The Ensign Group, Inc. (ENSG) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Ensign Group Fourth Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Chad Keetch, Executive Vice President. Sir, you may begin.

Thank you, Shannon. Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday. This announcement is available on the Investor Relations section of our Web site at www.ensigngroup.net, and a replay of this call will be available on our Web site until 5 PM Pacific on Friday, March 13, 2017. Before we begin, I have a few housekeeping matters. First, any forward-looking statements made today are based on management’s current expectations, assumptions and beliefs about our business, and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements, and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by the federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements, when changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. In addition, certain of our wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal risk management, and other centralized services, to the other operating subsidiaries, through contractual relationships with such subsidiaries. In addition, our wholly-owned captive insurance company, which we refer to as The Captive, provides some claims made coverage to our operating subsidiaries, for general and professional liability, as well as for certain worker’s compensation insurance liabilities. The words Ensign, company, we, our and us, refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center, and our wholly-owned captive insurance subsidiary, are operated by separate wholly-owned independent subsidiaries that have their own management, employees, and assets. References herein to the consolidated company and its assets and activities, as well as of the use of the terms we, us, our, and similar terms used today, are not meant to imply nor should it be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees, or revenue, or that any of their subsidiaries are operated by The Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business; that they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday’s press release, and is available in our 10-K. And with that, I’ll turn the call over Christopher Christensen, our President and CEO. Christopher?

