Gen Digital Inc.
Q2 2015 Earnings Call Transcript

Published:

  • Operator:
    Good morning, my name is [indiscernible] and I will be your conference operator today. At this time, I’d like to welcome everyone to the Second Quarter 2015 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]. I will now like to turn the conference over to Lori Mayer. 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 Investors section of our website at www.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 I encourage you to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by Federal Securities laws, 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 reasons. 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 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 various operations are operated by the same entity. Furthermore, we supplement our GAAP reporting with non-GAAP net metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon at the exclusion of GAAP report. A GAAP to non-GAAP reconciliation is available in today's press release. To facilitate comparisons before and after the February 2015 combination with Skilled Healthcare, we’ve also provided certain non-GAAP financial information on the basis assuming the combination of Skilled Healthcare and Genesis HealthCare occurred at the beginning of each reporting period. This data is labeled pro-forma. Also, when we reference earnings per share, we are always referring to diluted earnings per share. And with that, I will turn the call over to George Hager, CEO of Genesis HealthCare.
  • George Hager:
    Thank you, Lori. Good morning and thanks for joining us this morning. I would like to begin today's call with a brief overview of our results, and then provide an update on a number of our operational and strategic initiatives. Then I will turn the call over to Tom DiVittorio, Genesis HealthCare's Chief Financial Officer. In the second quarter, on a pro-forma basis we reported EBITDAR of 198 million, EBITDA of 76.6 million and earnings per share of $0.14, all exceeding our expectations. And I am extremely proud of our performance this quarter. Our EBITDAR growth of nearly 6% and our EBITDA growth of 10% in the second quarter is the result of excellent progress with our cost savings initiatives, realization of skilled healthcare synergies, our tuck-in acquisitions and our power-backed development strategy and success managing controllable costs relative to fluctuations and business volume. In the quarter, we have realized $9 million of savings related to our expense reduction initiatives and 15.5 million of savings through the first six months of 2015. We are on track to realize 30 million to 40 million in savings in 2015. We realized 3 million of Skilled Healthcare transaction synergies in the second quarter and 4 million to the first six months of 2015. We remain confident in our 13 million synergy estimate for 2015 and 25 million of full year run rate synergies by mid-2016. On July 1, we successful started 91 therapy contracts with four key customers and 22 outpatient sites. These new contracts, more than offset the loss of rehab contracts in the fourth quarter of 2014, we expect these contracts to contribute an additional 7.5 million in annual EBITDAR which is already considered in our annual guidance. And controllable routine costs were well managed company wide. With therapist efficiency of 70%, our highlight in the quarter, up 60 basis points over the prior year quarter. Overall, this was a very successful quarter for Genesis. Now moving on from the second quarter results, I would like to discuss our progress in three strategic growth areas
  • Tom DiVittorio:
    Thanks George and good morning. I focus my comments today on two topics; one, the status of our HUD initiative and two our earnings outlook for the near and immediate term. First, the HUD financing initiative. In March we submitted our request to reinstate Skilled Healthcare's former corporate HUD financing program having $360 million of capacity. We also requested an additional $400 million of capacity. The initial $360 million will be used to refinance 67 former Skilled Healthcare properties, currently subject to a real estate vigilant. The additional $400 million of capacity will allows us to attractively finance our planned REIT facility buybacks and Riviera transaction, leaving us some capacity to finance future unidentified transactions. Our ability to access HUD financing as a key element of our balance sheet repositioning strategy, the bridge refinancing and completion of the announced transactions with our REIT partners alone will increase our annual after tax free cash flow between $25 million and $30 million, a nearly 40% increase of our 2015 guidance midpoint. We are making excellent progress working through the approval process with HUD. We have had very constructive and encouraging discussions with HUD officials. We continue to work diligently through their underwriting and internal approval process. We are not aware of any major open business issues. We look forward to providing you an update as soon as we have more information to share. Now to our outlook starting with 2015. We are reaffirming with confidence our 2015 EBITDAR