAAP financial measures provides useful information to investors regarding our results because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business, but such non-GAAP financial measures should not be relied upon at the exclusion of GAAP financial measures. Please refer to the company's reasons for non-GAAP financial disclosures and its GAAP to non-GAAP reconciliations contained in today's earnings release. And with that, I'll turn the call over to George Hager, CEO of Genesis Healthcare.

[George Hager:]

Thank you, Lori. Good morning and thank you for joining us. Today, I'm going to focus on the following. First our [technical difficulty] for the quarter. Second, progress from the execution of our near-term strategic objectives. Third, the improving reimbursement and regulatory landscape. And last, our patient comes and CMS Five-Star results. I will then turn the call over to Tom DiVittorio, to provide more color around our business trends. After a solid first half of the year, I am pleased to announce a very strong third quarter, driven primarily by disciplined operational expense control, overhead cost reductions, and improving reimbursement and occupancy trends, same-store adjusted EBITDAR, less cash lease payments. A critically important measure that, we and all of our stakeholders track exceeded FactSet consensus estimates by $7 million or 21%. More importantly, adjusted EBITDAR on a same store basis grew over the prior year quarter by 3.8 million or 2.6%. I cannot stress how significant these results are as we have not seen absolute same store organic year-over-year growth in adjusted EBITDAR since 2015. To several quarters now we have consistently discussed how occupancy trends are clearly improving. While year-over-year occupancy declined 30 basis points this quarter. The rate of decline definitely continues to narrow. In fact, our third quarter occupancy grew 20 basis points sequentially from the second quarter marking historical seasonal trends. Even more encouraging, thus far in the fourth quarter, we are seeing the strongest same-store occupancy trend in over four years. In a few minutes, Tom will discuss these trends and reference our investor deck in much greater detail. Overall, we are cautiously optimistic that this critical leading indicator may have finally reached bottom. I’m also pleased to report that the reimbursement environment continues to improve. Medicaid rates are up 2.5% for the year, as compared to flat this time last year. On the Medicare front, after taking into account the 2.4% net market basket adjustment and the impact of the SNF value-based purchasing program we expect our Medicare Part A rates will increase approximately 1.7% effective October 1, 2018. This compares to 1% last year. While nursing wage inflation is still modestly exceeding overall reimbursement rate growth, the gap is clearly closing. Beyond our inpatient business, our rehabilitation services segment had another very strong quarter, producing year-over-year EBITDA growth of $8.3 million or 40%. As we continue to position Genesis Rehab Services as the leading therapy provider in the United States. Operational execution, productivity improvement, and therapist efficiency have all contributed to this segment’s success. Genesis Rehab Services will continue to emphasis outcomes and a strong quarter of compliance as we prepare for the new SNF reimbursement system called Patient Driven Payment Model or PDPM, which will go into effect October 1, 2019. Now, I’d like to move on to our progress on our near-term strategic objectives. Over the past year, we had been primarily focused on optimizing our portfolio with particular focus on exiting those markets where we do not have the local market density for meaningful acute care and payor relationships to compete. During the third quarter, we divested, exited or closed the operations of an additional seven facilities. And thus far in the fourth quarter, we have completely exited the State of Texas along with the operations of an additional five facilities in our Western division. In total, by year-end, we expect to have exited the operations of 