Gen Digital Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Genesis HealthCare Fourth Quarter and Fiscal Year End 2016 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) Thank you. It is now my pleasure to turn the conference call over to Lori Mayer, Vice President of Investor Relations. Please go ahead.

[Lori Mayer:]

Good morning and thank you for joining us today. We filed our earnings press release yesterday afternoon. This announcement is available in the Investor Relations section of our website at www.genesishcc.com. Replay of this call will also be available on our website for one year. Before we begin, I would like it 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 more complete discussion of factors that could impact our results. Except as required by federal securities bond Genesis HealthCare and its affiliates do not undertake to publicly update or revise any forward-looking statements are changes that arise as a result from new information, future events, changing circumstances or for any other reason. In addition, any operation we mention 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 term similar verbiage are not meant to imply that Genesis HealthCare has direct operating assets, employees or revenue or that any of the various operations are operated by the same entity. Our discussion today and the information in our earnings release and in our public filings include references to EBITDAR, adjusted EBITDAR, EBITDA, adjusted EBITDA which are non-GAAP financial measures. We believe 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 will turn the call over to George Hager, CEO of Genesis HealthCare.

[George Hager:]

Thank you, Lori. Good morning and thank you for joining us this morning. I'd like to focus today's call on a brief discussion of our fourth quarter results followed by a review of our accomplishments in 2016. Our long-term strategic plan and our value-based initiatives. Then I will turn the call over to Tom DiVittorio, Genesis' Chief Financial Officer. First, we obviously had a disappointing fourth quarter, which reflected continued census pressure and seasonally impacted operating cost. Tom will provide more details shortly, but this pressure forced us to react aggressively. We have implemented immediate cost reduction initiatives that will reduce operating costs by $50 million annually. These initiatives which are substantially completed at this time included reduction incorporate and regional support staff and reductions in other discretionary spending. It should also be noted that a portion of our near-term earnings pressure is self-inflicted, as we continue to position the company for long-term success in a value-based environment. With that said Genesis had a very active year both operationally and transactionally. In 2016, we continued the execution of our long-term strategic plan which strengthened our foundation to deliver long-term and sustainable growth. Specifically, we first divested of non-core facilities and ancillary businesses in order to focus more acutely on our core markets and core ancillary lines of business. Second, we significantly restructured, most of our major credit agreements, resulting in extended maturities, improved covenants, lower cost of capital and reduced burden from leased escalators resulting in cumulative rent savings of $440 million. And finally, we invested in managed care and value-based programming. Our value-based initiatives, which include 32 facilities in the bundled payments for care improvement Model 3 program and over 200 facilities in our post-acute accountable care organization to the Medicare Shared Savings program delivered improved patient outcomes and lower health care costs. We continue to position the company for long-term value creation by developing our industry lead value-based programs that include one vitality to you in-home rehabilitation and Genesis care transition. Both of these programs provide us with greater connectivity to patients in the home and allow us to reduce unnecessary re-hospitalizations post-discharge from our centers. Genesis physician services and a Genesis HealthCare ACO, which allowed Genesis to participate in cost-effective care management of the long-term care dual eligible population in our centers. PowerBack Rehabilitation, our enhanced short-stay product and fourth, long-term care specializations including dementia and Alzheimer's, dialysis, ventilator, wound and palliative care. Success in a value-based system is dependent upon a provider's ability to deliver high quality specialized clinical care and achieve consistently improved outcome for its patients in a cost effective manner. Our unique capabilities and programs position Genesis to more broadly and successfully participate in our evolving value-based health care system. In addition to these capabilities and programs that I just described, we have also extended our conservative, prudent investment strategy in China. We continue to be optimistic about the significant upside potential of our first-to-market entree into China. As we look forward to 2017, senses and mix trends have strengthened and are showing improved performance from the start of the year. Stable senses combined with our aggressive cost reduction initiatives provide confidence in our ability to meet our goals for 2017. In conclusion, I want to thank our more than 80,000 dedicated Genesis employees for their unwavering commitment, as we continue to maintain our focus and discipline in executing our long-term strategic plan. Near-term earnings volatility will ultimately stabilize, giving way to sustained, demographically driven earnings growth to providers like Genesis that possess scale, clinical and technological sophistication and the commitment to achieving long-term cost effective quality outcomes. With that I'd like to turn the call over to Tom DiVittorio. Tom?

