Select Medical Holdings Corporation (SEM) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for joining us today for Select Medical Holdings Corporation earnings conference call to discuss the fourth quarter and full year 2012 results and the company's business outlook. Speaking today are the company's CEO, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter highlights and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I would turn the conference call over to Robert Ortenzio. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us for Select Medical's Fourth Quarter and Full Year's Earnings Conference Call for 2012. For our prepared remarks, I'll provide some overall highlights for the company and our operating divisions, and then ask Martin Jackson, our Executive Vice President and Chief Financial Officer, to provide some additional financial details before opening the call up for questions. Our reported earnings per fully diluted were $0.28 in the fourth quarter compared to $0.25 in the same quarter last year and $1.05 for the full year compared to $0.71 for the prior year. In both 2011 and 2012, the company's reported earnings included nonrecurring loss on early retirement of debt. Excluding these losses and their related tax effects in both periods, adjusted net income per share was $1.07 for 2012 compared to $0.84 for the prior year. Net revenue for the fourth quarter increased 3.2% to $741.1 million compared to $718.4 million in the same quarter last year. Net revenue for the full year increased 5.2% to $2.95 billion compared to last year. During the year, we generated approximately 75% of our revenues from our specialty hospital segment, which includes both our long-term acute care and inpatient rehab hospitals; and 25% from our outpatient rehab segment, which includes both our outpatient clinics and contract services. Net revenue in our specialty hospitals for the fourth quarter increased 4.1% to $556 million compared to $534.2 million in the same quarter last year. This growth resulted primarily from increases in our net revenue per patient day and revenues generated from the Baylor joint venture. Specialty hospital net revenue per patient day increased 3.2% to $1,542 in the fourth quarter compared to $1,494 per patient day in the same quarter last year. We experienced increases in both our Medicare and non-Medicare net revenue per patient day in the fourth quarter. Additionally, our patient days increased slightly, 337,522 days compared to 336,711 days in the same quarter last year. Specialty Hospital net revenue for the full year increased 4.9% to $2.2 billion compared to $2.1 billion last year. Growth resulted from increases in our net revenue per patient day, our patient volumes and revenues generated from services provided in the Baylor joint venture. Specialty hospital net revenue per patient day was $1,534 in 2012 compared to $1,497 in 2011. The increase in our net revenue per patient day was a result of increases in both our Medicare and non-Medicare rate. Increase in our Medicare net revenue per patient day was due to an increase in the Medicare base rate that went into effect October 1, 2012. Increases in our non-Medicare net revenue per patient day resulted primarily from increases in commercial contract renewals that occurred during the year and for Medicaid bonus payments we received during the second quarter of 2012. Our patient days increased 1.1% to over 1.3 million patient days for 2012. We generated approximately 84% of our specialty hospital revenue from our long-term acute care hospitals and 16% from our inpatient rehab hospitals in 2012. Net revenue in our outpatient rehabilitation segment for the fourth quarter increased 0.5% to $185.1 million compared to $184.2 million the same quarter last year. During the fourth quarter, a substantial number of our outpatient clinics in the mid-Atlantic and Northeastern states were adversely affected by Hurricane Sandy, which had a negative effect on our net operating revenues and adjusted EBITDA. We've estimated the lost patient revenue from Hurricane Sandy to approximately -- to be approximately $3.0 million for the fourth quarter. Revenue in our clinic-based business, including our owned and managed clinics in the fourth quarter, increased 2.9% compared to the same quarter last year. And for our owned clinics, patient visits increased 3%, with over 1.1 million visits, compared to the same quarter last year. Our net revenue per visit was flat at $104 in the fourth quarter both this year and last year. Revenue in our contract services business in the fourth quarter declined 6.1% compared to the same quarter last year. A significant portion of the decline in revenue in contract services was related to the termination of a number of low-margin contracts. Net revenue in our outpatient rehabilitation segment for the full year increased 6% to $751.3 million compared to $708.9 million last year. Revenue for the full year in our clinic-based business increased 3% compared to last year. For our owned clinics, patient visits increased 2.2% to almost 4.6 million visits, and net revenue per visit was $103 in both this year and last year. Revenue for the full year on our contract services business increased 16% compared to last year. Growth in our contract services revenue was primarily attributable to the addition of new contracts in the fourth quarter of 2011. In 2012, we generated approximately 75% of our outpatient revenue from our owned and managed clinics and 25% from our contract services. Overall