55 facilities since the start of 2018. These facilities generated annual revenue of nearly $480 million, and adjusted EBITDA of $8 million. However, these divestitures have reduced debt by nearly $100 million. Even though our recent emphasis has been focused on exiting non-core markets we continue to look selectively and conservatively to add to our core markets. On that note, I am pleased to report that on November 1, 2018, we acquired the operations of eight skilled nursing facilities and one assisted living facility in New Mexico and Arizona. We are excited to add these properties to our portfolio as they increase our already significant presence in New Mexico and the transaction is structured such that we have minimal downside financial risk. We believe there is significant opportunity for us to achieve the kind of operating results we see in our other facilities in these markets. In the near-term, we expect to continue to execute on transactions that will return us to our strategic model that emphasizes strong local market density and meaningful acute care and payor relationships. Whether that is continued portfolio pruning or selective market enhancement, we are keenly focused on those transactions that will generate consistent and positive clinical, operating, and financial outcomes. Now, moving to reimbursement and regulatory environment. Since last quarter, we have spent a tremendous amount of time studying and preparing for PDPM. While certainly a significant transformation, we remain cautiously optimistic that this model will be a net positive for the industry as it is mandated to be budget neutral on the top line. This new reimbursement system will reduce administrative burdens for our caregivers, promotes the use of more cost-efficient therapy modalities such as group and concurrent therapy and redirects clinical resources to patient care. There is no question that PDPM better reflects the principles of value-based healthcare. And last today, I would like to touch upon our patient outcomes and the Five-Star Quality Rating System. As we discussed last quarter, we are very focused on our CMS 5-Star Quality Rating, particularly in the area of nurse staffing. As of October 2018, our staffing and our end-staffing continued to significantly exceed the national average. Our overall staffing star rating remained steady at 3.3 stars, compared to the national average of 3.0 stars. Our RN staffing however is at 3.8 stars, which exceeds the national average of 3.2 stars. Additionally, over 90% of Genesis Centers have achieved three or more stars in RN staffing. As such, the Genesis centers remain significantly above the national average of 70.2%. This is a tremendous achievement for our centers. And finally, but most importantly our overall quality measures continue to exceed four stars. Despite the significant financial pressure on our company and the SNF industry, we have continued to invest in our strong clinical capability. Our investments in clinical specialties such as cardiac, pulmonary, ventilator, dialysis and dementia care combined with our industry-leading RN staffing levels is evident of our commitment to the delivery of quality outcomes to our patients. In conclusion, my sense of optimism is growing, the fundamentals are improving, census levels are increasing, the reimbursement and regulatory environment is stable, and our investments in improving patient outcomes are producing results. Furthermore, our unique and innovative investment in Genesis physician services and our related Genesis Healthcare ACO are expected to produce results in 2019. And as stated earlier, we expect PDPM to have a positive impact on Genesis and the industry. I’m very excited to what the future holds as we look forward to the fourth quarter and into 2019. Before I turn the call over to Tom, I would like to once again thank our Genesis team for their dedication in providing compassionate care to our patients and residents every day. And I would also like to welcome our new team members in New Mexico and Arizona. With that, I will turn the call over to Tom DiVittorio, Genesis’ Chief Financial Officer.

