Executives
Roland Rapp – General Counsel
Boyd Hendrickson – Chairman and CEO
Dev Ghose – EVP and CFO
Jose Lynch – President and COO
Mark Wortley – President, Hallmark Rehabilitation
Analysts
Pakstein Scott [ph] – Jefferies & Co.
Brendan Strong [ph] – Barclays Capital
Kevin Fischbeck – Banc of America
Jason Gurda - Leerink Swann
Chris Greenberg [ph] – Bearend Capital [ph]
Ralph Giacobbe – Credit Suisse
Robert Mains – Morgan Keegan
Gary Taylor – Citigroup
James Bellessa – Davidson & Co.
Andreas Dirnagl – Stephens Inc.
Skilled Healthcare Group, Inc. (SKH) Q3 2008 Earnings Call Transcript November 6, 2008 1:00 PM ET
Operator
Good day ladies and gentlemen and welcome to the Q3 2008 Skilled Healthcare Group Incorporated earnings conference call. My name is Kim and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of towards conference. (Operator instructions)
I would now like to turn the presentation over to your host for today’s conference, Mr. Roland Rapp, General Counsel. Please proceed sir.
Roland Rapp
Thank you, Kim, good morning. I would like to welcome everybody to Skilled Healthcare’s quarterly earnings conference call and introduce our presenters, Boyd Hendrickson, Chairman and Chief Executive Officer, and Dev Ghose, Chief Financial Officer.
Before we begin I would like to note that certain statements and information that we discuss this morning may be deemed to be forward-looking statements, including but not limited to guidance for all of our 2008 financial performance. These statements include statements relating to our objectives, plans and strategies, as well as statements other than statements of historical fact that address activities, events or developments that we expect or anticipate will occur in the future. Any forward-looking statements discussed on this call are made as of the date of this call and Skilled Healthcare undertakes no duty to update or revise any such statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments, and business decisions to differ materially from our forward-looking statements are described in our filings with the SEC.
Additionally, as we discuss performance, we will be referring to, EBITDA, adjusted EBITDA, and adjusted EBIDAR, which we use as a measure of performance but are not considered as measures of financial performance under generally accepted accounting principles. Adjusted EBITDA includes adjustments for premium on redemption of debt and the write-off of related deferred financing cost in the first nine months of 2007, loss on the sale of assets in the first three months ended September 30, 2008, and changes in the fair value of an interest rate hedge in the three and nine months ended September 30, 2007. EBITDAR is adjusted EBITDA excluding rent cost of revenue. Therefore, please see the reconciliations included in our earnings release issued this morning, which can be located on the investor relations section of our web site at www.skilledhealthcaregroup.com. With the exception of EBITDA, adjusted EBITDA, and adjusted EBIDAR, this report and our discussion today are presented on a consolidated basis under GAAP and as such references to the Company, Skilled Healthcare Group, Skilled Healthcare, “us”, “we” and “our” refer to Skilled Healthcare Group, Inc. and each of its consolidated subsidiaries.
I will now turn the call over to Boyd Hendrickson, Chairman and Chief Executive Officer. Boyd.
Boyd Hendrickson
Thank you, Roland, and good morning everyone. We appreciate you joining us for our call today. Before we discuss the third quarter and year-to-date results I would like to thank all of our facility employees for their dedicated service. They are the backbone of the company and we appreciate their hard work and commitment to good high quality patient care. I would also like to congratulate our employees for their heroic effort during the September hurricanes by evacuating the residents at Oakcrest, (inaudible), and Clermont, Beaumont location in Texas and safety relocating them to affiliated facilities. The employees’ dedication and work ethics proves that patient needs and safety remains our number one priority.
In the quarter that is typically the slowest in our annual operating cycle, we suffered some slowdowns from competitive and operational pressures at a handful of our facilities. However, based on our latest operating trends and our new developments and Express Recovery Units coming online, we’re optimistic about the future as we enter into a traditionally stronger operating period of our business cycle.
Moving on to our third quarter results, revenues increased by $182.5 million or 13% over the same period last year and adjusted EBITDA increased to $26.6 million or 3.8%.
For the first nine months of 2008, revenue increased to $543.5 million or 18.9% compared to last year’s period and adjusted EBITDA increase to $84 million or 12.7%.
