Brookdale Senior Living Inc. (BKD) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You have joined Brookdale Senior Living's Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder this conference maybe recorded. I would now like to turn the call over to your host, Kathy MacDonald with Investor Relations. Ma'am, you may begin.

Thank you, and good morning, everyone. I would like to welcome you to the second quarter 2018 earnings call for Brookdale Senior Living. Joining us today are Cindy Baier, our President and Chief Executive Officer, and Teresa Sparks, our Interim Chief Financial Officer. I would like to point out that all statements today, which are not historical facts including all statements regarding our guidance may be deemed to be forward-looking statements within the meaning of the Federal Securities laws. These statements are made as of today and are subject to various risks and uncertainties. Forward-looking statements are not guarantees of future performance. Actual results and performance may differ materially from the estimates or expectations expressed in those statements. Future events could render the forward-looking statements untrue and we expressly disclaim any obligation to update earlier statements. Certain other factors that could cause actual results to differ materially from our expectations are detailed in the earnings release we issued yesterday, as well as in the reports we filed with the SEC from time-to-time including the risk factors contained in our annual report on Form 10-K and quarterly report on Form 10-Q. When considering forward-looking statements, you should keep in mind those factors and the other risks factors and cautionary statements in our SEC filings. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. Also please note that during this call we will present our GAAP and non-GAAP financial measures. I direct you to our earnings release and our supplemental information, which may be found on the Investor Relations page at brookdale.com and was furnished on our 8-K yesterday. For important information regarding the company's use of non-GAAP measures including the definitions of each of these non-GAAP measures and a reconciliation of each such measure from the most comparable GAAP measure. With that, I would like to turn the call over to Cindy.