[Tom DiVittorio:]

Thank you, George. Good morning everyone. Today, I’ll focus my comments on operating results and trends starting with the topline. Revenue in 3Q 2018 of $1.22 billion declined $98.2 million or 7.5% from 3Q 2017. $25.2 million of this reported revenue decline is attributed to our January 1, 2018 adoption of Accounting Standards Codification Topic 606, revenue from contracts with customers. If the provisions of topic 606 were applied on a pro forma basis to the prior year quarter ended September 30, 2017 the year-over-year reported revenue decline would have been $73 million or 5.7%. Over 90% of this 5.7% comparable revenue decline is attributed to the impact of divestitures, while the remaining 10% is attributed to lower year-over-year occupancy and skilled mix. Our same-store revenue declined approximately 50 basis points this quarter. The lowest rate of decline in many years, due to improving occupancy trends and stronger reimbursement rates. Adjusted EBITDAR of $145.9 million in 3Q 2018 declined $1.9 million or 1.3% from 3Q 2017. Of this decline, $5.7 million is attributed to the impact of divestitures implying same-store adjusted EBITDA growth of $3.8 million or 2.6%. As George mentioned, this marks the first period of same-store adjusted EBITDAR growth since 2015. This growth was fueled by aggressive cost management, improved productivity, and a series of permanent cost reductions implemented this past July. In total, we executed on $50 million of annual cost reductions, which will be fully realized on a run rate basis by the end of the second quarter of 2019. Only $4 million of these reductions were realized this quarter. Our ability to drive organic growth was also fueled by more stable occupancy trends and reimbursement rates, which I’ll touch on in greater detail shortly. Adjusted EBITDAR, less total cash lease payments equaled $39.9 million, which increased $16.2 million or 68% from 3Q 2017. In addition to the organic earnings drivers previously discussed, significant growth in this measure was further fueled by the rent reductions realized in our 1Q 2018 financial restructuring. The impact of divestitures was also favorable to this measure by about $1.4 million as the rent reductions realized exceeded the adjusted EBITDAR of divested centers. On the topic of all-in nursing labor costs versus reimbursement [technical difficulty] 3Q 2018 wage inflation for non-overtime hours worked by our employed nursing staff grew 2.6% over 3Q 2017. Including overtime hours and agency costs, our all-in nursing wage cost per worked hour grew 2.9% in 3Q 2018 over 3Q 2017. This all-in inflation rate moderated 40 basis points from 2Q 2018, but continued to exceed the 2% weighted average reimbursement rate growth we received from our payers over the same period. Although it is difficult to forecast nursing wage inflation, we do expect further strength in Medicare and Medicaid rates in the fourth quarter, with respect to patient mix an occupancy. Skilled days mix in 3Q 2018 of 17.9%, declined 80 basis points from the prior year quarter. Within the category of skilled days mix Medicare mix declined 80 basis points from the prior year quarter, while the insurance category, which largely consists of managed Medicare days was flat. During the third quarter of 2018 we experienced a 4.2% decline in skilled patient admissions, as compared to the third quarter last year. The 4.2% skilled patient admission decline was driven by an 8.6% decline in Medicare admissions offset by a 1.2% increase in managed Medicare admissions. As compared to the same quarter last year, average Medicare length of stay for patients discharged to home, increased about half a day in 3Q 2018, while managed Medicare length of stay declined about a half day. Over the past three quarters our Medicare length of stay, which dropped about two days since 2016 has been relatively stable. Operating occupancy in 3Q 2018 of 84.3% declined 30 basis points from the prior year quarter. This 30-basis point decline compares to an average 70 basis point decline in each of the last two years when comparing 3Q to 3Q pointing to continued deceleration in the year-over-year decline in occupancy. As George mentioned, the third quarter of 2018 marks the first time in many years. Genesis has supported 2Q to 3Q sequential occupancy growth. This 20 basis points sequential improvement occurred in what is historically is seasonally weak occupancy quarter. On this point, I encourage you to review our investor deck, which can be found on Edgar and the investor relations section of our website. In particular, I would like to draw your attention to slides Number 13 and 14. We have all been closely monitoring the decline in skilled nursing occupancy nationally and within Genesis’ portfolio over the past few years. Occupancy pressure has been caused by near-term demographic headwinds among the long-term care population principally those over 85 years of age and the impact of value-based initiatives among the short stay population. Slide Number 13 illustrates the year-over-year declines in the average daily patients served in Genesis' same-store facilities between 2015 and 2018. The same-store facilities in this graph represent 93% of the Centers Genesis operations today. You will clearly see from the graph that the year-over-year decline in average daily patients served is decelerating rapidly. From 2015 to 2016 the same-store centers lost 618 average daily patients. From 2016 to 2017, these centers lost an additional 742 average daily patients. And from 2017 through 2018, these centers lost an incremental 327 patients. The year-over-year decline peaked in mid-2017 at nearly 900 patients, but we’re pleased to report that this gap continues to rapidly narrow. In the month of October 2018, this gap dropped to just 105 patients. If you move to the next slide, Number 14, you will see on by day basis, the average daily patients served over the course of October 2018. In the third week of October, we’re pleased to report that our average daily patient counts exceeded prior year levels. This is the first time we have seen same-store occupancy growth in over four years and this trend has continued through the first week of November. We are cautiously optimistic that the bottom of the protracted occupancy challenge may have finally been reached. In summary, we’re very pleased with our performance this quarter and the many milestones reached this year. The recent cost reductions, reimbursement trends, and the strength in patient volume, gives us confidence that we are well-positioned to continue our momentum in the fourth quarter and into 2019. With that Debra, please open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Chad Vanacore.