adjusted EBITDA for the fourth quarter increased by 5.3% to $98.8 million compared to $93.8 million in the same quarter last year, with overall adjusted EBITDA margins at 13.3% for the fourth quarter compared to 13.1% margins the same quarter last year. Overall adjusted EBITDA for the year increased 5.2% to $405.8 million compared to $386 million last year, with an overall adjusted EBITDA margins at 13.8% in both periods. Specialty hospital adjusted EBITDA for the fourth quarter increased 7% to $95.6 million compared to $89.3 million in the same quarter last year. The increase in adjusted EBITDA was driven primarily by both our net revenue increase and the -- and a reduction in our bad debt expense. Adjusted EBITDA margins for the specialty hospital segment increased 17.2% compared to 16.7% in the same quarter last year. The primary driver behind the increase in adjusted EBITDA margins in the segment for the quarter was a reduction in relative bad debt expense. Specialty hospital adjusted EBITDA for the full year increased by 5.2% to $381.4 million compared to $362.3 million last year. Again, the improvement in adjusted EBITDA for the year was driven -- primarily driven by increases in revenue and a reduction in our bad debt expense. Adjusted EBITDA margins for the Specialty Hospital segment increased slightly to 17.4% compared to 17.3% last year. Outpatient rehab adjusted EBITDA for the fourth quarter decreased slightly to $18.4 million compared to $18.6 million in the same quarter last year. Adjusted EBITDA margins for the outpatient segment decreased slightly to 9.9% for the fourth quarter compared to 10.1% in the same quarter last year. For the clinic portion of our business, adjusted EBITDA declined 5.1% to $14.7 million, and adjusted EBITDA margins were 10.5% compared to 11.4% in the same quarter last year. Had we not experienced Hurricane Sandy, we believe margins would have been 200 basis points higher in our clinic-based business. For our contract services, adjusted EBITDA increased 19.1% to $3.6 million, and margins were 8% in the fourth quarter compared to $3.1 million of adjusted EBITDA and margins of 6.3% in the same quarter last year. Thus, even though we experienced a reduction in our net operating revenue from our contract services business in the comparative fourth quarters, we achieved an increase in adjusted EBITDA and adjusted EBITDA margins. The adjusted EBITDA and margin improvement in our contract services business was the result of exiting a number of unprofitable contracts. Outpatient rehab adjusted EBITDA for the full year increased 3.8% to $87 million compared to $83.9 million last year. Adjusted EBITDA margins for the outpatient segment decreased 11 point -- decreased to 11.6% for the year compared to 11.8% last year. For the clinic portion of our business, adjusted EBITDA increased 1.9% to $72.9 million for the year, and adjusted EBITDA margins were down 10 basis points to 13% compared to last year. The decline in adjusted EBITDA margins in our clinic business was primarily due to increased labor costs in the clinics, affected by Hurricane Sandy, without any corresponding patient revenue. For contract services, adjusted EBITDA increased 14.9% to $14.1 million for the year, and margins were down 10 basis points to 7.4% compared to last year. The decline in adjusted EBITDA margin was due to increased labor costs associated with new business and lower productivity resulting from regulatory changes that became effective on October 1, 2011. I also want to provide a couple of updates since our third quarter earnings call last November. On Wednesday, February 20, our Board of Directors authorized a $100 million increase to our stock repurchase program and extended the program an additional year. The repurchase authorization is now $350 million through March 31, 2014. Through December 31, 2012, the company had spent $163.6 million of the authorized capacity under the program. On December 12, the company paid a special cash dividend, totaling approximately $211 million or $1.50 per share to common shareholders. On a regular -- regulatory front, as many of you know, the statute that has governed LTAC hospitals since 2007 expired at the end of 2012. As a result, the moratorium on new LTAC hospital beds has sunset. Last May, CMS determined, as part of its annual LTAC rule-making, to maintain the so-called 25% rule at current levels of 50% until the end of 2013 for existing LTAC hospitals. Patient and facility criteria legislation, first conceptualized by the American Hospital Association and then introduced as legislation by 10 U.S. senators, is under consideration by the New Congress. The goal of LTAC criteria legislation is to make sure Medicare payments are made only to those LTAC hospitals that are providing medically complex care to severely ill patients. Those patients can be safely seen in lower costs and less intensive settings should we be referred to those venues of care. We support the LTAC criteria legislation and have done so for many years. We support the American Hospital Association and appreciate their efforts in Washington to explain to policymakers the unique role of LTAC hospitals and the type of care we provide. We're committed to ensuring that any LTAC criteria is a saver for the Medicare program, and we'll do all we can to support legislation that is put forth in that area. At this point, I'll turn it over to Marty Jackson, our Chief Financial Officer, to cover some additional financial highlights for the quarter and the full year.