Thanks, Chad. Good morning, everyone. Although we’re disappointed to announce that we did not meet our 2016 annual guidance, there are many lessons that we’ve learned throughout the course of '16 that will help us start 2017 much stronger than we were one year ago. Even though a few of the challenges we experienced in 2016 will impact our performance in only the early part of 2017, most of the challenges we experienced last year have been mitigated, and we expect these lessons to ultimately strengthen us in 2017. More specifically, the Legend transition had a very different start than we anticipated, but it is improving quarter-after-quarter [Audio Gap] challenges are behind us. Also, even though our bad debt associated with the large number of transitions impacted our results, we don’t see the same impact in 2017. As we talked about several times over the last few quarters, our bad debt challenges relate to the sheer number of change of ownership applications we filed over the last two years. Suzanne will discuss this in more detail later in the call, but our dedicated team of service center resources have developed better systems that will drive improvements in our billing and collections efforts, and as a result we expect a significant reduction in our bad debt expense this year. We’re confident that our talented local operators are taking each of their results very personally. Our recent results have served as a reminder to all of us that our success depends on our relentless focus on our core operational and cultural principles that have served us so well throughout our history. We’re very encouraged by the progress that we’ve seen across the organization and are happy to report that these improvements have already started to take effect, and we expect them to continue into 2017 and beyond. We did experience a non-operational anomaly over the prior year, namely our self-insurance accruals spiked quite significantly increasing by more than 6 million over the prior year. That spike was not expected, and while dramatic increases like this are rare, we’re working diligently to structure our employee healthcare programs in a way to provide more predictability. These lumpy insurance accruals are yet another example of why our results are not symmetrical on a quarter-by-quarter basis and why we don’t provide quarterly guidance. Without the unexpected spike in our self-insurance costs, we would have achieved the lower end of our 2016 earnings guidance. But we believe that our operational performance can and should have been much, much better. With that understanding, our focus is on the fundamentals of our business and on driving improvements and performance throughout the year and over the long term. The effects of the slow start at Legend and the distraction to our same-store operations will partially carry over into the very early parts of 2017. However, we are expecting to see meaningful improvement in occupancy, skilled mix, bad debt expense and our cost of services in 2017. Most of our challenges on the occupancy and skill mix front were limited to a few geographies, primarily Texas and Utah, while the rest of our mature operations showed steady results. We also expect the performance in our newer states to accelerate as they mature in their practices of Ensign principles. On the cash flow front, we’ve opened several new facilities in 2016 which have startup losses that create an additional drag on our cash flow. We also made a significant investment in our physical facilities over the last couple of years, in an effort to prepare for the future needs of our patients and their families. As a result, we also anticipate a large decrease in our capital expenditures for renovations, which will positively impact our cash flow in 2017. As Chad will explain in a few minutes, we also announced that we’ve successfully completed the sale of our urgent care operations in Seattle, Washington. As one of our first new venture investments, the urgent care business was primarily led by a long time Ensign leader, Michael Dalton, who worked tirelessly to build an urgent care business from scratch, into one of the largest consolidated operators of urgent care clinics in Seattle. While our intent with new ventures has never been to sell them, in this case we believe that the new owners of these assets, MultiCare Health System, are in a much better position than we were to take our urgent care team to the next level. It also allows us to turn our attention to our post-acute care businesses. We’re very proud of what Immediate Clinic team has accomplished and very pleased with the value that has been created and realized in this sale. But more importantly, we’re excited about the opportunity that MultiCare provided to each of our amazing urgent care leaders and caregivers, and look forward to cheering them on, as they combine efforts to make these state-of-the-art urgent care clinics even better. Beginning in the fourth quarter of 2016, we separated our TSA segment, which included transitional skilled and assisted living services into two new segments, Transitional and Skilled Services and then Assisted and Independent Living operating segments. We’re anxious to share more detail on the performance of our assisted living operations, and believe that this increased visibility will demonstrate the expanding influence these service offerings are having on our entire organization. But even more important than the financial contribution, our assisted living operations continue to strengthen our skilled nursing, home health and hospice operations in many ways that don’t show up in the financial statements, including helping us to seamlessly transition many of our residents into a home-like setting, while improving our organization’s reputation of quality in the healthcare community. On the clinical front, we continue to make tremendous progress with a focus on strengthening outcomes and extending our capabilities to care for more complex patients across the post-acute continuum. We’ve continued to direct time and resources into developing outstanding leaders, investing in the best care pathways and new clinical programs. As a result, we’re seeing significant improvements in key indicators related to outcomes and satisfaction. In addition, we continue to see steady and large improvements in our four and five star facilities, in spite of the many changes to the CMS star rating methodology in 2015 and 2016. Across the organization, we saw a 21% increase in the number of our facilities that achieved a four or five star rating in 2016. And remember, most of the operations we acquire are one or two star operations at the time that we acquire them. As we announced yesterday, we adjusted our 2017 guidance to 1.76 billion to 1.8 billion in revenues and $1.46 to $1.53 adjusted annual earnings per diluted share for 2017. Even though we adjusted our annual guidance for 2017 as of today, our organization now has 76 recently acquired operations for their transitioning of skilled services and assisted independent living services in our portfolio, which is the largest number of operations in that bucket in the organization’s history. Our organic growth potential within our portfolio has never been higher and we anticipate tremendous improvement in the contribution from these operations in 2017 and beyond. Our operational leaders are fully engaged on all fronts to identify and overcome weakness wherever it occurs, and because of them we remain confident that Ensign’s future both near and long-term is very bright. Before we discuss our financial performance in more depth, I’d like to have Chad just provide an update on our recent investment activities. Chad?