[Chad Vanacore:]

Hi, good morning.

[George Hager:]

Good morning, Chad.

[Chad Vanacore:]

Alright. So, just [indiscernible] occupancy you say you are cautiously optimistic that it may have stabilized, any thoughts on why that might be, is it more internal on changes in the organization, is it the overall industry or does that do due with the changes in your portfolio as far as restructuring?

[George Hager:]

Chad, I would say that, it’s hard to specifically identify any one issue. I think it’s a combination of all the things that you had mentioned. You know, you have seen from the data that Tom just presented there has clearly been a trend to declining, the reductions have been, incentives have been narrowing literally since the peak in mid-2017. So, to some degree our view was that that line ultimately had to cross. And that’s a function of I think we are more focused as we have, I think done a good job of exiting certain markets, but we're not competitive, but I also think the fundamentals of the industry are improving lengths of stay are very stable as Tom said. So, we're not seeing a drag from the length of stay and you’re beginning to see, you’re continuing to see declining supply of beds as more and more beds have been taken out of service, and just it’s incremental and it’s small, but the supply shrinking, marginal improvements in demand. I think, some degree impacted by demographics as we’re finally beginning to see growth again in 2018 of the 85 plus population where that population actually declined for the last three years. 2015, 2016, and 2017. So, it’s incremental supply demand fundamentals improving greater focus by Genesis. I also think that this industry, which historically has been focused on only the short-stay population clearly understands the value and the need of providing services to the long-term care population and we have been focused on specialties like dementia care that are more focused on attracting the long-term care patient. And I think, and hopeful that we will continue to see the trends that we’ve seen in the back end of October and through November to date.

[Chad Vanacore:]

Alright. Just on your comments on the future cost savings, did you say 50 million by the end of the first half of 2019? And what do you have to do to get from the 4 million realized in this quarter to that 50 million?

[Tom DiVittorio:]

Yes, Chad you heard it right. So, we will have full realization of those reductions no later than the end of 2Q 2019. Virtually no execution risk at this point. All of the difficult decisions that need to be made in those situations have been made and we’re just sort of executing our plan. Some of this really relates to the degree of divestitures that we’ve done over the last 12 months, you know the company's footprint and platform it’s syncing and so we’re able to bring our cost structure down as well.

[Chad Vanacore:]

Alright. Thanks for taking the questions.

[Operator:]

Your next question comes from Joanna Gajuk.

[Kevin Fischbeck:]

Hi, great thanks. It’s actually Kevin Fischbeck in for Joanna. I guess, I wanted to ask about the acquisitions because it has been a little while since we’ve seen you guys do something and certainly buying nursing homes with one coverage ratio is more or like the types of things, we would expect you to be divesting rather than getting into. It sounds like there’s some interesting things here, as far as the structure, can you provide a little bit more color about why there is no financial downside risk and what you think the opportunity is on margins where they are today and where they could get?

[Tom DiVittorio:]

Yes, Kevin I think these buildings are buildings that I think have some opportunities, some real upside opportunity. So, I think we’re just being a little bit cautious about what we’re projecting in terms of earnings opportunities in year one, but these are markets, particularly in New Mexico we're very comfortable. We know those markets very well. We like the State of New Mexico and Arizona for that matter, and we see a lot of upside opportunity there. On the financial restructuring side, I think it’s really just about structuring at least that is accommodating for a group of centers that we expect is going to take a little bit of time for us to move them in the right direction.

[Kevin Fischbeck:]

Okay. So, there is a low initial, I guess rate increases or rent increases as you – is that the right way to think about it?

[Tom DiVittorio:]

I think that’s the right way to think about it. Yes.