Thanks, Bob. For the fourth quarter, our operating expenses, which include our cost of service, general and administrative costs and bad debt expense, increased 2.9% to $644 million compared to the same quarter last year. As a percentage of our net revenue, operating expenses for the quarter were down slightly at 86.9% compared to 87.1% in the same quarter last year. For the year, our operating expenses increased 5.2% to $2.5 billion. This compares to $2.4 billion last year. As a percentage of our net revenue, operating expenses were 86.4% both this year and last year. Cost of services increased 3.4% to $620.3 million for the fourth quarter compared to the same quarter last year. As a percentage of net revenue, cost of services was 83.7% for the fourth quarter compared to 83.5% in the same quarter last year. For the full year, cost of services increased 5.8% to $2.44 billion. As a percent of net revenue, cost of services was 82.9% for the full year compared to 82.3% last year. The increase in cost of services as a percentage of net revenue resulted primarily from increases in the relative labor costs in both our specialty hospital and our outpatient rehabilitation segments. These increases were associated with the increase in relative costs associated with providing labor services under the Baylor JV services agreement in both segments and increased relative labor costs in our outpatient clinics as a result of the effects of Hurricane Sandy, where we continue to incur labor costs in the affected clinics without corresponding patient revenues. G&A expense was $16.3 million in the fourth quarter, which as a percent of net revenue was 2.2% compared to $14.7 million or 2% of revenue for the same quarter last year. For the full year, G&A expense was $56.2 million, which as a percent of net revenue was 2.2% compared to $62.4 million or 2.2% of net revenue last year. Bad debt as a percent of net revenue was 1% for the fourth quarter compared to 1.6% for the same quarter last year. Bad debt as a percentage of net revenue was 1.3% for the full year compared to 1.8% last year. The reduction in our bad debt expense continues to be driven by favorable collection experience, primarily in our specialty hospital segment. As Bob mentioned, total adjusted EBITDA was $98.8 million for the fourth quarter, and adjusted EBITDA margins were 13.3%. This compares to adjusted EBITDA of $93.8 million and 13.1% adjusted EBITDA margins in the same quarter last year. For the year, total adjusted EBITDA was $405.8 million for the full year, and adjusted EBITDA margins were 13.8%. This compares to adjusted EBITDA of $386 million and 13.8% adjusted EBITDA margins of last year. Depreciation and amortization expense was $16.1 million in the fourth quarter, and this compares to $18.8 million in the same quarter last year. During the fourth quarter last year, we incurred an incremental $1.5 million in depreciation expense related to an asset which we previously had held for sale. For the full year, depreciation and amortization expense was $63.3 million. This compares to $71.5 million last year. The reduction was primarily due to the assets acquired in the HealthSouth transaction becoming fully depreciated, as well as the reduction in amortization due to the expiration of the HealthSouth non-compete. We generated $1.3 million in equity and earnings during the quarter. This compares to $1.6 million in the same quarter last year. The decline in the quarter was primarily the result of losses incurred in start-up companies where we own a minority interest. We generated $7.7 million in equity and earnings during the full year. This compares to $2.9 million last year. The increase was primarily the result of incremental income contributed by the Baylor JV. Interest expense was $22.7 million in the fourth quarter, which is down from $24.1 million in the same quarter last year. For the full year, interest expense was $95 million, which is down from $99.2 million in the prior year. The reduction in interest expense for both the quarter and full year is primarily related to lower interest rates on the portions of debt that we refinanced on June 1, 2011, and during the third quarter of 2012. The company recorded income tax expense of $18.2 million in the fourth quarter and $89.7 million for the full year. The