[Tom DiVittorio:]

Thanks, George. Good morning, everyone. My comments today will start with a recap of operating trends then move to recent financing activities and conclude with 2017 guidance. Our earnings in the quarter were impacted by two factors, one, lower occupancy and two reimbursement rate growth lagging the growth in all-in nursing labor costs. With respect to our occupancy, operating occupancy in 4Q16 of 85.1%, declined 90 basis points from the prior year quarter and 40 basis points from the sequential quarter. A majority of this decline occurred in the months of November and December. Same-store skilled patient admissions in 4Q 2016 dropped 4.7% as compared to 4Q 2015 resulting in a 9.6% decline in same-store average daily skilled patients in 4Q 2016 as compared to 4Q 2015. Our same-store long-term care average daily patients were flat in 4Q 2016 as compared to 4Q 2015. 4Q 2016 average length of stay among short stay Medicare patients [ramped] 4% below 4Q 2015 and approximate one day reduction while 4Q 2016 average length of stay of Medicare advantage patients was unchanged compared to 4Q 2015. So in our inpatient segment occupancy challenges continue to be driven by lower skilled patient admissions and to a lesser extent our ongoing initiatives to reduce skilled patient length of stay were clinically appropriate. The skilled census pressure is experienced by Genesis are sector wide and as a result, our third party rehabilitation therapy customers are also experiencing fewer skilled admissions impacting the revenue, efficiency and earnings of our rehabilitation therapy segment. As a result of our participation in accountable care and bundled payment programs, we are in a unique position to recapture in future periods, some of the current year lost revenue caused by our success managing down episodic cost. We continue to believe our success managing down costs, and reducing avoidable hospital readmissions will increasingly yield opportunities to gain market share of short stay skilled patients as acute care hospital systems increasingly narrow their discharge panels to fewer post-acute providers. Moving on to reimbursement rate growth versus all in nursing labor costs. In 4Q 2016 wage inflation for non-overtime hours worked by our employed nursing staff grew 1.9% over 4Q 2015. We also experienced growth in our overtime hours and agency staff to supplement staffing constraints in certain markets, including overtime hours and agency costs are all in nursing wages per worked hour grew 3.1% in 4Q 2016 over 4Q 2015. This 3.1% exceeds the approximate 1.2% weighted average reimbursement rate growth we received from all of our payers over the same period excluding taxes, which I'll touch on in just a minute. Markets having the greatest impact on nursing wage inflation relative to reimbursement rates are primarily located in the Midwest and Western states, specifically California, Texas, New Mexico and three states we plan to exit Kansas, Missouri and Montana. Many of Genesis' large-legacy markets in the East, such as New Jersey, Maryland and West Virginia are not experiencing any wide gap between Medicaid rate growth and nursing labor inflation. With respect to our operations in Texas, 20 of the facilities we consolidate in Texas where participants in a voluntary supplemental Medicaid payment program known as the minimum payment amount program or MPAP. The MPAP expired on August 31, 2016. The funding by this program generated about $62 million of annual revenue and $18 million of pre-tax earnings to Genesis. The state of Texas has been actively appealing CMS to extend the MPAP program through August 2017 and to approve quality oriented replacement program effective September 2017. The loss of the Texas MPAP negatively impacted our earnings $4.5 million in 4Q16. In summary, the combination of lower skilled patient occupancy and the relationship between reimbursement rate growth in certain markets, including the loss of Texas MPAP funding and our all-in nursing wage inflation are the primary contributors to our EBITDAR margin compression from 12.9% in fiscal 2015 to 12.2% in fiscal 2016 and our earnings in 4Q16 relative to our guidance. Now turning to recent financing activities. As previously announced in the fourth quarter of 2016, we closed on two accretive transactions, involving 92 leased facilities sold by Welltower to two new landlords. Base rent of $170 million was reduced to 5% under the new leases and lease escalators were reduced from 2.9% to a weighted average 1.3% after year one, 1.7% after year two and 2% thereafter. As a result of these two