[Kevin Fischbeck:]

Okay. And then, I guess, when you think about the labor cost, I appreciate that the numbers start to improve a little bit in the quarter. I guess in general we're looking at a more tight labor market expectations anyway going forward, you know what have you been able to do to kind of improve that number sequentially and how do you think about that heading into 2019?

[Tom DiVittorio:]

Kevin, I think some of the things that we did this time last year are now beginning to pay some dividend. So, you will recall this time last year is when we really started to see some and report on some fairly significant inflation in nursing wages, and there were a lot of markets where there was tremendous pressure, and so we reacted to that and we made the adjustments that were necessary to preserve and improve retention levels. And so, I think that the investments that we made this time last year are now beginning to pay dividends as our retention rates have improved, and I think we just got a more stable workforce.

[Kevin Fischbeck:]

Okay. And then, I guess maybe the last question, going back to your occupancy comments, I mean obviously the company has made a push into PowerBack and PowerBack type facility, if you looked at the occupancy trend, would there be a dramatically different profile between those types of assets and the rest of the Genesis assets?

[George Hager:]

Hi, Kevin, the PowerBack model has been extremely successful and those assets, especially the purpose-built [ph] new assets have filled above expectation and have really taken the market by storm. We would love to have more than we have. So, the simple answer to your question is, yes. The performance of PowerBack and total occupancy and in skilled mix is different than the rest of the portfolio. Unfortunately, we just don't have enough PowerBack for that difference to have a meaningful impact in our overall results. I will also say that where we operate PowerBack, which is effectively in our core markets. When we do open PowerBack, we’ve seen a residual positive effect in our centers in same market. So, what PowerBack has done, it has increased the traditional draw area of skilled nursing center, so it’s widened the traditional draw area. It’s also expanded the types of patients that we can serve in that model with a much heavier physician presence, and in many cases direct affiliation with hospital partners, but in many cases as well we are managing market-based admission volumes in up to a thousand beds in PowerBack markets, all through the admissions function in the PowerBack Center. So, we are more efficiently triaging patients throughout our network when there is not a need for PowerBack, but a need for other types of services that might lend themselves to maybe longer-term care needs. So, PowerBack has been a great addition to Genesis. We’re looking very selectively where we can add PowerBack. We have a new property in-fill in Northern New Jersey and another one in the western suburbs of Pennsylvania, but with the capital constraints we are very limited in how much new PowerBack we can bring online in the near term.

[Kevin Fischbeck:]

Great. Thanks.

[Operator:]

Your next question comes from AJ Rice.

[Caleb Harris:]

Hi, this is Caleb Harris on for AJ. The press release mentioned the divestitures were expected to reduce annual lease payments by around 0.3 million, so just looking for some color on why that is a little bit higher?

[Tom DiVittorio:]

Hi Caleb, the vast majority of the divestiture is slated for 4Q are largely owned properties. So, there is really not much in the way of leased asset there, and that’s why you see accompanied with those divestitures about $100 million of debt reduction.

[Caleb Harris:]

Got you. And just to clarify, is that 100 million, that’s just related to the 4Q divestitures not anything earlier in the year?

[Tom DiVittorio:]

That’s correct. And by the way, all of those 4Q divestitures, but one, have already been completed.

[Caleb Harris:]

Okay. And then looking towards 2019 and maybe beyond, is there more of the portfolio that you think you will be pruning over time or do you think you are pretty close to where you want to be?

[George Hager:]

Yes. We have accomplished a lot. As you can see in the press release, there are still some markets, principally out in the West that we are critically evaluating, but I would say we are 80% through what we want to accomplish on the portfolio management side of things, but still little more to go in the West in some of our markets where we just don't have the density or the relationships to compete, but we’re a very good way through the process.

[Caleb Harris:]

Okay. And then one other, on the Medicare Shared Savings Program, could you give an update on whether there has been any word on 2017, and how well positioned you think you are for 2018 payment?