effective tax rate for the year was 36.8%. This compares to an effective tax rate of 38.6% in 2011. The decline in our effective tax rate is primarily the consequence of an IRS penalty abatement and a lower effective state tax rate. Net income attributable to Select Medical Holdings was $39.4 million for the fourth quarter, and fully diluted earnings per share were $0.28. This compares to $0.25 in the same quarter last year. For the full year, net income attributable to Select Medical was $148.2 million, and fully diluted earnings per share was $1.05. This compares to $0.71 for the prior year. During both 2012 and 2011, we incurred losses on early retirement of debt related to refinancing activities. Excluding these losses and the related tax effects in both periods, adjusted net income per share was $1.07 for the full year 2012 compared to $0.84 for the full year 2011. We ended the year with $1.47 billion of debt outstanding and $40 million of cash in the balance sheet. Our debt balances at the end of the year included a little bit more than $1.1 billion of term loans outstanding, which is net of the original issued discount; $167.3 million of holdco senior floating rate notes; $130 million of revolving loans outstanding; $70 million of the 7 5/8% senior sub-notes; with the balance of $6.3 million, consisting of other miscellaneous debt. As we mentioned in our press release issued yesterday, we entered into a new $300 million incremental term loan with a 3-year maturity. We also issued call notices on the remaining $70 million of the Select 7 5/8% senior sub-notes and all of the remaining $167 million of the holding's senior floating rate notes. The call period is 30 days, and we expect to redeem those notes on March 22. Operating activities provided $104.6 million of cash flow in the fourth quarter and $298.7 million of cash flow for the year. Day sales outstanding was 45 days at December 30, 2012, compared to 51 days at September of 2012 and 53 days at the end of last year. The decrease in DSO is primarily due to the timing of the periodic interim payments we received from the Medicare program at our specialty Hospitals and a reduction in our non-Medicare receivables. Investing activities used $32.2 million of cash flow for the fourth quarter and $72.4 million for the full year. For the year, this includes $68.2 million for the purchase of property and equipment, $14.7 million of investment in businesses and $6 million in net acquisition-related payments, which were offset in part by the sales of assets of $16.5 million for the year. Financing activities used $81.9 million of cash for the fourth quarter. The use of cash in the quarter primarily resulted from the payment of other -- of a special cash dividend of close to $211 million, offset by borrowings under the revolving portion of our credit facility of $130 million. Financing activities used $198.2 million of cash for the year. The use of cash resulted primarily from the refinancing activities during the year, a special cash dividend and stock repurchases of close to $47 million. As Bob mentioned, our Board of Directors authorized a $100 million increase in our share repurchase program. This brings the capacity to $350 million. During the fourth quarter, we did not repurchase any shares of our common stock. During the year, we repurchased a little bit more than 5.7 million shares at a total cost of $46.8 million. Under the share repurchase program, we have spent a total of 160 -- close to $164 million of the now $350 million authorized and have repurchased almost 22.5 million shares. I would like to close by, again, confirming our 2013 business outlook initially provided in our January 7 press release. This includes net revenue in the range of $2.95 billion to $3.05 billion, adjusted EBITDA in the range of $400 million to $415 million and EPS in the range of $0.98 to $1.04. As mentioned in our January 7 press release, the current business outlook includes adverse financial impact of the MPPR changes for our outpatient services that became effective April 1,2013, but does not include any potential adverse impact from sequestration should that occur, absent further Congressional action. This concludes our prepared remarks. And at this time, we'd like to turn it back to the operator to open the call up for questions.