and EBITDA guidance range, the midpoint of this guidance range implied EBITDAR of $763 million and EBITDA of $275 million, which yields 10% EBITDAR and 23% EBITDA growth of 2014 on a pro-forma basis for the Skilled Healthcare merger. We have updated our 2015 diluted EPS guidance upwards from a range of $0.29 to $0.34 now to a range of $0.34 to $0.39. The $0.05 per share increase is attributed to further refinement to our estimate of 2015 depreciation and amortization expense related to the Skilled Healthcare acquisition accounting. Based on our performance through the first six months of this year, the expected incremental realization of transaction synergies incremental cost reduction initiatives and the new rehab contract starts we are increasingly confident in our ability to perform above the midpoint of our 2015 EBITDAR guidance range. As we look ahead and guide to the individual quarters in the backhalf of this year, our third quarter is typically a seasonally soft quarter, because we often see a sequential quarter drops in Skilled mix during the summer months. If you are running a financial model of Genesis and you assume we achieved the midpoint of our full year 2015 EBITDA guidance. We recommend the implied EBITDA in the back half of 2015 the split, 49% in the third quarter and 51% in the fourth quarter. Now looking beyond 2015 and for those of you who maybe near computer right now or maybe after the quarter, I encourage you to look at slide number 19 of our investor deck, you can find the deck under the investor relations link that’s on our website. We also filed the deck in a separate exhibit to the 8-K that we filed yesterday as well. Slide 19 illustrates the incremental value creation into 2016 of the initiatives and transactions we’ve engaged in over the last six months. Most of these transactions have already closed or we have signed agreements return sheets. They include continue realization of Skilled transaction synergies. The full year impact of the 91 therapy contract starts and the 22 site outpatient we have acquisition that closed on July 1st. The year-over-year impact is completed new build power-backed facilities and newly acquired facilities that are moving out of start-up and into recurring operations. The HUD financing initiatives, the Revera acquisition. The transactions with our REIT partners to divest or acquired 33 currently leased property and the sale of non-core assets. What we can tell you with absolute position is the timing and which these transactions will close like the retranslations and the non-core asset sales, but we fully expect it will close over the course of 2016. We hope this illustration if you perspective on the aggregate impact of these transactions. Benchmark after midpoint of our 2015 guidance and assuming they were all in place for a full year. These transactions before taking into account normal levels of organic growth, we’ll generate EBITDAR growth of 6.3%, EBITDA growth of nearly 25% and free cash flow growth of nearly 67%. In conclusion, we’re very pleased with our performance thus far in 2015, we’re optimistic about continued strong performance in the back half of this year and we’re very excited about our growth prospects as we past 2015. With that, we’ll be happy to answer your questions. Operator, please open the line.
  • Operator:
    [Operator Instructions] Your first question comes from the line of Joanna Gajuk with Bank of America-Merrill Lynch.
  • Joanna Gajuk:
    Good morning. Thanks for taking the question. So first on the core business skilled mix decline, but can you comment on the same-store skilled mix performance which you would compare legacy Genesis assets year-over-year and also similarly is it possible to talk about performance on legacy skilled assets under same metrics on skilled mix? Thank you.
  • George Hager:
    Sure. Thanks Joanna for the question I am glad you brought that up. Because when you look at our key performance indicators in the press release, they are a little bit of an apples-to-orange comparison with the current period including Skilled Healthcare since February 2nd and the prior year only being reflective of Genesis. And Genesis had a very different occupancy and skilled mixed profile than Skilled Healthcare. Legacy Genesis running in the 88% to 89% occupancy levels and Skilled historically running in the 81% to 82% occupancy levels so some of the drag that you might see or foresee and the comparison is really just being driven by the fact we have got Skilled in our numbers now and obviously don’t in the prior year but to answer your question directly and obliviously we have tried to look at the business on a same-store basis, we see second quarter this year versus second quarter last year about a 1% decline in overall occupancy but the skilled mix is up about 1o basis points in the quarter. And to answer to your last question, I think that what we are seeing in the skilled businesses relatively Genesis business is relatively consistent, very similar trends. Flat to slightly up skilled mix year-over-year and a roughly 100 basis points decline in occupancy, maybe a little bit larger decline in occupancy in the skilled business than in the Genesis business.