Thank you, Christopher. During the quarter, we announced that our urgent care subsidiary, Immediate Clinic Seattle, completed the sale of substantially all of its assets relating to its 14 urgent care operations in the greater Seattle market. The sale of Immediate Clinic, together with the sale of Integrity Urgent Care in Colorado in the third quarter, represents all of the Ensign-affiliated urgent care operations. We recognized a pre-tax gain on the sale of our Seattle and Colorado urgent care operations of 19.2 million dollars with an aggregate sales price of 41.5 million. We also recently announced the acquisition of the operations and real estate of Park Lane West Healthcare Center, a 124-bed skilled nursing and 17-unit assisted living facility in San Antonio, Texas. This asset, which was formerly operated by Brookdale, is subject to a 40-year long-term ground lease and represents an ideal turnaround opportunity, because it combines an outstanding physical facility with a solid core of providers that truly care about the residents and their families. Our Keystone team is planning on offering a wide selection of high-quality post-acute and assisted living services to the residents of a 400-unit independent living operation already located on the campus and to the healthcare community at large. Also during the quarter, we announced that we purchased the underlying real estate of 15 assisted living operations throughout Wisconsin. An Ensign subsidiary has been operating each facility since August 2015 under a lease with a purchase option. With our ownership of this real estate, we are excited about deepening our commitment to the healthcare community in Wisconsin. The purchase further demonstrates that we will continue to acquire and retain real estate. As those who have been following our story know, our real estate assets provide us with significant flexibility with respect to many of our operations. Because almost all of the real estate assets we acquire are underperforming at the time we acquire them, each owned assets provides us with a significant opportunity to create value and to use that value to help maintain a healthy balance sheet and to prepare for future growth opportunities. Since we spun off 96 real estate assets in June of 2014, we have acquired the real estate in 51 of our operations and have purchase options on nine of our leased operations. And of those 51 assets, 48 of them are completely unlevered. As we’ve done in the past, we are in the early stages of selecting certain owned assets that we will be taking to HUD for financing. And as with any HUD financing, the process is long and complex but we expect to complete a HUD-based mortgage transaction during the year. This will allow us to pay down our revolving line of credit and to establish a long-term fixed financing at very favorable rates. As we do so, we add to our liquidity and our ability to acquire well-performing and struggling skilled nursing operations, assisted living operations and startup or early stage hospice and home health agencies. We also announced an increase to our cash dividend of $0.0425 per share during the quarter, which was an increase of 6.3% over the prior year. This is the 14th consecutive year we have increased our dividend. We also announced yesterday that we implemented a new stock repurchase program, which allows Ensign to repurchase up to 30 million of our common stock over the next 12 months. We firmly believe that this new stock repurchase program is an important ingredient of our capital allocation plan, and is a strategic way of creating value for our shareholders. In addition, our recently upsized credit facility and our conservative balance sheet provides us with the flexibility to opportunistically repurchase Ensign shares, while continuing our acquisition strategy. The share buyback program also demonstrates that we and our Board of Directors are confident in our ability to accelerate revenue growth and bolster our already strong balance sheet, as we drive improvements in our same-store transitioning and newly-acquired operations. We continue to see a collection of several smaller attractive acquisition opportunities on the horizon and believe that the market is slowly beginning to favor buyers. As a result, we are seeing more and more opportunities that are appropriately priced and we expect to acquire some of these operations later in the first quarter and early in the second quarter. We continue to be very picky buyers and will continue to remain true for our locally-driven approach to each and every acquisition. And with that, I’ll hand it back to Christopher.