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

First of all, maybe a quick comment on the bad debt. Obviously, getting a 60-basis-point improvement on that line item, it's a bit fluctuated between 1% and 2% is a nice margin swing. Do you think the level you're at now is sustainable or is that a little bit of an anomaly?

No, A.J., we're pretty comfortable now. I know we have talked about bad debt being in the 1.8% range. I'd say the range now is closer to 1.5% or maybe even a little bit less than that. The operators have done a great job collecting a lot of the older receivables, and we're more comfortable with that 1.5% range.

Okay. You mentioned exiting some contracts in contract therapy. Is that -- can you give us some flavor for how many contracts we're talking about on this portion of the book? And is that contracts that became unprofitable because of the recent reimbursement changes or is that something that's been a trouble spot for a while?

A.J., we dropped about 10 contracts in the quarter, and they were just contracts that we continue to have very, very little margin in, and it didn't make any sense to continue.

Okay. On the guidance, does the guidance include any benefit from either the refinancing or ongoing buybacks?

They do not.

Okay. And then final question for me. We're at the end of the -- obviously, the moratorium's expired. You could conceivably start building on new LTACs. Are we assuming that there are any new additions this year? And also, maybe just comment on acquisitions and joint ventures and what the pipeline looks like there.

A.J., in the current year -- this is Bob. In the current year, I wouldn't look for the company to start construction on new LTACs. I mean, I think our first focus is to expand bed capacity in those LTACs that over the years have enjoyed very high or virtually full occupancies. So that's really our priority, we get our best return on investment on that and our best pull-through. And we'll wait for a bit more certainty in the regulatory and legislative environment before we would embark upon a lot of -- a new allocation of capital to the construction of new LTACs. In terms of the other segment of our business, we do see potential, more growth in the rehab segment -- rehab part of our business mainly through our model of joint venturing. And so while we can't move those as quickly because they're obviously dependent on future partners, that's still our focus.

And your next call comes from the line of Frank Morgan with RBC Capital Markets.

In your guidance, what would be the implied cash flow from ops outlook for 2013? And then how much CapEx do you think you'll put out in 2013?

Frank, the CapEx -- our expectation on CapEx is probably somewhere in the neighborhood of $70 million to $80 million.

Okay. And then on the cash flow from ops, is it safe to grow it at some level off the annual number for '13 -- sorry, the annual number for '12? Is there anything unique we should be thinking about in terms of the cash flow from operations in '13?

Yes, I actually think it's going to be a little bit less than 2012 coming from operations.

Okay. And it's just -- any particular reason?

Yes, it really is a function of the AR. If you take a look at the AR that we experienced in 2012, it was a significant improvement. And consequently, I think that's 45 days, and we don't anticipate it going down much further than that. As a matter of fact, it may bounce back a little bit.

Okay. Well, I get that kind of ties in with your -- this improvement in bad debt you saw this year, so -- and just kind of a technical question, just making sure the $20 million hit from sequestration, that is a 9-month number, right? The impact of the 2% cut to your specialty hospital business, that's what it would be for the period of the sequestration -- not an annualized number, but for the amount that would be in effect for '13?

Yes, Frank, the $20 million is a ballpark number, and it really is an annualized number. I think one of the -- it's really a function as to how sequestration is applied. Historically, the way sequestration has been -- or any hit has been applied is against the base rate. If applied against the base rate, then the cost base business, being the short sale are in the high-cost outlier, would not be impacted. So I know when a lot of the -- when a lot of you and your peers take a look, and if they take a look at the total Medicare dollars, it's actually Medicare dollars that are only associated with DRG payments as opposed to that which is associated with the short-stay outliers and the high-cost outliers. And I think across the industry, the cost base reimbursement, typically, is in the 25% to 30% range of the total Medicare dollars.

Okay. So you take that out then do the 2% to the...

That's correct.

Balance of it. Okay. And any guidance you would -- might be willing to share with us on some of the below-the-line items? I mean, with all this refi activity going on in terms of maybe like interest expense or anything unique and any of these other lines, the JV equity income lines or some of these other below the line?

Yes, I think as far as the financing was concerned, I think on an annualized basis, it's probably the ballpark is $7 million. But again, that's an annualized number.

Okay. All right. And then one last one. Case mix in the quarter on the specialty side, case mix growth in quarter?

Case mix was about 1.17%, I believe.

And your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

I wanted to get a sense of what you guys thought -- when you think about long term, what the growth of your business is going to be as you think about 2015 and 2016, I guess, because the 2013 guidance basically has adjusted EBITDA roughly flat and EBIT down -- sorry, EPS down slightly in 2013, even though you're not assuming a sequestration happens. So I know there's a few more rate cuts in 2013, and there are going to be in '14 and '15, but you're still going to have market basket adjustments in the phase-in of the budget neutrality adjustment. Do you expect 2014 and 2015 to be similar EBITDA-type growth years for the company? Or is there a reason to think that you'll kind of accelerate off of this base?