  • Tom DiVittorio:
    Joanna, I will just add to that that I would say most of or at least a majority of the decline in the overall stands seems to be based in mid-America and western regions and we have not fully deployed referral to admission protocols and processes and include the placement of clinical admission directors inside our key hospital partners and the use of our central line or intake line, care line that is used in most of our traditional legacy Genesis market. So we see some upside there, but there still is some softness overall in several of our markets on total senses.
  • Joanna Gajuk:
    I remember first quarter the Legacy Genesis had a very strong improvement, 90 basis points year-over-year that’s maybe there is something also seasonally that you should not expect Q2 to improvement being as strong as Q1 or anything to kind of add in terms of helping us think about whether this 10 basis points is deceleration or there is some seasonality is here or some other things?
  • George Hager:
    Well, Joanna from a sequential quarter point of view its not an usual at all for us to see some decline in skilled mix in the second quarter or for the first quarter, our first quarter is typically our strongest skilled mix quarter and as we look ahead and its one of the reasons we’ve guided you on the splits between the third and fourth quarter performance, looking ahead, the summer quarter, the summer months, the September quarter are typically are very lowest, skilled mix levels from just a seasonality point of view. But you are right, I mean the legacy Genesis business had a very-very strong skilled mix, year-over-year skilled mix growth in the first quarter and we certainly saw skilled mix growth year-over-year in the second quarter, but it was not a strong, we’ve try to think through that as well and I think there is two factors that we’ve been able to identify. One is that the first quarter of last year, so the first quarter of 2014 was unusually low quarter for skilled mix despite a typically being a strong seasonal quarter. And we think a lot of that had to do if you remember there is quite a bit of severe weather back in the first quarter of 2014, we feel that had an impact on our overall skilled mix in the eastern markets of the United States. This year we didn’t have nearly the same level of weather related issues, we did in England, but not throughout the rest of the east coast, in this year’s first quarter. But there was a very high level of influenza across the country and frankly we think we were benefactor of that in the first quarter and we saw a lot of patients coming through the system, they were coming out of hospital after flu and pneumonia type symptoms, so I think -- those two dynamics are soft first quarter last year and a very strong quarter this year. First quarter I’m stretching out because of influenza really affect Q1 this year-over-year growth.
  • Joanna Gajuk:
    Okay. Because we remember with the strong first quarter you also commented that you feel that some of it was from power-backed facility, so there was impressive but it seems like maybe this quarter, whatever you would have benefit from the power-backs that was offset by some other pressure. So I just want to -- I’m just trying to understand that whether there is any seasonality or other things that were kind of impacted results more in Q2 versus Q1, but it seems like you’re saying that the comps were just easier in Q1, so that’s why the improvement was much stronger. So just a leaving that and I guess talking is a switching topics the commentary around the BPCI environment based. I have notice in your slide deck that you’ve filed with earnings less but you have that slide when you talk about your challenges and opportunities. So can you a little bit elaborate which of these do you think are the biggest and specifically some color, there is one point here that’s interesting you said third-party entrance managing post-acute as a risk. So how big of the risk is that and the flip side, can you talk about a biggest opportunities here with what’s going on or other changes that are happening? Thank you.