Thanks, Chad. Before Suzanne runs through the numbers, I’d like to offer a few examples of how our frontline leaders and their teams continue to produce record results in a changing operating environment. As with our financial results, there is much improvement – there is as much improvement as ever that can be made within our same-store operations. As an example, the Springs at La Jolla located in La Jolla, California has seen remarkable growth under the leadership of CEO, Matt Stevenson; and COO, Vera Cordova. Their remarkable team of physicians and therapists have transformed the Springs into the standard for rehab services in the La Jolla market, boasting an overall occupancy of over 90% and skilled mix of 99% on average over the quarter. They developed a tremendous reputation for short-term rehab outcomes, lower lengths of stay and a very low hospital readmission rate. As a result, they’ve leveraged these outcomes to become the trusted partner to the key managed-care networks, ACO and physician groups in their markets. Because of their consistency in outcomes through state-of-the-art services, demand for their services in this changing healthcare environment has met all-time highs. The Springs has seen rapid growth in skilled days, which were up 9% over the same quarter last year. Additionally, their EBITDAR was up 118% and skilled revenues increased by over 18%, all while improving clinical results and patient outcomes. As I mentioned earlier, we’re excited to provide you with more specific disclosures with respect to our assisted living operations. Bridgestone Healthcare has been a key part of our success throughout the years and has grown significantly over the past three years, going from 24 operations to 61 as of the end of 2016. As an example of our successes in the assisted living front, we’ve seen some impressive performance from the team at Mountain View Retirement Village in Tucson, Arizona. CEO, Tim Nelson; and Wellness Director, Carolyn Grover [ph] transformed Mountain View into a remarkable operation. Mountain View has a long tenured staff with most employees being there five years or more, who have collectively achieved superior results for many years. However, the team has found ways to improve by creating a five-star dining program, achieving a perfect survey from the Health Department and securing the best reputation in the greater Tucson market, garnering some of the highest accolades in that community. Accordingly, net income improved for the quarter by an incredible 118% on much higher occupancy. In addition, total revenues grew by 667 basis points compared to the same quarter last year. We’ve also been very pleased with the performance of Cornerstone Healthcare, our home health and hospice team, as they continue to add strength to our organization. One example of their progress is Buena Vista Hospice in home health in Ventura County, California. Led by Executive Director, Andrea Doctor; and Director of Patient Care Services, Helen Ottish [ph], Buena Vista Hospice in home health is the provider of choice for many referral sources in Ventura County, California. Buena Vista joined The Ensign family in July of 2015, and Andrea and her team have made extraordinary progress in the last year from a clinical, financial and cultural perspective. Quarter-over-quarter, Buena Vista’s top line revenue grew 11% and its bottom line financial performance increased 115%. These outstanding results came as the agency strengthened its processes and became more efficient in delivering the highest quality patient care. There are many more such examples across the organization and we appreciate you allowing us to share them, since to us there’s no important information we’ll offer today than to tell you that Ensign is literally full of extraordinary leaders and stories like these. These few examples show what makes us different and they illustrate that the opportunity for organic growth in all parts of the company remain more compelling than ever. With that, I’ll turn the time over to Suzanne to provide more detail on the company’s financial performance and our balance sheet and update our guidance, and then we’ll open it up for questions. Suzanne?

Thank you, Christopher, and good morning, everyone. Before I dig into the numbers, I wanted to clarify a few points on our cash flow. As Christopher mentioned earlier, after we acquire a skilled nursing facility, we experience a temporary delay in our ability to collect on our receivables. More specifically, following the transfer of ownership, we undergo a process with Medicare, Medicaid and managed care agencies to transfer the contracts and billing codes to an incentive affiliate account. Our process results in delays in the receipt of payment of our services provided our recently acquired operations, and certain other operations that are participating in alternative reimbursement programs. In addition to the extent we participate in Medicaid quality enhancement programs, we will experience delays of 9 to 12 months on the collection of revenue. As a result, we experienced temporary spikes in our accounts receivable following each acquisition, while we wait for the paperwork to be completed. This temporary delay in collections results in an increase in our accounts receivable and can result in negative free cash flow, which is consistent with what we would expect during periods of significant growth. In addition, these delays have led to an increase in our bad debt in certain circumstances because it causes delays in our contracts and limits our ability to correct errors in a timely manner. We have developed new system procedures to help mitigate these delays and expect our bad debt expense to improve in 2017. In addition, we have opened several new facilities in 2016. With each new opening, we experience a drag on our cash flow as we fully staff and equip a brand new building, and slowly build census over time. Most of our newly constructed buildings are opening in 2016, and we do not anticipate as many opening in 2017. Detailed financials for the year are contained in our 10-K and press release filed yesterday. Highlights for the year ended December 31, 2016 as compared to the year-ended December 31, 2015 included; consolidated GAAP EBITDAR for the year was 252.3 million, an increase of 20.4%. And consolidated adjusted EBITDAR was 262.2 million, an increase of 18.5%. Consolidated GAAP revenue for the year was up 23.3% to 1.65 billion and consolidated adjusted revenue for the year was up 21.4% to 1.59 billion. Consolidated GAAP EBITDAR for the year was 127.7 million, an increase of 5.8% and consolidated adjusted EBITDAR was 150.1 million, an increase of 11%. Same-store revenue for all segments grew by 3.7% to 1 billion and transitioning revenue for the segments grew by 5.1%. Same-store skilled nursing revenue grew by 3.1% and same-store managed-care days grew by 4.7%. Transitioning skilled revenue grew by 5.7% and transitioning managed-care days grew by 7.6%. Bridgestone Health Inc., our assisting living and independent living subsidiary, grew its segment revenue by 35.5 million or 40.3%, EBITDAR by 14 million or 45.7% and adjusted EBIT by 4.6 million or 40.3%. Cornerstone Health Inc., our home health and hospice subsidiary, grew its segment income by 22% to 16.6 million and revenue by 25.5 million to 115.8 million for the year, an increase of 28.2%. Other key metrics included cash and cash equivalents of 57.7 million at December 31 and 150 million of availability on our revolving 300 million line of credit as of February 7. As Christopher mentioned, we are updating our guidance for 2017. We are projecting revenue of 1.76 billion to 1.8 billion and adjusted earnings of $1.46 to $1.53 per diluted share. The guidance is based on diluted weighted average common shares outstanding of approximately 53.7 million. The exclusion of acquisition-related costs and amortization costs related to patient-based intangibles. The exclusion of losses associated with the development of new operations, and startup operations which are not yet stabilized. The exclusion of costs related to the system development. The inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax. And a tax rate of approximately 35.5%. The exclusion of stock-based compensation and the inclusion of acquisitions closed to-date in the first half of 2017. Additional factors contributing to our asymmetrical quarters include; variations in reimbursement systems, delays in changes in state budgets, seasonality in occupancy and skilled mix, the implement of the general economy on our census and staffing, the short-term impact of our acquisition activities, variation in insurance accruals related to our self-insurance programs that Christopher mentioned earlier, and other factors. We want to remind you that we anticipate the momentum to build over time and that we do not evenly spread out our performance between each quarter. As we’ve said before, we expect to return to our typical pattern of strong performance in the latter half of 2017. And with that, I’ll turn it back over to Christopher. Christopher?