Thank you, Kathy. Good morning to all of our shareholders, analysts, and other participants, welcome to our second quarter 2018 earnings call. As always, we appreciate your interest in Brookdale. This morning we will provide an update on our turnaround strategy, our second quarter 2018 results and outlook. Before I speak about the three pillars of our strategy, I'd like to take a minute to highlight the Board of Directors announcement we made last night and talk about our recent transaction with Welltower. I would also like to welcome Rita Johnson-Mills to our Board of Directors. Rita brings more than 20 years of healthcare experience including serving as the President and Chief Executive Officer of UnitedHealthcare Community Plan of Tennessee which serves more than 0.5 million healthcare consumers. Her expertise in healthcare operations and strategy will be extremely valuable if we continue to execute our turnaround strategy. As a side note, given that approximately 80% of healthcare decisions are made by women, over 75% of caregivers are female, and 65% of care recipients are female is exciting to see our Board continue to evolve to more closely resemble our customer and employee base. Starting at the top of our organization, we are committed to performance and it has well established the companies with diverse teams are more likely to outperform their peers. I am pleased that we reached a win-win agreement with Welltower at the end of June. As we announced in our press release yesterday, we reflected to Welltower early lease termination in our 2018 outlook. Teresa will provide the details in a few minutes. As a result of this agreement, our contractual rent payments over the life of our leases will be reduced by approximately $600 million. Also we will improve our ongoing cash flows and overall lease coverage at the properties we missed in Welltower and will reduce our lead exposure, while offering long-term stability for the remaining Welltower portfolio. It is worth noting that in the last year we have significantly restructured our lease portfolios with our three largest REIT partner. This allows us to improve our operation while providing strategic flexibility and we are continuing to look for mutually beneficial opportunities with our repartners. Now let’s turn to discuss the progress we're making to turn around our business by winning locally. Let me remind you of our three strategic priorities. First, attract and retain the best associates. Second, earn resident and family trust by delivering high quality care and services to create Brookdale advocates and generate future resident preferrals. And third, drive attractive long-term returns for our shareholders. Let me start with our associate's priority. The top three leaders in each community set the standard for the rest of their teams to provide the best service to residents and win locally. Therefore it is critical that we have the sales team supporting and coaching the top leaders in our communities. At the beginning of the second quarter, we reduced the number of regions and improved the span of control. By the beginning of June, we had also completed the vertical realignment of our sales organization, so community level sales associates now report to sales leadership. In June, our contact center implemented extended hours and now operates seven days a week. Early results show that our speed to lead is having a positive impact on connecting us with more prospects. All of these changes enable Brookdale to become more agile where the contact center is able to drive more high quality leads, sales directors are more focused on converting leads to move-ins, and executive directors have the ability to make decisions more quickly for their residents and associates. Let me share a community example of this is already making a positive difference. Now that we have further empowered the executive directors, they are using these local decision rights to resolve resident issues more quickly which is positively lowered controllable move-outs. This is good for our residents and the results are also energizing for our associates. On Page 8 of our Investor Presentation, you can see the executive directors and health and wellness directors trailing 12-month retention rate improved 2% on a year-over-year basis, and the rate increased nearly 100 basis points sequentially from the first to second quarter. We're also making good progress with our sales directors. Trailing 12-months voluntary turnover improved each of the past four months. The sales directors trailing 12-month retention rate improved 5% on a year-over-year basis and sequentially the rate increased 40 basis points. Turning to our second strategic priority. We believe providing quality care to our residents will improve RevPAR and occupancy. Teresa will provide the details so I will highlight Brookdale's second quarter results in relation to the NIC data. The competitive landscape continues to be difficult. The recent second quarter NIC data evidenced this with a large number of new openings and a corresponding negative impact on industry occupancy. On a positive note, construction as a percentage of inventory slowed sequentially. At Brookdale, we've taken proactive steps to soften the negative impact to our real estate changes and G&A optimization. This will put us in a position to capitalize on the future silver wave of demographic trends. The second quarter NIC data reported a decline in occupancy of 40 basis points sequentially and 80 basis point year-over-year. Overall, our second quarter same community occupancy decline was slightly less than the NIC on a sequential and the year-over-year basis after adjusting for the difference in product mix. The industry as a whole showed more pressure in the Assisted Living category. Since Assisted Living is a larger part of our business it massed the positive news that our retirement centers or independent living in NIC terminology delivered solid occupancy improvement year-over-year and sequentially. Occupancy is a good segue to update you on our leading indicators which we committed to share consistently. On Page 9 of the Investor Presentation, you can see in the second quarter we improved three of our four metrics on a same community basis. Leads were up 11% on top of the strong second quarter of 2017. First visit continue to show a positive sequential trend, move-ins were lower. Our efforts to drive leads and first visits through a reorganization of a sales team and extended contacted center hours has shown early signs of effectiveness. Controllable move-outs improved 8% on a year-over-year basis. As I mentioned earlier, we were pleased with our progress. With the improvement of controllable move-outs, we saw a slight sequential improvement in occupancy from May to June and we continue to see occupancy build in July. This year's trend is ahead of last year when our occupancy didn’t turn positive until July. Turning to the final strategic priority, our shareholders. I want to update you on our real estate strategy of opportunistically creating value from asset sales. I previously announced our intention to sell approximately 30 owned assets. A majority of these assets are part of the portfolio optimization grouping, or several are high performing communities. We believe that we are close to selling one of our high valued assets and we have nearly finalized the agreement for the large portfolio of approximately 20 of the assets we mentioned last quarter. The Board and I continue to access a capital allocation options related to the future proceeds of these asset sales. I expect to address this topic later this year. As I reflect on the second quarter, let me point out that our organizations efforts are not yet fully reflected in our financial results. We're making good progress on all our strategic priorities on monetizing select assets, empowering community leaders, and enhancing our care and services to residents, and I look forward to sharing financial good news in future quarters. I will turn the call over to Teresa.