  • George Hager:
    Well, there is no question Joanna that world is changing in all of healthcare and clearly as a major element of the healthcare delivery system in opposed to space and we very much like where we sit especially with our cost structure and our opportunities to really actively manage certain elements that are driving higher levels of costs system-wide, not least of which is a necessary hospital readmissions. The world is changing and we’re having tremendous number of very active and strategic conversations with acute care partners, who are looking to take risks and gain share as well as obviously increasing penetration of managed care payers in the Medicare population. So that world is changing and it’s incenting providers through actively participate and collaborate both upstream and downstream and creating systems and processes and models that drive cost down and hopefully achieve better outcomes for the patient. So right now, I think the near-term implications of those activities, I’d say marginally negative on the industry. Because what is happening right now is there is I think active energy around trying to reduce post to acute utilization and you see some of that result in some pressure on length of stay and in certain market even admissions volumes. Despite that we’ve been able to still grow our skilled mix in both the first and second quarter of this year. I think our goal to grow skilled mix will continue to accelerate over the time. Because what we expect to happen is that both the large and getting larger and manage care payers as those industries consolidate and the large at risk provider organizations both hospitals and physician groups, there is no question they will begin and are beginning to narrow panels and those panels will be narrowed based on those providers that are able to produce clinical outcome that supports the interest of those at risk organizations, so also those providers that have the density and the presence on the clinical skills necessary to achieve those outcomes. So I think that panel narrowing process has yet really occur in any meaningful way. So this is also an evolution, I do not think that you are going to see we are not going to wake up next quarter or the fourth quarter and have dramatic changes this is all incremental change I think positive and constructive change for the healthcare industry, we are a big part of that change I think with features like our own - company, our care transitions capability our vitality to you capability providing rehab of resources back in the community. We are very-very well positioned to be a big part of the evolution of the system. So we are excited but right now there is a near-term pressure, but we think ultimately that would result in a very-very solid skilled mix growth effectively continued consolidation in the industry and a continuing narrowing of panels and concentration of skilled mix referral volumes into providers like Genesis.
  • Operator:
    And next question comes from the line of Frank Morgan with RBC Capital Markets.
  • Frank Morgan:
    Good morning. I was hoping you could kind of - culture.
  • George Hager:
    Hey, Frank we are losing you.
  • Frank Morgan:
    I was wondering if you could talk a little bit about your care environment in your key stage how you see rates setting up in the second half of the year and bring into next year.
  • Tom DiVittorio:
    Hey Frank this is Tom. The rate that we projected for 2015 Medicaid weighted average we are looking at 1.7% rate of, we are half rate through the year. We have a pretty good hand along most of the states as we look to the back half for the year, they haven't all completely settle down from a legislative point of view, but we feel very strongly that we’re on track for that 1.7%, there is some winners and some losers as we look at the individual stage but it all sort of ways out that we’re just sort of sales of 2% rate growth, target.
  • Frank Morgan:
    Okay. And then secondly it sounds like you are making lot of traffics on your balance sheet, I’m just curious as you are seriously overall focused, what percentage you ultimately think you could get ahead in terms of own real estate overtime as a percentage of return?
  • George Hager:
    Well, our target Frank is to get to 30% to 35% facility ownership, with the deals that we’ve announced pro forma were at 23%, so it would take a couple of years for us and a couple of transactions like couple of their type transactions where the majority, the facilities are owned acquisitions to get close to that, but that's our goal, 30% to 35%.
  • Operator:
    And next question comes from the line of A J Rice with UBS.
  • AJ Rice:
    Hi everybody thanks, I appreciate, comments on the modern patients program, I was going to ask you related on that joint replacement an issue, we’ve got 108 facilities in those markets, as what you think it going to happen that would see helpful a more volume coming in a way, is an efficient provider but maybe less like to stay and are hospitals engaged with you at this point or they still just trying to figure it out, what’s to do under that scenario?
  • George Hager:
    AJ its obviously that's a tough one to read at this point, at the hospitals are clearly still trying to figure it out. But I think there is going to be motivation to try to obviously provide care to that joint replacement population in a lowest possible cost setting, so I think we do have an opportunity once again because of the unique capabilities that we do have to increase our market share of that population. So I do think admission volumes will grow, I agree with you completely, I do think length of stay will continue to be managed aggressively, but overall we think this is a real positive event, this is why like the capability we have around vitality to you at home, we didn’t get patient out of the center more quickly but follow them home and support their rehab needs through vitality to you back in the community with continuity of the care provider, the rehab provider. I think once again we’ll be delivering and excellent outcome at a lower cost point.