transactions rents in 2017, will be $12 million lower than rent we would have paid under the former lease. To put our overall rent escalators in greater perspective, Genesis' weighted average rent escalator in 2016 was 3%. Our weighted average rent escalator in 2017 is expected to be only 1.8%, meaningful near-term improvement. In the long term, the cumulative rent savings to Genesis through January [2032] is initial term of the new leases is $440 million dollars. After taking into account $75 million of debt issued in exchange for the restructured leases. The pre-tax free cash flow savings to Genesis through January 2032 is $327 million, a highly accretive outcome for our shareholders. In addition to these lease restructuring transactions in 4Q 2016, we closed on $62 million of HUD guaranteed loans totaling now $205 million of HUD loans closing in fiscal 2016. The average fixed interest rate on the completed HUD loans is about 4% with maturities ranging from 30 years to 35 years. We expect to refinance about $80 million of the remaining real estate bridge loans through either asset sales or lower cost longer term HUD guaranteed mortgages in 2017. Leaving us with about $300 million of real estate bridge loan balances associated with 33 properties principally located in the states of Texas and California. Refinancing the real estate bridge loans underlying these 33 properties is delayed as a result of the recent performance of these facilities. These facilities have been disproportionately impacted by the downward census, reimbursement and labor inflation drivers previously mentioned in my comments around operating trends. As a result of these expected delays in December 2016, we amended our real estate bridge loans to provide for a five year term and a reduction to the interest rate to 10% escalating 25 basis points per year. We will continue to diligently work to improve the operating performance of these facilities in order to take advantage of lower cost; longer maturity HUD guaranteed mortgages or other permanent financing. As a result of this amendment to the real estate bridge loans Genesis has no significant debt maturities until 2020. And finally to our 2017 earnings guidance, before I get to the numbers, I want to highlight two important changes to our prospective non-GAAP reporting filing comments from the SEC. First, beginning with this guidance the Company will no longer refer to adjusted EBITDAR as a non-GAAP performance measure instead adjusted EBITDAR will only be referred to as a non-GAAP valuation measure. Second, and also beginning with this guidance the Company will no longer deduct the cash rents associated with its capital leases and financing obligations when computing adjusted EBITDA. The Company will however provide information on the additional cash rents paid during the reporting period pursuant to its capital leases and financing obligations. The supplemental information may be useful to users of our financial statements who find our historical computation of EBITDA and adjusted EBITDA useful in their evaluation of the Company's performance. In our earnings release we have provided a low and high range for the 2017 guidance. The following comments refer to the midpoint of this range. Regarding GAAP performance measures and other key data at the midpoint, we are projecting revenue of $5.5 billion. GAAP lease expense of $135 million and a net loss attributed to Genesis HealthCare of $79 million. Regarding non-GAAP performance measures and other key data at the midpoint, we are projecting non-GAAP EBITDA of $519 million, non-GAAP adjusted EBITDA of $558 million and additional cash rent not included in GAAP rent of $354 million. Regarding non-GAAP valuation measures at the midpoint, we are projecting non-GAAP adjusted EBITDAR of $692 million. This guidance assumes that (inaudible) of 31 facilities over the course of 2017 with the majority occurring in the first six months of the year. A full year of reduced Medicaid funding related to the Texas MPAP program negatively impacting pretax income and EBITDA of $13 million. We're assuming virtually no weighted average Medicaid rate growth in all other states outside of Texas. We're assuming $50 million of overhead and net operating cost reductions. And last, we're assuming $10 million of net favorable gain share recognized from the Medicare shared savings program related to the reconciliation of 2016 costs. This estimate is based off internal observation of utilization and cost data and will not be reconciled via CMS until July 2017. With that [Raquel], please open the line for questions.