[George Hager:]

Yes. Just to make sure we are clear for everyone on the call. When you say 2017, you know 2017 would be settled in mid-2018, it’s an annual retrospective settlement process at least one year in arrears. And we’ve already communicated the Street that we had no expectation of gain share for 2017 and it was effectively in it is most simple form, we had a mismatch in our target rate, and the population included in our ACO. As we look forward for the 2018 year, we are seeing much different results. Once again that settlement will not occur until mid-2019, but I would say, yes, we are very encouraged by what we are seeing so far in the Medicare Shared Savings Program for 2018. So, I made limited comments in my formal comments that we expect to realize, we are gaining share, which we will not quantify until we get closer to the actual settlement, but we do expect to see a gain share in 2019.

[Caleb Harris:]

Okay. Thanks a lot.

[Operator:]

Your next question comes from Frank Morgan.

[Frank Morgan:]

Good morning. I guess one of the subject of the emission is you are still seeing the decline in the skilled admissions, is there any way to identify what segment of that skilled population, what clinical category of that skilled population that you are not seeing that you may have seen in the past? And just trying to get some comfort on what that might be, so that, just trying to confirm that the stabilization in potential turn and occupancy and mix doesn't have some other leg to it?

[Tom DiVittorio:]

Frank, I don't know that we’re seeing anything in particular in one-episode family versus the other. I think what sort of generally speaking to the extent that there are patients that are more stable and are ready or able to be cared for at home. I think hospitals are making those decisions, I think more aggressively than they have in the past, maybe keeping patients a little bit longer in the hospital where they think that a couple of more days in the hospital for otherwise stable patients we will – it is still a clinically effective approach for them. So, we’re not necessarily seeing it in one area of diagnosis versus the other.

[Frank Morgan:]

So, it is not like single joints that they are either, where you're just getting bypassed?

[Tom DiVittorio:]

No, I think we would have answered the question differently two years ago and we did because it was clearly the orthopedic patients where we were seeing quite a bit of decline and it was more significant than [5.2%] because that was a pretty substantial part of our short stay patient population. So, now I’d say it’s a bit more broad-based.

[Frank Morgan:]

And you did the same graph that you did for occupancy over those time periods, how would it look if you were just looking at admission growth or I guess admission declines, are you seeing the same trend there? I mean, is the occupancy stabilization more that you're mix is going to longer stay patients or is it that you really are seeing a stabilization in a shorter stay higher dollar skilled patient?

[Tom DiVittorio:]

I think between 3% and 4% skilled admission decline is what we’ve been reporting on now for quite some time. So, we have not seen that decelerate yet. So, clearly the occupancy growth that we’re seeing or the decline in the rate of decline of occupancy is being caused by us as George pointed out focusing more on patients with longer-term care needs than we may have in the past.

[Frank Morgan:]

Got you. And switching back to the, go ahead.

[George Hager:]

Frank, I just wanted to add to that. I think, for the last decade at least and probably longer, it has been such an intense focus on skilled mix and short stay patient as a driver of growth. I think where the occupancy levels have gone to in this industry people shouldn't undervalue the benefits of an incremental patient even a long-term care patient. The cost structure, the skilled nursing business is to [indiscernible] fixed on the routine side that incremental patient is extremely important to begin to return the industry back to earnings growth. I think there’s a lot of upside in the industry and Genesis going from the 84% level back to the low 90s where we’ve operated historically, which is our goal and our challenge, but we’ve been doing that with principally a long-term care population focused in areas like dementia care and the dialysis and tertiary care type services are still very, very important for the economic sustainability of the industry.

[Frank Morgan:]

Got you. In flipping over to the acquisitions, was this more, I mean, should we really move into this as a sign of kind of where you are with a business or was this just more of a, sort of something that popped up that was a sort of a one-off opportunity that happened to be in your market, so how much shall be read into the fact that you are doing any acquisitions at all?