  • AJ Rice:
    I understand, but I’m with you is we have oriented, but give an everything this going on, do you get a little bit interested and just traditional home health nursing as an opportunity or I know you’ve not going to enthusiastic about that some of the others, would you like to say something there?
  • George Hager:
    AJ, our thinking really hasn’t change, I mean one we try to concentrate the business now for more than a decade on the areas of we think we have great expertise. We have physician services, clinical specialization around things like ventilated programs through rehab, our own cast respiratory therapy company. We have largest operator than letter units in skilled nursing in the country. Still not a big part of the business, but we try to concentrate on where we have expertise. We have done in homecare and what we’ve done with vitality to use actually partner with regional and homecare providers. Any of which are subsidiaries of our two care partners who we do not want to compete with. So we’ve been very cautious there and we think there is tremendous upside opportunity on the rehab component of community based rehab component of the needs, of the patient population returning back into the community. We’re going to stay there at this point in time, but we do see significant upside.
  • AJ Rice:
    And maybe just one last one just help me under 16% increase in productivity in the therapy area that seen very high. What was driving that and can you just maybe comment on therapy and then nursing wage is I guess is even this is economy put any pressure or anything that?
  • George Hager:
    I’ll take first crack of that AJ and then maybe turn the wage issue over to Tom and see if he has any additional comments. But there is still such pressure as you know and in the rehab business with changes in things like concurrent therapy, group therapy the most procedure payment reduction and if we go down the list, there has been an intense focus for two years in our rehab company in managing productivity, we actually employed a couple of years ago being consulting that help us redesign a system around how we manage staking at the gym level and as we integrated some and integrated skill and we are better able to deploy that technology and those processes, I think that’s what driven the improvement of productivity and in all candor, even though 70% is a good goal and it’s an improvement over the prior year quarter by 60 basis points. We think there continues to be upside from there in effectively managing rehab productivity.
  • Tom DiVittorio:
    On the wage issue, yes, I mean I would say the wage issue is obviously things that we are sensitive to some rate pressure of the economy, it is obviously stronger, unemployment rates down I would say in certain markets we see some level of the wage pressure that's something we are obviously keeping our eye on very-very carefully. Right now we think we can continue to manage total cost within the level of inflationary rate increased we are getting from both Medicare and Medicaid but it's one we are looking at very carefully.
  • Operator:
    Your next question comes from the line of Dana Nentin of Deutsche Bank.
  • Dana Nentin:
    I guess this relates to margins in the business. Is there any color you could provide whether it is similar to Genesis, how that has performed? And then I guess in terms of the contract rehab business, number of contracts that they have there?
  • Tom DiVittorio:
    Okay. If I understand your question on margin you are asking, are you trying to compare Genesis margin to legacy skilled or just how the margins are performing in the business relative to the past?
  • Dana Nentin:
    Sorry, as it relates to the Riviera transaction.
  • Tom DiVittorio:
    There is upside in that transaction. So as we look at those facilities relative to our facilities in similar markets, they underperformed the Genesis comparable facilities. If you look at the slide 19 that we have provided you we are really trying to guide to next year, you can see that we have provided you what we think the revenue and EBITDAR is. And there is some synergy realization in its estimates and yet the margin there is still lower than what we typically run. So there is some real upside opportunity there, we will take some time I think to achieve not something we are necessarily going to capture in year one, but there is some upside there.
  • Dana Nentin:
    Got it. And then the size of that contract rehab business?
  • Tom DiVittorio:
    The size is very small.
  • George Hager:
    It is very-very small Dana. It was principally captured, there were some level of outside contracts. Our recollection was that there was about of the total EBITDA in the business about a million dollars of it was associated with the third-party rehab contract. So relatively small add to GRS out of the Revera transactions.
  • Operator:
    Your next question comes from the line of Gary Taylor with JP Morgan.