Turning to our key operating statistics, our skilled nursing occupancy measured on available skilled beds was 84.1% for the third quarter of 2008 compared to 84.8% in the same quarter last year. For the first nine months of 2008 our occupancy measured on available skilled beds was 84.6% compared to 84.8% in the first nine months of a year ago.
Our skilled mix, which is defined as the number of Medicare plus managed care days as a percentage of total skilled nursing facility days was 23% in the third quarter of 2008 versus 23.4% in the third quarter of 2007. Excluding the 10 skilled nursing facilities in New Mexico, which we acquired in September 2007, skilled mix was 23.6% in the third quarter of 2008. For the first nine months of this year, our skilled mix was 24.4% consistent with the comparable period a year ago. To date in the fourth quarter, we have seen an up-tick in our overall occupancy as well as our skilled mix.
Our quality mix, defined as revenue other than Medicaid, was 67.9% in the third quarter of ‘08 versus 68.5% in the same quarter a year ago, and 68.9% for the first nine months of 2008 versus 69.5% in the nine-month period last year. The decrease in quality mix was partly a result of enhanced Medicaid rates in New Mexico during the third quarter this year, which included a cumulative retroactive Medicaid rate increase of $1.4 million.
Another key operating statistic in the percentage of patient in the upper nine Medicare RUG utilization group. Medicare resource utilization group or RUG categories, which were implemented in January of 2006, year-over-year the metric continued to improve. We regard that percentage as a key measure of being able to provide high acuity care because the RUG categories provide greater reimbursement for the admission of patients with higher clinical intervention and needs.
For the third quarter of 2008, our upper nine RUG category utilization increased to 40.1% from 38.7% in the third quarter of last year and to 40.1% for the first nine month period of 2008 compared to 38.6% in last year’s comparable period.
Our total rehab RUGs were 92.9% in the third quarter versus 91.4% for the prior year quarter.
Our continued strategy to build the Express Recovery Units is continuing well. We now have three different offerings. The Renew Unit, which is a specialized women’s unit; Pulmonary Advantage, a respiratory specialty unit; and our traditional Express Recovery Unit, which includes a larger variety of rehabilitation needs.
During the third quarter of 2008, we expanded two existing ERUs and we added 4 new Express Recovery Unit for a total of 123 ERU beds. This brings our total number of Express Recovery Units to 38 and the total number of ERU beds to approximately 1244 or 13.7% of our total SNF available beds. The 38 units are located in 37 different facilities, which mean that nearly half of our SNFs at the end of third quarter now have an Express Recovery Unit.
For the third quarter of 2008, our facilities with an Express Recovery Unit had a combined skilled mix of 26.3% versus 18.9 for those without an ERU unit. Also, for the third quarter of 2008, our facilities with an Express Recovery Unit had a combined EBITDAR margin that was 1.8% points higher than those without the ERU. By the end of the year we plan to open 50 ERU, Express Recovery Units, and extend 6 other units for a total of 551 additional ERU beds.
Delays in our plan to open Express Recovery Unit for 2008 have resulted in lower occupancies as we temporarily took beds out of service. Once these units are completed they should a positive impact on our skilled mix and our occupancy in future quarters. Currently we expect at December 31, 2008, we will have a total of approximately 53 ERU units open with 1795 beds. Of our current 75 skilled units we believe that 78% are candidates for the Express Recovery or ERU related specialty units.
We are and continue to be firm believers in the model and expect that the construction of new unit slows in 2009; our operators will be able to focus their efforts on all the new units we opened up during the fourth quarter. Not only are we redeveloping existing units with ERUs but we are committed to growing through acquisition and new developments. As you know during the month of September we acquired 7 ALF buildings in Kansas. In addition we expect to put into service our 136 bed state of the art skilled nursing facility near the downtown Dallas campus of Baylor University’s Medical Center, a 1000 bed general acute hospital in January.
After now being cleared by a local transit authority in the Fort Worth area, we commenced development on a second skilled nursing facility late in the fourth quarter which is located next to several downturn Fort Worth acute hospitals. This facility will be identical to the new one being built in Dallas.
Our ownership percentage of our operating assets is an industry-leading 73%. We believe that that gives as additional flexibility with regard to our operation and our development activities.
Now, I’d like to turn the call over to Dev Ghose, Chief Financial Officer, to talk about the Company’s financial results in more detail. Dev?