Thanks, Suzanne. We again want to thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We also appreciate our colleagues in the field and the Service Center for making us better all the time. I guess we’ll turn the Q&A portion of our call to Shannon. Maybe you can instruct us on what we should do. And I want to remind everybody that Barry Port, our Chief Operating Officer, is with us as well. Shannon?

Thank you. [Operator Instructions]. Our first question is from Ryan Halsted with Wells Fargo. You may begin.

Hi. Good morning.

Hi, Ryan.

I wanted to go back to something you guys have talked about in the past. Just the impact that you’re seeing in some of your markets by the narrowing of networks by some of the managed-care payers. I was hoping maybe you can just provide a little bit more color on how much pressure on occupancy you saw from that. And then I think you feel pretty confident, or you’ve expressed some confidence that going forward you think you could potentially operate effectively through those narrow networks, maybe gain market share that would ultimately offset any pressures you might be seeing on your occupancy or length of stay. My question is just what gives you sort of that confidence? What kind of visibility do you have in some of these payer networks?

Well, I know we’re not here to talk about the first quarter at all but I think I mentioned maybe last quarter or the quarter before, I don’t remember, you alluded to it. But we have prepared maybe prematurely in certain markets for the narrowing of networks expecting that maybe some volume would come that didn’t come, and the narrowing of networks was delayed. And we’ve seen that in a few of our markets. We even mentioned those markets in the script earlier. But we feel confident with the visibility that we have in the first quarter that that narrowing is actually taking place, while it was delayed. We’re seeing the impact now and I guess that’s what gives us the greatest confidence, is that we’re seeing it happen. Otherwise, we’d just be hoping I guess. But I’ll just use one example, and I don’t know – in northern Utah for instance, where we have a dozen or so operations, almost every one of those is included is this narrowing of networks and you will see the largest participant in Medicare Advantage managed-care programs has narrowed the network from I think 90-some odd, I don’t want to get it wrong, so 90-some-odd facilities down to 30-some-odd facilities. And given that half of those are rural, you really are going from about 80-some-odd metropolitan facilities, down to just the teens. And so you can imagine that those are spread across 80 metropolitan facilities and now it’s spread across just 15, 16, 17, whatever the number is, it’s going to be a dramatic increase in our occupancy and dramatic increase in – you’ll still have shorter length of stay, but with that kind of volume coming through your operations, you’ll see a dramatic increase in occupancy. And that’s just one example.