  • Gary Taylor:
    I had just a couple of quick numbers questions on a big picture question. On the, I know on slide 19, you show impact of the HUD refinancing, but trying to back into. Could you just tell us, what is the expected, average interest rate, you’d expect on that 760 million if you close it?
  • George Hager:
    No, I think what we’re thinking right now is it somewhere in the four in a quarter percent range all in. Because there is mortgage insurance that has to be procured as well in the HUD program which I think we would add in the financial costs, so if you include that we are at about 400 quarter.
  • Gary Taylor:
    On salary wages and benefits declined about $40 million sequentially and I was just wondering if any of that got re-class to other expense lines if that purely all of the restructuring efforts driving that.
  • George Hager:
    I think there is a couple of things. We did changed our presentation of our income statement to include general and administrative line but we didn’t provide that in the first quarter as we’ve sort of, I would say made our financial statements more compliance from an SEC disclosure point of view, we have now separated in G&A line. So some of those salaries that you may have recognized last quarter have move down into G&A.
  • Gary Taylor:
    Okay. That combined look to little higher in the labor, look to little lower. One more quick question just FYI looks like on page 13 there is a type just in the EPS referencing after-tax number until the pre-tax number there, but regardless. Why do you do your earnings per share calculation, it looks like that does not include the minority interest coming out?
  • George Hager:
    That’s right. And the reason that we don’t do that, because we’re also reflecting the shares on a fully converted basis. So the assumption here is that all of the existing secondary holders have converted their shares. And in that case, there is no more non-controlling interest.
  • Gary Taylor:
    Okay that make sense and then my big picture question maybe George, I guess when everyone looks at all of these activity around bundled payments Medicare shared savings, BPCI, the new joint initiative et cetera, it seems like is kind of a consensus that higher cost post-acute can see some pressure whether that's [indiscernible] and lower cost facilities that can do rehab like some of your facilities could stand to certainly gain some of that incremental flows that shows, but we could also see some length of state pressure on their existing business and maybe those last couple of days moving to home health et cetera. So when you look at kind of the entire environment is that how you view the world and top of that with your comments around narrow networks you believe Genesis has the type of facility that just going to gain share in that type of environment?
  • George Hager:
    I mean when I comment around any of the other elements of the provider continue on but there is no question there is no insanity or to look at now the total cost of providing the -- for the episode of care, which includes downstream post discharge from sub-acute back in the community, even managing activities in the communities too to minimize readmissions and other cost, I do think that so there is no questions or motivation to provide care in the lower cost setting, and I think to some degree the way of some of these progress have been structure today its quite a little bit of pressure especially on the -- in the sniff world but we see overtime is that, this is not going to be a world for at the moment top operator, this is going to be a world for as you can see compared world of consolidating even some of the acute care in terms of markets are consolidating, just saw the large consolidation of the acute care systems in Orange County and Los Angeles announced this week or last week. Both of them we are in act of discussion with so I think that you can continue to see consolidation and those providers position to really be able to be a meaningful participant and resource to that risk organization, our risk being both managed care payers and provider base target organization. So, we do see the world going that way, I don't think it’s going to flip and change or the thing I think all of these will be incremental as all of these demonstration programs like BPCI and Medicare share savings and CCJR all begin to get some legs. But let me also make this point an environment that is increasingly a managed and managed care based environment. And now so I think the lower cost platforms achieving the outcomes that we can achieve and that’s why we’re looking at really go to resources being able to provide rehab back into community where providers not paying the cost of room and more charges for example or unnecessary let’s say nursing charges when the principal need of the patient is rehab. There was no question is changing, we are much like where we said in the delivery spectrum. And the infrastructure we build Genesis’s physician services and our care transitions model et cetera. We think are going to pay huge dividend this evolution continues.
  • Operator:
    [Operator Instructions] Your next question comes from the line of Dana Hensley with Stephens.
  • Dan Hensley:
    On the HUD refinancing, I guess, I’m getting a little nervous given the history with skilled healthcare and I thought maybe a little further along in the process and you don’t sound like you’re nervous at all. Are there any date we can look at any kind of timeline or it’s just at the way of HUD?