Dev Ghose
Thank you, Boyd, and good morning to those in the West Coast and good afternoon to those in the East. We operate our business in two reportable segments. Our long-term care services segment is the most significant part of our business and includes the operation of skilled nursing and assisted living facilities, representing approximately 85% and 3% of revenue for the nine months of 2008. Our ancillary services segment, including our rehabilitation therapy and hospice businesses, represents approximately 10% and 2% of respectively of revenue over that same period.
Revenue in the long-term care services segment increased by $18.5 million or 13.1% to $159.7 million for the third quarter of 2008 from $141.2 million in the same quarter last year. Approximately $16 million or 11.3 percentage points of the increase in long-term care services revenues resulted from healthcare facilities acquired or developed after July 1, 2007. The remainder of the increase was due to arrive in payer rates.
Revenue in our ancillary services segment increased $2.5 million or 12.3%, to $22.8 million in the third quarter of 2008 compared to $20.3 million in the same quarter last year. Approximately $1.9 million or 9.4 percentage points of the increase in ancillary revenues resulted from the acquisition of two hospice businesses in New Mexico in September 2007.
Net income for the third quarter of 2008 was $9.6 million, an increase of $2.7 million or 39.1% compared to net income of $6.9 million for the third quarter of 2007.
For the third quarter of 2008, earnings per diluted share were $0.26 compared to net income of $0.19 per diluted share for the same period in 2007.
Adjusted earnings before interest, tax, depreciation, and amortization, or adjusted EBITDA, for the third quarter of 2008 was $26.6 million, an increase of $1 million, or 3.8%, compared to the same period in 2007.
Our EBITDAR margin declined from 17.9% in the third quarter of 2007 to 17.2% in the third quarter of 2008 and the EBITDA margin declined from 15.9% during the third of quarter of 2007 to 14.6% in the same period this year.
During the third quarter EBITDA and EBITDAR were impacted by the lower occupancy relative to the corresponding quarter of 2007. They benefited from increased revenue due to our acquisition of the New Mexico and Wichita facilities including a cumulative retro rate Medicaid adjustment as well as reductions in general liability and workers compensation reserves of $2.3 million.
These benefits were offset by approximately $1.8 million of additional bad debt reserve in our ancillary services businesses. These included $600,000 each in additional bad debt reserves and in our hospice and rehab businesses and an additional $600,000 related to the CMS pilot program utilizing private Recovery Audit Contractor or RAC funds to recoup alleged Medicare overpayments for our rehab customers.
This is unique to our locations as we were one of the only long-term care companies impacted.
Our third quarter results were also negatively impacted because we didn’t receive notice of projected medical and Missouri Medicaid rate increases since August 01, 2008, and July 1, 2008, respectively. In the third quarter 2007 these rate adjustments constituted approximately $1 million. We incurred approximately $350,000 in costs related to the evacuation from the hurricanes in Texas that Boyd discussed earlier, which included additional labor costs.
Finally, tax expense decreased by $2.2 million of which $1.4 million related to certain taxes reserves that were no longer necessary due to the expiration of the statute of limitations with the balance due to generation of state tax credits.
For the first nine months of 2008, earnings per diluted share were $0.73 compared to earnings of $0.11 per diluted share after accretion of preferred stock for the first nine months of 2007. Net income for the first nine months of 2008 increased to $26.9 million from $2.6 million of net income attributable to common stockholders for the same period in 2007.
Last year’s results for the first nine months of the year were negatively impacted by approximately $11.6 million of redemption charges relating to the early payment of $70 million of our 11% senior subordinated notes. After adjusting for that payment, the majority of our year-over-year growth in EPS came from organic growth in our long-term care business, acquisitions, lower interest expense and the tax impact discussed earlier.
Adjusted EBITDA for the first nine months of 2008 was $84 million, an increase of $9.4 million or 12% compared to the same period in 2007.
Turning to the statement of cash flows, during the nine months ended September 30, 2008, we invested $23.1 million in acquisitions and $34.5 million in additions to facilities, which were commenced by $42.7 million in operating cash flows with the balance from additional borrowings. As of September 30, 2008, we had $478 million in additional debt outstanding. This comprised of $129 million of our 11% senior subordinated notes that are due in 2014, $252 million of our first lien senior secured term loan that matures in June 2012, $86 million outstanding under our $135 million revolving line of credit which matures in June, 2010, and finally capital leases and other debt of approximately $11 million.