Kevin, this is Bob. The out-years could be the same if the company doesn't make any strong moves to accelerate growth. Our history has been that we're fairly -- we try to be opportunistic and look for good value in acquisitions and when we deploy capital to grow. So there's obviously a lot of things that we could do. The judgment is, is whether we think it's prudent to do so. So what you saw last year was a fairly large dividend. You've seen stock buybacks. And so I think what you can take from that is that we're not comfortable with any other opportunities that are out there such that our capital has been used to look to reward shareholders in other ways. I think this current year is an important year. If we get some more visibility on what the environment's going to look like in 2014 and beyond, we can obviously make some bolder moves, if I can use that term. But failing that, we won't go out and deploy capital either to build new hospitals or to make acquisitions if we think in hindsight that they can look like bad moves for shareholders. So we're hanging around, and we're keeping an eye on things, and we're still the type of company that can move quickly. And so there are opportunities out there to make acquisitions, but the question is, is at the price, and given where the macro environment is right now for the post-acute services, is that the right move? So we'll be watching it. And so I'm not really prepared to give any guidance for 2014 or 2015 or beyond.

Okay, I think that's very helpful. I guess -- so you're saying is obviously, as a company, you've had all the history of buying things accretively and buying back stock or giving dividends. So that's just all a function of kind of where you are on the rate visibility side of things, and you figure that as rates become more stable, you may flip back from share repurchase and special dividends back towards acquisitions. Or it's easier to do that, I guess, to get more rate visibility.

Absolutely. And it's not just rate. I mean, you look at things -- I mean, the industry has been working for a couple years to get patient facility criteria passed but hasn't happened yet. But that, I think, would certainly give the industry a little bit more stability and visibility on the LTAC side. We have a strategy on the rehab side. That outpatient has been a stable, highly non-Medicare business, which we like very much. So we'll be watching what's going on in all the segments and the development of ACOs and what's happening with bundling and what's happening on the regulatory front and whether sequestration happens or doesn't happen, and make moves accordingly.

Okay. And then just one last kind of quick question. The equity earnings in the quarter, you mentioned it was down because of losses in some start-up companies where you own a minority interest. I guess what kind of start-up companies are you investing in?

I think we have that in the -- we have a list of those companies in our file, the 8-K, but we have an investment in NaviHealth, which is a Welsh, Carson company which is focused on post-acute payment and risk-taking. We have investment in a physician -- a rehab-based physician practice management company. We have an investment in a inpatient hospital within a hospital psychiatric company. And we have an investment in a rural hospital health hospital management service in joint venture with the Mayo Clinic. And we have an investment in alarm -- alert technology company that we're using in our hospitals. So those are 5 hospital -- 5 investments that we have right now.

And then one that just kind of jumped out at me on that list is the NaviHealth. Is that something that you guys are really looking at doing as far as taking risks from a post-acute care perspective?

Well, we're not doing it right now. But to our involvement in that company, which is, I think, doing some unique things, that is really where we're monitoring it and participating in it, and from a board level, to really get a better understanding so that when we have to move in that area, we'll have, hopefully, a level of sophistication that we won't have to learn on the job, if you will.

And your next question comes from the line of Gary Lieberman with Wells Fargo.

This is Ryan Halsted on for Gary. I guess my first question was going back to the environment in D.C. It seemed like at the beginning of the year, there may have been some negative rhetoric coming up, and I guess I know you gave, I guess, some brief update on the legislation. I was just curious if you are hearing, I guess, sort of some negative rhetoric in D.C. and kind of any general comments on the outlook -- on the regulatory outlook there.

Yes, I mean, I guess -- I don't know that I can give great insight there. If you follow this industry historically, there's always been noise, particularly around the LTAC, and this -- the LTAC industry. And in this kind of day and age, with a lot of bundling demonstrations, accountable care organizations, there really -- nothing really surprises me. I don't think that -- I think the one thing that is consistent, whether you look at the Congress or look at CMS or look at MedPAC, I think that they all continue to say for the right type of patient, the LTAC hospital makes both clinical and economic sense for the Medicare program. So that's why, above everything else, our primary public policy goal remains adoption of LTAC patient facility criteria. But yes, from time to time, you do get that. But at a lot of other segments get it as well, including home health, and there has been a lot of others. So I think as a small industry, we certainly get our share, and that's why we have a public policy initiative.