[Operator:]

Thank you, ladies and gentlemen, the floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Joanna Gajuk with Banks of America.

[Joanna Gajuk:]

So in terms of the guidance, which assumes EBITDAR, adjusted EBITDAR margin will improve about 30 basis points at the midpoint and it seems like the cost cutting they had about 90 basis points to margins, So, total asset mix, this to be a very tough comp for 2018. So how do you think about the margins sort of EBITDAR margins in the business mid to longer term?

[George Hager:]

I think your calculation are correct. We took the aggressive stance of driving cost down in 2017 with a $50 million cost reduction program. We continue to see the dynamic that Tom referred to regarding Medicaid rate, so with flat Medicaid rates that will negatively impact margins in the near term, we don't think that flat Medicaid rates are sustainable in the long term. If you look at history, Medicaid rates ultimately even though they do some time lag cost increase ultimately keep pace with underlying inflation in market basket increases in cost. But for this year, we did need to take that aggressive action principle because of the relationship of Medicaid rates to underlying cost.

[Joanna Gajuk:]

Okay, but then so how would you frame sort of the margin rate because this $50 million of cost cuts that you identified for this year. It's not like you can repeat it the year after that, right so that the growth there, will have a tough comp because of that. So should we think about margins in the 12.5% range on EBITDAR?

[Tom DiVittorio:]

Joanna, are you really trying to project ahead to 2018.

[Joanna Gajuk:]

I'm just trying to kind of assess what's the underlying, sort of growth in the business because the $50 million cost cut seems like it'll be hard to repeat in future periods.

[Tom DiVittorio:]

What it implies of course is that the underlying business in 2017 is in fact showing margin compression for all the reasons; George described the relationship between Medicaid rate growth and inflation in our cost. We don't expect that to continue long-term, would be highly unusual for us to go three consecutive years which 2018 would be where reimbursement rates aren't sort of catching up to the historical costs, which eventually will reflect this higher level of inflation in our cost base. So we do expect that to right-size itself over time, we've seen this dynamic before, maybe not in the last few years, but typically the rates will catch back up over time. And in fact you often get on the back end of it, you get positive effect where if labor cost in a particular year let's use 2018 start to moderate, but now you're getting enhanced Medicaid rates, which are reflective of your cost in 2016 and 2017, you get the opposite effect in your favor.

[George Hager:]

And Joanna I would say, look the ability to precisely or more precisely forecast margins in 2018 are also impacted by several other factors. One, I think we'll have a little more visibility as to census trends as we get to the back end of 2017. Our expectation begin to see -- we think 2017 will be the trough in census and we'll begin to see some, maybe not significant, but marginal in 2018 as we look forward to absolute census levels. We also are very optimistic when we look at the trends in our value-based programming. Our bundled payment -- our 32 facilities in the bundled payment Model 3 program have performed incrementally better in each consecutive quarter that we have been in the program and we expect that trend to continue and therefore we would also expect our gain shares under the Medicare Shared Savings program if it continue to improve as well as we look forward into 2018, we continue to look forward to some of our other ancillary programs that are designed to participate more effectively in the value based arena like vitality to you to also drive growth and earnings. So there are a lot of levers that we look to pull and develop as we can move forward into 2018 that all will contribute to -- we believe improved margin as we look forward to 2018 and beyond.

[Joanna Gajuk:]

The next one is in terms of the bundling and the progress of MSSP, MSSP if I could just last one. So you assume $10 million which seems conservative based on some prior comments you made, which I guess that makes sense. But, so would you say that you have incrementally more visibility versus when you talk about things three months ago, so in terms of your progress you are making on MSSP.

[George Hager:]

We continue, we get monthly report from CMS both around attribution and around utilization. Both are encouraging to us, but this is our first year of any settlement under the Medicare Shared Savings program and we want to be very cautious. We just have not been through those settlement processes before and that's why we've taken a more conservative view there.

[Operator:]

Your next question comes from the line of AJ Rice with UBS.

[AJ Rice:]

AJ Rice, obviously, but hello everybody, couple of questions I got to ask. First of all, sort of technical one, so you talking about getting $10 million from the shared savings program I think in the release, you're saying that the $10 million you got in BPCI for 2016 will grow; do you have a sense of how much that might be and is that factored into the guidance for 2017?

[Tom DiVittorio:]

AJ that's packed in the guidance, I mean it's obviously, it's not as big of an incremental impact year-over-year faced based on current trends. I think that 20% plus growth in our BPCI gain share in 2017 versus 2016 would be a conservative estimate.

[AJ Rice:]

Okay. Alright and then on the slowdown in occupancy that you pointed to in the back half of the quarter, you said you thought that was industry-wide, is there, are you just walking away from that, it's just sort of the, employees sometimes get or do you think there is something more significant going on there?

[Tom DiVittorio:]

Well, based on how census has recovered early in 2017, we believe it's having been flow of census and our conversations throughout the industry would tell us that it was somewhat pervasive. The months of November, December as weak census months in the industry. But I will say that we've been around a long time and historically and when we look at census trends, Q1 was typically your highest census and quarter two would be slightly less than that, your lowest quarter census historically was quarter three and you would typically rebound some in Q4 as we think about modeling and spreading our guidance over four quarters. This is now two years in a row that Q4 has been below Q3 so fundamentally the historic census trends that we were used to Q4 versus Q3. We think we are projecting Q4 will be continue to stay below Q3 as we look at 2017 versus 2016.