  • George Hager:
    We’re not terribly nervous Dan and that’s because we’ve had a lot of the direct interaction with HUD. And I think this is a really large program for them. This is three quarters of a billion dollar program. And look they’re doing their work, they’re doing their due-diligence, but all the body language all the signaling that we’re getting from them is very-very positive and we’ve obviously talk to them about any substantive issues they have. And look they just want to commit to us a date, but based on all of the signaling and body language we’re not nervous. From a timing point of view, we still think that, let just say we’re very fortunate we got an approval tomorrow. We think that we can get those first 67 properties through the HUD funnel and have closed mortgages on all of them by say the end of January next year might leak a little bit into February. And then we’ve immediately move into the 20 Revera properties get them off of the bridge and then move right to the 20 or 21 facility buybacks with the REIT. So if we got that approval next week Take us into the early to mid part of 2016 to get all this behind us.
  • Dan Hensley:
    Okay. Alright. Thanks.
  • Tom DiVittorio:
    And we do think and we obviously have gotten direct questions about some of the issues that HUD and Skilled when that program was I guess put on some sort of deferral as Skilled was going to through some of their management changes. We think we have adequately, more than adequately addressed those concerns that existed back then when Skilled program was put on for a while.
  • Dan Hensley:
    Okay. Thank you. And then Tom on the cash flow I think your operating cash is negative year-to-date. I think you have talked about being on like $70 million free cash run rate, can you just help break to me from where we are today to that $70 million.
  • Tom DiVittorio:
    Yes. Sure. So you are looking at negative cash flow for the six months of roughly $7.8 million, but what's flowing through there Dan is all of the deal, any of the deal cost in the Skilled transaction that we have funded with cash is depressing that measure. So what you will see when you get the key and taking a little bit of time to actually piece it together we have obviously done that. If you adjust all of the cash that was funded for the Skilled transaction cost we actually had about $54 million of operating cash flow in the first six months, pretty evenly split between the first two quarters.
  • Dan Hensley:
    Okay. Are most of those costs completed at this point?
  • Tom DiVittorio:
    Yes, the vast majority. There will still be some stuff that trickles over the next two quarters, but it's very very small at this point.
  • Dan Hensley:
    Okay. Great. And then last, there is a slide in the deck on the bifurcation case study, which was skilled mix improving nearly 300 basis points, can you just talk about where you are in that program? I think you talked about the new bills but just on the conversions and is there any chance to expand that program beyond the 10 buildings?
  • Tom DiVittorio:
    Dan I would say that the power backed model what we have seen with our steering is much more successful when our new build programs that we bring out of the grounds. I would say we are more focused on the short stage side, on the power-backed side, of identifying sites and trying to accelerate our development program. Our referenced were very active and hopefully finally stage of conversation with two development partners around the development of five additional power-backed centers in existing markets, but we are working to find ways to accelerate the development of our power back, new build power back model, so for getting some of these numbers on the conversion of [indiscernible] to the short stay power back model, probably it put us little behind, when we thought we might be able to achieve this, growth of that magnitude in our skill [indiscernible] On the other hand, we do see an increasing need on the bifurcation strategy to look at long term care specialization, and specially as, you look at things like the lower joint program with CMS, we do see a need to increasingly specialized on around clinical areas like rehab, orthopedic rehab and increasing number of centers. And likewise we need to specialize in long term care indications in increasing number of centers to match our Alzheimer’s dialysis, ventilator services et cetera. So I would say we’re slightly behind our original expectations on when we can achieve this level of two mix change, but we see great opportunity in the power-backed model.
  • Operator:
    And at this time there are no further questions. Presenters hand back for any closing remark.
  • George Hager:
    Now we just thank everyone for joining us this morning and look forward to keeping you all updated as we continue with our progress, thanks. Have a great day and great weekend.
  • Operator:
    This concludes today’s second quarter 2015 earnings conference call. You may now disconnect.