Okay, that's helpful. And I guess going back to some of those initiatives you have investments in, I saw the announcement about the Mayo JV. I guess I was just curious what you were sort of looking at with that venture and what you may hope to learn from that.

Well, this is the providing of services similar to that, that we currently provide, not exactly at the same level, in more rural settings because as you find that, that is important, and it's something that -- Mayo had developed some really outstanding clinical protocols in some operational areas, and they teamed up and partnered with us to move that across a larger geographic area.

Okay. And I guess my last question. So you've talked about potentially expanding bed capacity. Any sort of specifics you can offer there? What kind of capacity availability do you think exists and how aggressively you could potentially build in 2013 on some of that?

We haven't really put out any specific guidance on the amount of beds, what we're looking at, because many of our hospitals are a hospital within a hospital. Obviously, having -- negotiating to be able to get more space is always an issue even if we have demand profile. And then in some of our locations, we do have some construction that we'd want to do to add on to those hospitals. And we're going through kind of the regulatory and the real estate processes to do that. So I'm not comfortable at this point really giving a bed number and a financial impact. But we do have a number of hospitals that enjoy fairly high occupancies.

Okay. How about as far as a runway, I guess, on the regulatory or approval side of that, that you just mentioned?

Well, I think it varies, depending on what state you're in. For example, we have some that we're going to be wanting to do in the state of Florida, for example, and so you may have anywhere from 30 to 90 days to get local real estate approvals. And then in some of our markets where we have hospitals within hospitals, we really have to work with our host hospitals to free up space and then get in and do any renovations that are necessary. And sometimes, that can be anywhere from 30 days to 120 days. So it's a mixed bag.

And your next question comes from the line of Miles Highsmith with RBC.

Bob, just a follow-on from the earlier question. I'm just curious, following some of the commentary out of MedPAC in December, if there's been any specific initiative on your part to educate them just in terms of the value of LTACs? Or do you guys sort of have bigger fish to fry and maybe that comes later?

Well, yes, I want to always be respectful of the stuff that's coming out of MedPAC. And I was -- notwithstanding some of the negative that seem to come out of there, I was still gratified to see the number of physicians and others who serve as MedPAC commissioners added positive comments about the role of LTACs in their local communities. And it is important for us to continue to engage with them and work with them. At the end of the day, the Congress engaged on MedPAC matters as far back as 2007. And CMS, obviously, has a very big role. And we're looking really toward the April proposed rule that comes out. So we always have to try to make judgments on where we put our resources. So all are important and some more than others. So yes, we'll continue to engage policymakers or advisers to policymakers wherever we can. So I think we have a pretty good story to say. And there isn't all negative. There is a fair amount of positive. And again, it comes back to this, for the right type of patient, the LTAC hospitals make really great clinical and economic sense for the program and for patients. And we fit, I think, very solidly, although not in a large area, in the continuum of care. The big debate that is going on right now is this whole coordination of care. I mean, all these bundled payments and these accountable care organizations is really about where patients should be treated and how they should move through, through the post-acute. And that's a debate that's just going to -- I think that's just going to continue because the reality is that there is a lack of coordination during what they consider this episode of care in the post-acute. And that's, I think, what everybody is trying to wrap their arms around, and you see us doing it through our joint ventures, you see it through the demonstration projects. And it is a theme and a thread that's running through some of the comments that's coming through MedPAC and others, which is how do you deal with this lack of coordination through this episode of care in the post-acute? So we're trying to engage all levels on that. And this is not an issue that's going to be resolved soon. And I don't think anybody that is involved in this area or is thoughtful, think that this is something that's going to happen this quarter or even this year. It's going to be very much in the out-years.

Okay. And Marty, just a quarterly question on the restrictive pay capacity. I guess with the income you generated this quarter, is it right to think you got several hundred million following the dividend that was done in Q4?

Miles, you're always very good with that. Yes, that's appropriate.

And just a follow-up. Is that governed by your credit agreement? And the reason I ask is, if the bonds go away, will that number still apply?

Yes, it will still apply.

And there are no further questions at this time. I would now like to turn the call back to management for closing remarks.

No closing remarks. I appreciate your attendance and your interest in the company, and we look forward to updating you next quarter.