Thank you, Cindy. My remarks today will focus on three primary topics. First, given our significant announcement with the Ventas and Welltower this quarter, I’ll provide a progress update on the real estate strategy. Then, I will discuss our second quarter 2018 financial results, and finally our 2018 annual outlook. From a portfolio perspective, we are delivering on our real estate strategy to streamline our lease portfolio, while improving our cash flow and opportunistically creating value from select owned real estate properties. We expect the composition of our portfolio to have a higher concentration of owned assets. Let me start the discussion with an update on our real estate strategy and highlight the significant progress with our three largest rate partners. We created a new squad in our most recent Investor Presentation posted on our website. We believe Slide 19 will be a helpful tool to understand our announced transactions and the status of the various pending activity. During the quarter we were pleased to announce several transactions. Later in my remarks, I will discuss how these are reflected in guidance. In April we announced the restructuring an extension of our portfolio of communities leased from Ventas. As discussed in the last earnings call, the transaction improved to near-term cash flow and provides us with the opportunity to streamline the portfolio. In June we announced an agreement with Welltower also focused on improving our ongoing cash flows. Effective June 30, 2018, we terminated early the triple net leases for 37 communities and sold our equity interest in RIDEA joint venture that covers 15 communities. The lease termination fee net of our proceeds from the sale of the RIDEA venture was approximately 23 million. In addition, we announced that we will not renew two master leases covering 11 communities that will mature in September 2018. Further streamlining is available through lease terminations on communities with aggregate annual base rent of up to 5 million upon Welltower sale of such communities. In addition during the quarter, we continue to make progress with HCP on transactions we announced in 2017. We terminated leases on 10 communities, terminated management agreements on seven communities, and acquired five communities. We expect the remaining terminations to occur throughout the remainder of 2018, however they remain subject to various closing conditions and regulatory approvals. On our own real estate strategy, we refined the list of assets from approximately 30 to our current expectations of selling 28 assets. We still expect to generate proceeds in excess of 250 million net of associated debt and transaction cost. Of the total 28 communities, two were classified as assets held-for-sale as of the end of the second quarter. One, was a high valued asset and the other was a portfolio optimization asset. The remaining 26 assets are not contemplated in the pro forma, however we provided the estimated financial information on Slide 19 of the Investor Presentation. In summary, since the beginning of the second quarter of 2017, and through the second quarter of 2018 we have disposed of 94 communities through sales and lease terminations. This activity resulted in a net 44.5 million left in residency revenue and 36.9 million left in facility operating expenses for the second quarter 2018 compared to the prior year quarter resulting in a reduction of 4.3 million in adjusted EBITDA and 1.8 million improvement in adjusted free cash flow. Turning to the second quarter 2018 financial results. Our results were generally in line with our expectations. Our 2018 financial results when compared to the prior periods of 2017 reflect the significant changes in both our leased and owned asset portfolios. We provided a pro forma view of our second quarter 2018 and on year-to-date results in our Investor Presentation on Slide 21 and 22. For the second quarter of 2018, total revenue was $1.16 billion compared to $1.19 billion in second quarter of 2017. This 2.6% decrease reflect the disposal of communities through sales and lease terminations, and reflects lower occupancy which was experienced industry wide. Next, I'll provide you with the details about senior housing, and then ancillary services. For our senior housing communities, the best way to analyze the business is to use consolidated same community results. This is due to the execution of our real estate strategy impacted reported comparability. Same community revenue declined 0.3% compared to the prior year. The second quarter year-over-year rate increase mitigated some of the decline in occupancy. As a reminder, our business is seasonal. Based on our history, the highest decline in occupancy is usually in the first quarter due to post holiday, flu, and winter related death. In the second quarter, occupancy is normally down and recovering from the first quarter low point. A turn to higher monthly occupancy usually happens in the second quarter. We're pleased that our occupancy turned positive from May to June, which is earlier than last year. And the positive trend continued through July. The second quarter 2018, same community senior housing portfolio weighted average occupancy was 84.3%, a decline of a 100 basis points compared to the second quarter of 2017, and sequentially lower by 50 basis points from the first quarter of 2018. Our second quarter same community RevPOR growth of 90 basis points over the prior year reflects positive in-place resident rent growth, somewhat offset by the use of incentive to manage occupancy through 2017, due to a competitive environment. To recap, over the past three quarters, we saw our negative mark-to-market on move-in shrink. In the third quarter 2017 mark-to-market was approximately minus 6%, moving to minus 3% in the fourth quarter, minus 2% in the first quarter 2018, and minus 1% for the second quarter. Our second quarter 2018 consolidated same community senior housing operating expenses increased 3.2% compared to the prior year quarter, with the labor and benefit cost being the main driver. Same community total compensation increased 4.1% for the second quarter and 5.1% year-to-date compared to the prior year period. This reflects wage pressure due to a tight labor market, plus our intentional above industry investments in key leader salaries, along with more robust benefit to improve our ability to recruit and retain the best associates in the industry. As a result of lower revenue and increased investments in our communities, along with increased operating