[AJ Rice:]

Okay. Interesting. And this may be a little premature, but I'll ask anyway. We've obviously seen already the delay in the next sort of bundled payment program, the cardio, one from CMS. Obviously, we've got new CMS administrator reinstated new HHS to talk about how we're going to refine and replace the ACA [ph] from where you guys seeing the things that are important to you, do you have any early read on how this administration might, do you think that relate to things that are important to you?

[George Hager:]

We're really hard to if call this early AJ on that, I would say that. At a very high level, our hope is that see some relaxation in the oversight regulatory environment, which has been very aggressive over the past four years and I think generally speaking, we live and operate and probably the most highly regulated component of the healthcare delivery system. Some relief on that front would be welcomed. So other than that, I think it's hard to project where the ACA or where some of these [technical difficulty] bundles go. I will say that, we made comments before that whether with CJ or the other with the cardiac, the other mandatory bundles, we didn't think that those things had a huge impact on the business I think environmentally, I think the world has changed, train has left the station regardless of repeal are not at the ACA and there is conscious effort up and down in the healthcare delivery spectrum to try to drive cost out, reduce unnecessary utilization and improved outcome as I said at lower cost point. So I think those trends continue regardless of changes made by the current administration.

[AJ Rice:]

Just to clarify one thing on the comment about regulatory issues. Just sort of general regulatory past year you look into hopefully maybe become a little more user friendly or is there some specific regulations that -- I know they're looking for regulations to repeal. Is there a specific regulation that the industry put forward and say, hey, this will be helpful if you guys repeal this regulation.

[George Hager:]

There is nothing specific. I would say that there were changes in how civil monetary penalties have been calculated and they've been relatively significant I think too many providers in the industry. And things -- individual items like that are things that we hope we will see some relief on.

[Operator:]

Your next question comes from the line of Dana Hambly with Stephens.

[Dana Hambly:]

Few questions, one, when I think Welltower's guidance included the buyback of I think $400 million in real estate from you guys. Just wondering, I'm not sure how that factors into your guidance, if at all, do you think you'd be able to finance that are kind of what are some of your options to finance that.

[George Hager:]

Yes, Dana, we're still working on that transaction with Welltower and it's tough to give clear and definitive guidance but I think that $400 million transaction is more likely in the near term, not to be a true repurchase of real estate, but more likely a transaction that is similar to the transactions that well-targeted with the two transactions that we referred to earlier including the one with [indiscernible] where there will be a new buyer and new release at a reduced lease rate with lower escalators. I think that's the more likely outcome on that program.

[Dana Hambly:]

Okay, that makes sense. And then and with skilled --

[Tom DiVittorio:]

And Dana just want to confirm that any upside associated with the transaction like that is not reflected in our --

[Dana Hambly:]

Okay, that makes sense. And then on the skilled mix, I think everyone understands the pressure on the fee for service. I just wonder the managed care mix has been kind of a 7.5% range for the last couple of years. Thought it might start to bump higher, I mean if you look out into 2017 and beyond, should we start to see a meaningful improvement in that number?

[Tom DiVittorio:]

It looks like the enrollment statistics have just come out and I don't have them at the tip of my tongue. But I do believe that there is increased -- in the Medicare population increased enrollment and in Medicare Advantage plans and so I do think that you might see that trend move up to some degree.

[Dana Hambly:]

Okay and as Tom, I've scribbling to ask -- you said managed care length of stay was, it was unchanged. Is that right in the quarter?

[Tom DiVittorio:]

Right.

[Dana Hambly:]

Okay. And then the last one from me, I know on the, can you just update us on financial coverages, whether it's debt to EBITDA fixed coverage, rent coverage and kind of with the new outlook on 2017 if you're in danger of tripping anything in the near term.

[Tom DiVittorio:]

Dana, we reset, many of those covenants back in July when we restructured the term loan with a new lender and amended our credit facility. So we built some room into that, obviously our fourth quarter doesn't help us all that much, but I think we're comfortable that we'll be able to manage through the year with the covenant restrictions we've got in place.

[Dana Hambly:]

Okay, thanks very much.

[George Hager:]

Operator. I don't know if we have any more questions in the queue?

[Operator:]

Your next question comes from the line of Chad Vanacore with Stifel.