[George Hager:]

I would say Frank that your description, your large description is more accurate, it was a one-off opportunity in our core markets, and once again we looked at structuring this to minimize any financial downside, and we see some real upside for a host of reasons these facilities are not operating optimally as we take them over, which occurred effective November 1. But I will say this, I mean, we’ve been downsizing for a while, and as I responded to a previous question there is still some margins in the West that we have, you know we like the density that we need to complete, and we're looking at some opportunities there, but if we could find ways that’s density in the core markets, you know accretively without incurring significant leverage because that’s what this balance sheet and capital structure cannot afford. We will clearly look to do that, but we would be selective in looking at our opportunities.

[Frank Morgan:]

Got you. And you say you are 80% there. So, the 20% potential that’s left out there for a portfolio pruning, would that be more released or that was owned assets and if they are owned, what would the proceeds be and any hypothetical numbers on maybe the size of, if it’s a rent, how much cash rent experience could be eliminated?

[George Hager:]

Frank, I’m not sure we have those numbers, but I would say there is a balance here, I would say, what’s left, the majority is leased and so it would be, and I can't give you a number on what the lease expense reduction is expected to be, but the majority is leased, so there is a limited amount of owned assets.

[Frank Morgan:]

Got you. Okay. Last one from me. Going back, I appreciate the color and the comments around PDPM and your preparation for it, you talked about, obviously the use of either group therapy or concurrent therapies is one of the levers that you can pull, but any other now that you’ve dug into it more, any kind of new incremental nuggets that you could provide to us on what is increasing your comfort level that this change can be neutral and maybe even positive? Thanks.

[Tom DiVittorio:]

Frank, I wouldn't say we have any new nuggets to share. We are still making good progress on our evaluation and our assessment of and our planning for PDPM. You know, we still have, I say a fair amount of work to do on the planning for it, but I think overall, the work that we’ve done to date and looking at our patient data continues to indicate no material impact expected at the top line level, you know, but all of the things that you are hearing about the opportunities on the cost side, even outside of how therapy may or may not be delivered, we feel very good about. So, we know that there is fewer patient assessments that will be required. That’s a very significant opportunity for us and for our clinicians today. Skilled clinicians spend a tremendous amount of time on a lot of patient assessments and that takes their focus away from patient care, and so the ability to free them up to focus more on patient care, obviously you are going to improve outcomes and also, we will reduce cost because those – the time otherwise spent on assessments need to be replaced with cost on the floor and at the bedside. So, there is a real – there will be a real direct impact both to care and to economics.

[George Hager:]

Frank, if I could just add to Tom's comments? I also wouldn’t undervalue the impact of moving from virtually zero group concurrent to achieving up to 25% on those modalities. First, I would tell you on those modalities we’ve done some research on outcomes and we did that while we were participating in the final payment program. When I research in data on outcomes that told us is that, the group concurrent modalities are at least equal, if not more efficacious than one-on-one modality. So, I think there is a real – from an outcome perspective we are encouraged by what we have seen in the past, and what that means for our ability to migrate and evolve to utilization of those less costly modalities going forward. If you would just do some math, and assume you get the 25%, and blend that between a group and concurrent in whatever assumption you want to make as far as how much is group and how much is concurrent, probably come to an answer that the cost of providing therapy to the Medicare rate population could go down in the range of 15%. And unlike the skilled nursing business, the therapy business is a 100% variable cost business. If you start doing the math on that, you will see that that potentially be very material to the industry and to Genesis.

[Frank Morgan:]

Okay. Thank you very much.

[Operator:]

I would like to turn the call back over to our host for the final comment.

[George Hager:]

Well thank you everyone for participating. Tom, and Lori and I will be available for calls throughout the rest of the day. As I think you can all tell, there is a lot more optimism in our voices. The data is pointing in the right direction for the first time in a long time and we're looking forward to finishing 2018 strong with a lot of positive outlook going forward in 2019. Thank you for your participation and your instant company.

[Lori Mayer:]

Debra, you can go ahead and end the call.