expenses, our same community operating income decreased 6.6%, an improvement from the first quarter year-over-year comparison. Moving to Ancillary Services, we earned $10.2 million of segment operating income during the quarter. While lower than a year ago, we saw a sequential improvement from the first quarter 2018 with segment operating income margin improvement of 180 basis points. Our second quarter revenues stabilized with a slight decrease of $337,000 or 0.3% on a year-over-year basis. The decline was primarily driven by home health. The home health business continues to have lower business. However, we are seeing progress especially beyond our community walls. Medicare reimbursement rates are lower than a year ago. As we have described in the past, the residents at our communities utilize our home health services, are a unique base of patients, as they reside in an environment that provides personal care and oversight, unlike a traditional patient residing at home. As a result, we have historically experienced a lower ratio of nursing to therapy visits. Similar to the goals outlined by CMS, our delivery of services will continue to evolve as we move toward a more value based system. From an expense perspective, we are increasing our efficiency and delivering care through essential in-take process, and consolidated several agencies to decrease overall cost. On the positive side, hospice revenue increased by approximately 25% for the second quarter on a year-over-year basis. The Company's general and administrative expense was $60.3 million for the second quarter 2018, 10% below the prior year quarter. This is mainly due to the G&A rationalization we made earlier this year. We generated adjusted EBITDA of $147.2 million excluding transactions and organizational restructuring costs of $5 million. This compares to the second quarter of 2017 adjusted EBITDA of $164.2 million, excluding transactions and strategic project costs of $3.9 million. In general, the key drivers of the lower year-over-year adjusted EBITDA were approximately a $10 million decline related to the disposal of communities through asset sales and termination of leases and management agreement. $15 million of increased same community operating expenses mainly driven by our intentional above industry investments in select community leadership salaries, along with more robust benefits. These were offset by $8 million lower G&A mainly from the rationalization we initiated earlier this year. Our adjusted free cash flow was $12.4 million for the second quarter of 2018. In addition to the factors impacting adjusted EBITDA, the most significant impact was due to planned increase of capital investments of $8.8 million, of which $3.5 million was related to the remediation of damage from last year's hurricane and the State requirement of generators in Florida. On a sequential basis, we saw an improvement in adjusted free cash flow, from $5.5 million in the first quarter 2018 to $12.4 million in the second quarter 2018. This improvement was largely related to the G&A rationalization made in the first quarter 2018. As you look at the net cash provided by investing activities for the six months ended June 30, 2018, on our cash flow statement, the largest item is related to acquisition of HCP communities. We financed the community acquisitions with non-recourse, mortgage financing, and the proceeds from the sales of our 10% ownership, and two unconsolidated ventures with HCP. Another significant event was the sale of marketable securities to pay off the convert. Our proportionate share of adjusted free cash flow of unconsolidated ventures was $5.8 million in the second quarter 2018, and below the prior year primarily due to the sale of our interest of those ventures since the beginning of the prior year quarter. As of the end of the second quarter 2018, our total liquidity including our line of credit availability was $487 million. In the second quarter of 2018, we paid off the $316.3 million convertible senior notes that matured in June. This is the primary reason for the sequential change in liquidity. We have reasonable debt maturities over the next five years. Of our total debt outstanding, 94% is non-recourse asset backed mortgage debt. Based on our balance sheet position, our plan is to further optimize our portfolio and improve the positioning of our communities, we will continue to asses capital allocation options. To summarize our year-to-date performance, we're seeing positive momentum in our business with sequential improvement in adjusted EBITDA and adjusted free cash flow. Turning to our 2018 guidance, let me first summarize how the second quarter announced transactions are reflected in guidance. Starting with Ventas, since we announced the agreement prior to our first quarter earnings call, the current year $5 million rent credit was included in the guidance we provided in May. Turning to our Welltower agreement, we announced that we will not renew two master leases covering 11 communities that will mature in September of 2018. This was anticipated and therefore included in our guidance. However, we had not contemplated the early termination of the triple net leases for 37 communities, nor the sale of our equity interest in the existing RIDEA joint ventures in our guidance. When we announced the transaction, we provided an estimate of cash lease payments of approximately $60 million on a trailing 12-month basis and said we would provide the classification of those payments during this earnings call. The estimated cash lease payments classified as operating expense is approximately $45 million to $50 million, resulting in an EBITDA decline of approximately $10 million. Lastly both the Ventas and Welltower agreements have the ability to further streamline the portfolio through lease terminations on communities with aggregate annual base rent of up to $30 million and $5 million respectively. These transactions are not expected to close this year and therefore not included in our guidance. As a result of the Welltower agreement, we have updated our outlook to reflect the financial impact to adjusted EBTIDA of approximately $10 million. We now expect our full year adjusted EBITDA excluding transactions in organizational restructuring cost to be in the range of $535 million to $565 million. Our adjusted free cash flow expectations for 2018 remain unchanged. As we previously stated the merits of the Welltower transaction were to improve our ongoing cash flow. I'd now like to turn the call back over to Cindy.