[Chad Vanacore:]

So I just want to dig a little bit deeper into the occupancy questions. What you think drove that sequential occupancy drop and why did they start November and what's confined a certain states or at a national level.

[George Hager:]

It's really difficult to really pinpoint any issue. I would say, historically as we get near the Thanksgiving holiday there is whether its physicians on holiday or taking vacation and or family members looking not to do anything as far as placement in long-term care around that time of year or whether it's elective surgeries that are deferred until the beginning of the year. The holidays can be a contributing factor to softness in census. I would just say this year, the impact from mid-November on through the end of the year, I would get started as we are approaching Thanksgiving was more significant than has been historically. Other than that I don't think anything we can really pinpoint especially in light of how census has come back early in 2017.

[Chad Vanacore:]

George, were two months into this year already. How does the first quarter, how there are shaping up compared to the fourth quarter right now?

[George Hager:]

The first quarter always is, our season strongest census month. I will say that census has rebounded early in 2017 more significant than it did in 2016. So we're encouraged by what we see on the census side early in the quarter.

[Chad Vanacore:]

And then you are shifting gears to operating expenses, you're looking at $50 million savings, what levers did you to pull on overhead and then how much of have you institute already and how long to achieve the full run rate?

[Tom DiVittorio:]

Chad, the $50 million is almost exclusively people related, these were positions that were eliminated and there's obviously costs associated with people as well whether its travel or benefits sort or those sorts of things. The vast majority of the $50 million are people-related and all of those decisions. Not only have been communicated, but at this point most of the affected people have been let go unfortunately. So you'll see a little bit of ramp up in the effect of that over the course of -- into the second quarter, but the $50 million is really the impact that we anticipate realizing in 2017. So on an annualized basis it's a little bit higher than that.

[Chad Vanacore:]

Alright thanks Tom and then I guess one more, you're retaining properties in states that you previously expected to exit, so what change in those states that change your mind?

[Tom DiVittorio:]

Chad, I think it was a different issue, in the three states we decided to stay and I'll just quickly run through them. First, we had two properties in Indiana. So pretty small state for us, but Indiana similar to Texas has an upper payment limit component to its Medicaid reimbursement system and unlike Texas there doesn't appear to be at least any near term risk to that and we just did not see the value that we needed to for the earnings generated by those two facilities. So that was a valuation issue. I'd also argue that Ohio was the valuation issue as well. Ohio, we recently received in 2016 in the back half, an attracted Medicaid rate increase, one of the few states of bump Medicaid rates and also we did not see that adequately reflected in the valuation of our centers in Ohio. So I'd say those Indiana, Ohio are more valuation driven. Kentucky, the negative that Kentucky to a great degree has been the tort environment. And with this most recent election there are some fairly dramatic changes in integration of the state legislatures in Texas, in Kentucky, and we are cautiously optimistic that we will see some level of tort reform in the state of Kentucky which made us rethink our view of exiting that state. So those are the primary considerations in our decision to stay in. And I will say, we will continue to pursue the sale of the real [indiscernible] real estate in those states. I believe, Welltower has made an election at this point to continue to own the real estate in those three states.

[Operator:]

[Operator Instructions] Your next question is a follow up from Joanna Gajuk with Bank of America.

[Joanna Gajuk:]

Yes, thank you if, I may so just coming back to the discussion about the outlook for the year. So, and you said that labor costs are inclusive for up 3.1% in Q4. So, is that kind of run rate for 2017 about 3% increase in labor?

[George Hager:]

We're not going to provide specific guidance on the assumptions like that, but I will tell you that included in the guidance is accommodations in markets where we know there continues to be pressured supply and demand type issues, but we've accounted for that in the overall guidance.

[Operator:]

Ladies and gentlemen, this concludes the Q&A session for today. I will now turn the call over to George Hager for any closing remarks.

[George Hager:]

I just like to thank everyone for participating on the call today and just logistics if there are follow-up questions, Tom and I are speaking at the RBC conference in New York today after this call. So if you could please contact Lori Mayer, if you have follow-up questions and we will respond as quickly as we can either during the conference or after our commitments here at the RBC conference. Do again and look forward to stay in touch.

[Operator:]

Thank you, ladies and gentlemen, this concludes the Genesis HealthCare Fourth Quarter and Fiscal Year-End 2016 Earnings Conference Call. You may now disconnect.