Okay, that’s helpful. And then you highlighted some of the impressive EBITDA growth in your home health and hospice segment. Was there any particular markets where you saw the most impact or the most growth?

In terms of improvement in EBITDA?

Yes.

It was spread pretty evenly across most of our – we have some smaller operations where we didn’t see that kind of growth, but it’s spread pretty evenly across the western states in particular. So if you made me say states, I’d say, Idaho, Washington, Colorado, Oregon. We actually didn’t see it as much. We have a lot of opportunity in California where most of our new acquisitions are, and we haven’t really benefited from that yet. So we’re pretty excited about what that means for 2017 in the home health and hospice arena.

Okay. But are there – so is it fair to assume though that in some market where you did see these narrowing of networks, that your home health and hospice segment potentially was there to sort of complement the services that you offer in your skilled nursing facilities and was that part of the benefit you saw in that segment?

That’s probably a smart conclusion. I don’t know that that’s the case in these particular markets though, Ryan. I actually until you said that didn’t really think about it. I don’t know that they benefited from that delay, or from – I just don’t think that that’s the case. But that’s smart thinking.

Okay. And then your two larger competitors announced a collaborative partnership, Kinder and Genesis. I was just curious what your thoughts were for that type of partnership. Is that something that you view as something you might consider, or how much of a competitive threat do you think that could be in your geographies?

Yes. Look, I’m not going to pretend to understand why they did that or what the – or nor am I going to criticize because I don’t understand it well enough to have any comment on it. I think we still feel like we have to be very focused on the individual markets, because the clinical expectations, the regulatory expectations as we’ve learned through great experiences and some not so great experiences, are very particular market-by-market. And I think that we feel like it’s better to focus on each small market than it is on large. But again, there may be something there that I don’t understand. So I’m sorry I’m not very helpful on that.

Okay.

One quick comment on that though, Ryan, just to Christopher’s point. I think that ultimately – historically, relationships have been very important but I think the environment we’re seeing ourselves move into now, it’s really performance based. And so regardless of what relationships we’ve had in the past, they are important. They get us in the door. They allow for dialogue. The winners and losers are going to be selected based on outcomes. And so our focus has been on relationships certainly and we have good ones both with acute hospital providers, with ACOs, with managed-care providers, with physician groups. But our focus really has been on making sure our outcomes are there, that we have the data to measure ourselves against and we’re driving to the lower length of stays, the lower readmission rates, because ultimately that’s what’s going to matter most. That’s where the payment is based out of.

Okay, great. Thanks for taking my questions.

Thanks, Ryan.

Thanks, Ryan.

Thank you. Our next question is from Chad Vanacore with Stifel. You may begin.

Hello?

Hi, Chad.

Hi. So I’m just looking at same-store occupancy which dropped quite a bit and I was wondering what kind of factors you’d point to there that were impacting that line item?

Yes. It would be too difficult on our accounting group to have them report on every single area, but I will tell you I think we mentioned that the vast majority of that, really all of it, was impacted by two states and that’s Texas and Utah. And I think the Utah was related to the delay in the narrowing of networks and I think the Texas was related to a bit of a distraction, as we talked about last year, with the large Legend transaction. And we feel confident that you’re going to see a good improvement in those two areas. And as you do, it will impact the overall, because we have seen a strengthening of same-store performance in most of the states that we’re in.

Okay. And Christopher, can you go into a little detail – more detail about the narrowing of networks in Utah?