Thank you, Teresa. We are committed to our turnaround strategy and improving our operating performance for the benefit of the company and for our shareholders. We know we must win locally. In June, about 20 members of our senior leadership team worked in communities across the country. These were not tours. Over the course of a week we prepared and served meals, cleaned rooms, and worked the overnight shift. We walked in the shoes of our community associates, built relationships and gained a better perspective of what needs to be done to win locally. We came back with a renewed focus on what it will take to turnaround our refined company and most importantly provide the best care for our residence. We also came back with the knowledge that we are on the right track. Thank you for your time this morning. Teresa and I are happy to answer questions now. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Brian Tanquilut of Jefferies. Your line is open.

I guess, the first question for Teresa, just to clarify so as I think about guidance basically you are reiterating everything and everything is basically tracking to your assumptions outside of the Welltower $10 million impact. Is that the right way to think about that?

That is correct. We gave some financial metrics when we announced the transaction and committed to following up with the additional details, which resulted in the impact that we've highlighted in terms of guidance, everything else we are reiterating.

And then Cindy, on this slide that you alluded here earlier Page 9 or Slide 9 with the move-ins and the leads in first visit. How should we be thinking about the fact that if the leads were up, first visits were up, but the move-ins were down in the quarter, like, how are you viewing the lag between first visit to move-ins and what else can you do to drive move-ins in that situation?

So we basically made a lot of changes as we mentioned in our sales profits during June extending our call center hours and that allowed us to increase the number of first visit hand, which I think is good. It does take a lag, between the time someone visits the community and the times they ultimately move-in. So we would expect to see some improvement in the third quarter. I will also say that there is a very competitive environment with lots of new deliveries in the second quarter and we think that is reflected in our results. Moving forward our focus is going to be making sure that we've got the right sales directors in our communities. Making sure that they are getting the right coaching and mentoring so that we can assist our residents on the journey to Brookdale.

And then I guess one other question for me, Cindy in the past you’ve talked about the 30 units that you’ve put up for sale and how there was a limit because of your previous credit facilities. So now that you’ve paid off the convert and presumably you have new credit facility in place. Does that mean that you are able to add to that 30 unit portfolio of assets that you’re looking to monetize?

So the limitation was actually in our credit line and not our converts. We’re very excited to able to repay the converts during the second quarter as we had planned. We still do have the limitation in the credit line. We’re working on a new credit line and we would expect have fewer limitations sometime before the end of the year?

One last question from me, anything in Q3 that you would call out from a sequential basis other than typical seasonality on occupancy? Thanks.

I think that we were pretty happy that we had sequential improvement in adjusted EBITDA and adjusted free cash flow. We were also happy with the sequential improvement that we saw in our ancillary services business. In a very difficult competitive environment we’re happy that we're making progress on executing our turnaround strategy and that starting to be reflected on our performance. Thanks for the questions Brian.

Thank you. Our next question comes from the line of Chad Vanacore of Stifel. Your line is open.

So I'm just thinking about the occupancy statement that you made. So what gives you confidence that you'll gain back some occupancy by year end. And should we expect Q2 to be the lowest level of occupancy in a year you’re sitting somewhere around 84.1%?

Thanks for the question Chad. It’s nice to talk to you. So what I feel good about with regards to occupancies that we’re controlling the things that we can control. There is no question it’s a difficult macroeconomic environment. But in the first quarter and the second quarter, we really focused on executing our turnaround plan and compared to the NIC data I think we outperformed the industry on an adjusted basis when you take in consideration that we have more assisted-living in our portfolios than the rest of the industry. So again I think we had outperformance relative to the industry on a comparable product type. Now if I look at our second quarter, what we saw is June our occupancy improved over May and that trend continued into July which gives me confidence that we’re on the right trajectory to improve our occupancy through the remainder of the year. Now normal seasonality is you build occupancy in Q3 and Q4 is flat to slightly down but I do hope that will end occupancy higher than we are today.

And then just looking at your changing guidance, you laid out nicely that reflects dispositions, lease termination but what core NOI growth expectations are baked in there?

Yes, so Chad the metrics we pointed to really originally issued our guidance with occupancy slightly lower than prior year low single-digit growth on rates all that remains in place. And we had pointed to BHS revenue in the 440 to 460 range that stays in place. So really the only change as we pointed out is really the Welltower agreement.

All right and beyond that have you identified any of the future sales that there is 26 assets that are owned have really not been identified yet. But you got in your Welltower and Ventas agreement you got a certain quantity of rent which the assets were yet to be identified, have you thought about that a little bit more?

Yes, this is Cindy. So the 26 assets we know what the 26 assets that we’re planning to sell are, we’re in the process of marketing those assets and we’ll talk about it later in the year. With regard to the Ventas agreement, we have a team that’s been working on identifying the assets that we would like to have sale sold. We haven’t notified Ventas yet but we’re pretty far along on that and would expect to make some progress on that in the third quarter.

What about Welltower?

Welltower we haven’t identified the assets that we would like to change there. I think that it is something that we're taking in a very focused paced approach. And that’s something that we’ll talk to at a later point.

Thank you. Our next question comes from the line of Joanna Gajuk of Bank of America. Your please.

So this was follow-up on the guidance right, so understand that EBITDA guidance change for the Welltower transaction. But I would have expected that free cash flow I guess guidance would improve because as you talk about it indicated before that this would be free cash flow added as transactions. So is this some sort of offset to free cash flow impact for the transaction this year?

Yes, so when we announced the transactions and provided the details, we felt we had a good handle on the cash flow impact which really the cash flow economics led this deal, they've led both of these deals and it’s been less focused on EBITDA and more focused on the cash flow economics. And so if you’ll touch back to that deck those cash flow economics remain in place what we had needed to provide you on the cash lease payments of 60 million that was in the Welltower deck. We need to provide you with a breakout of operating lease versus capital lease. So you could circle up the EBITDA impact which we've provided. So if you think about the deal having a call it $14 million to $16 million positive cash flow impact, some of that would be realized through rationalization of G&A overtime, that’s not something you would see immediate but over time. And it doesn’t reflect lease escalators in the future which would obviously have a bigger cash flow impact as you think about those agreements that were in place.

The other point that I would make Joanna with regard to 2018 is CapEx isn’t pro rata throughout the year. And so that's something that you need to take into consideration in terms of the timing sometime moves and there are transaction costs associated with any agreement. So, we’re still very confident that will get the adjusted free cash flow benefit but that doesn’t necessarily mean that half of it shows up in 2018.

And then with the G&A changes that how long would it take, should we expect to see some benefits of that earlier in 2019 or should for a little bit later in 2019 to see those really to this Welltower transaction?

I think you’ll start to see that emerge in early 2019.

And then if I may, just sit to closer look here on some discussions around labor cost I understand there are some investment you make here in your labor force but also in the tax here in the press release talking about the ancillary services segment. You mentioned labor cost increases so can you flush that out is there something specifically around just wage pressure or shortages or is it similar to senior housing segment investments that you’re making?

It is similar pressure in terms of the labor force and the investments that we need to make there. One thing I would point out that we also highlighted in the release is that, as we expand our hospice services that very much is has the - attributes of the de novo. So there's some buildup in cost before the patients that flow and that book of business starts to build.

And finally the very last question sort of longer term I guess outlook in a sense of your views around the home health proposal on the Medicare home health proposal and the changes that will be taking place in 2020. So how are you thinking about the impact to the payment rates or the structure they’re calling forward. Are you anticipating changing or reducing exported to home health going forward base on those reimbursement rates?

Now let me start with the good news. In 2019 we’ll see a 1.41% increase in reimbursement that is very good news for the business. Now I’m sure that you know that the patient driven grouping’s model is budget neutral for the industry as a whole. Now because of the unique characteristics or the population that we serve, we do have a lower ratio of nursing to therapy. Now as CMS to couples therapy that will impact our rates. Now there are opportunities that we see to reduce cost as we transition to a new model, increasing our efficiency to things like central intake and consolidating some agencies to reduce our costs. We'll also need to make sure that we focus on recertification as the CMS guidelines move to 30 day episodes. And I think that we will start looking at our Ancillary Services model, our SNIF model, and our home health business, really as a single entity going to market. We are really focused on providing value based solutions and this is what we are focused on for the future.

Thank you. At this time, I'd like to turn the call back over to President and CEO, Cindy Baier. Ma'am?

So I want to thank everyone for joining us this morning, and we look forward to talking with you again soon.

Thank you, ma'am. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.