Yes. So I’m not sure what I can say to the whole world. There is one organization that controls the lion’s share of Medicare Advantage residents, patients and they for good reason decided to delay that narrowing of networks that we thought was going to take place in the summer, and then we thought it was going to take place in the fall. And it finally has taken place and we’re seeing a fairly dramatic improvement in our – well, it’s dramatic for us. It just isn’t – it’s not the lion’s share of our portfolio. But when you go from utilizing – when an organization that sends out that many patients goes from utilizing 90-some-odd facilities to utilizing 30-some-odd facilities, and I know I just said this, and half of those are rural, so you’re really going from 80 down to about 15, 16, something like that. I might be off by one or two. You can imagine the dramatic increase in volume. And in preparation for that, we probably thought we were going to benefit from that a little too early and maybe left a few beds open that we ought not to have, and changed some of our practices in preparation for that, because there are expenses associated with gearing up for a large amounts of referrals, large amounts – I shouldn’t say referrals, of admissions. And so we probably had some costs we ought not to have had, but more important on the census front, we thought they were coming sooner than they came. The good news is they’re coming now and we’re excited about what that means for '17.

All right, that’s great. And then this may be related, but also Medicare payment per day dropped pretty significantly. Was that to do with the narrowing of networks or was it transitioning of portfolio in Texas, or something else?

No. We talked about that last quarter that we had that supplemental payment in one of our states that was an increase that we recognized in Q3, that wasn’t going to be to the same level in Q4. And so if you go back on that, you’ll see that that amount was the key format. It wasn’t a drop per se, but we had a spike in the Q3 when you’re looking sequential quarters and I think that’s what you’re referring to.

Okay.

That makes sense.

Yes. Thanks, Suzanne. And just one thing about the Legend portfolio. Can you tell us what you’re doing there to improve operations? And is it focused around clinical, labor, collections, maybe something else?

Yes.

Yes to all?

Really all. I will say that they actually did a better job than most of our acquisitions have done and we have done a better job in managing that transition from a collections standpoint, which is one of the reasons we don’t think we’re going to see the same spike in bad debt, as we go through the latter part of a year in that transition. But other than that, even on the collection front in probably a third of the facilities. And in terms of the census, the census had declined rapidly prior to us taking the facility and I think we perhaps foolishly thought we could turn it more rapidly than we really could in a declining environment. And then there also were some lessons to be learned. I mean there are some expectations we have out of our local leaders that maybe they weren’t accustomed to in terms of daily consistency of costs. It’s not lowering or higher-ing of costs, it’s just being consistent every day so that we have happier people that are working there and obviously that saves us money as well. So it’s all of those areas. And then on the – we are seeing improvement in overall occupancy. But Chad, when you have something that large that’s declining the way it was declining, it’s probably my fault, but I thought we could get it turned much more rapidly as we generally do in these acquisitions. But it was just a larger thing for us. We still think it’s a great acquisition. Over the next 10 years – even over the next year, we think we’re going to be thrilled that we did it. But boy, it was tough.

I think you saw the impact on the same-store as well, because those people were really helping – our existing operators were really helping the new Legend operators to turn it, and so that’s why it impacted. I mean not just the Legend impact. It’s the impact on the same-store occupancy as well and I think that that’s what we underestimated.

We’re glad Suzanne’s talking, Chad. She’s not feeling great.

I feel bad making her speak now. But one last question, Christopher, on that portfolio that’s been having issues. Would you classify that as it’s now stabilized and working its way up, or would you say there’s some more bleed into 2017 before it turns around?

It depends on what your stance is. From where we were, it’s definitely turned around and heading in the right direction. From where we thought it was when we first did the transaction, we’re still not there yet. So I would expect that it will be two or three quarters before it is what we thought it was at the time that we did the transaction, but it’s still vastly improved over what it was in the second and third quarter now. Does that help?

Yes. That’s great. I’ll hop off. Thanks.

Thank you, Chad.

Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Christopher Christensen for closing remarks.

Shannon, thank you for your help. And thanks to everyone again for giving us your time. We’re very excited to have 2016 behind us and excited about what 2017 is going to bring at Ensign. So thanks again for your time.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.