Furthermore, we had approximately $5 million in outstanding letters of credit against our revolving credit facility. As of today, we have approximately $47 million of additional borrowing capacity under our credit facility. Also approximately $230 million or around of our total debt is fixed rate. Our debt to date has a weighted average remaining duration of 3.7 years. Also at the end of third quarter our leverage ratio was 4.2 times and our interest coverage was 3.2 times.
Lastly we are updating our 2008 full year guidance. We expect our full year guidance of between $730 million and $740 million for revenue and net income per diluted share to remain between $0.98 and $1.03, which are both unchanged from previous guidance. We expect 2008 EBITDA to be in the range of $115 million to $119 million and 2008 EBITDAR to be in the range of $134 million to $138 million.
With that, I’d like to turn the call back to Boyd.
Boyd Hendrickson
Thank you Dev. In closing I would like to note that we are very encouraged by the early fourth quarter trends in both overall occupancy and skilled beds. In addition, we are excited about the opportunity that lie ahead as we open up additional Express Recovery Units and continue to build our platform and build long-term care value for our shareholder.
Lastly before we open up for Q&A, I’d like to let everyone know that our management group that will be available today for Q&A besides Dev and I are Jose Lynch, the President and Chief Operating Officer of the Company; Mark Wortley, the President of our Ancillary Services segment; and Roland Rapp, our General Counsel.
With that, operator, we are ready to take questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Pakstein Scott [ph] of Jefferies & Co. Please proceed sir.
Pakstein Scott - Jefferies & Co.
Hi, good morning guys.
Boyd Hendrickson
Good morning.
Pakstein Scott - Jefferies & Co.
One macroeconomic question just to start with, is I noticed that your percentage of Medicare days in the upper 9 RUGs went up sequentially and year-over-year and looking at some of your competitors they experienced a little bit of pressure there and quoted some of the economic pressures to delaying some elective procedures. And just I was hoping to get any thoughts on why you think you have been successful there?
Jose Lynch
Yes this is Jose. Most of the success we have in (inaudible) when the upper 9s come the clinical delivery of the patient. So, the 40% growth there just really shows that we are continuing to take those patients that are receiving meds and the patients that are requiring intensity in rehab. So, we saw a jump in overall rehab RUGs of about 1.5% and nice growth in upper 9s. So, I think even though we had some struggle with volume of incoming Medicaid residents we didn’t have any problems with the acuity that we are receiving.
Pakstein Scott - Jefferies & Co.
So, you are not really seeing much of a, it is less economically sensitive and not as elective as one may think.
Jose Lynch
I think if you ask the question on volumes we can speak to some of the slowness in new admission, but in regards to the patients that we are actually receiving in the acuity hospitals due to the intensity and acuity of those patients that we get for those Medicare days have been pretty consistent and continuing to get thicker and thicker.
Pakstein Scott - Jefferies & Co.
Okay and my second question is just on some of the details that Dave gave on the adjustments in the quarter. And I was more wanting to make sure that I get all my numbers right here. There was $2.3 million for the reserve adjustment and then there was $1.8 million on the bad debts, $1 million on the top line for the medical and Medicare Missouri Medicaid rate letters, $350,000 in hurricane cost and then a $2.2 million on the taxes. So in net I am getting about a $900,000 EBITDAR impact. Does that sound about right?
Dev Ghose
You have got the $2.3 million that was a pick up. So that is a positive. The $1.8 million of bad debt that is a negative. We also got about $1.4 million of retro payments from New Mexico in the quarter. We didn’t receive medical and Missouri Medicaid amounts from July and August and that was about a million dollars last year. So those are the main ones.
Pakstein Scott - Jefferies & Co.
Okay, all right. Thank you very much.
Dev Ghose
And then the tax.
Operator
Your next question comes from the line of Brendan Strong [ph] of Barclays Capital. Please proceed.
Brendan Strong - Barclays Capital
Hi, good afternoon. Actually kind of a similar question, just when thinking about your guidance for the year. What are you including and what are you excluding in terms of these items in the quarter. Some of which seem like they’re one-time.
Dev Ghose
The guidance is a running guidance and so we take what we have done now is taken our first nine months of the year and updated it for our expectations for the fourth quarter. And that is how we come out to the $0.99 to $1.03. That guidance incorporates everything that we have seen to date.
Brendan Strong - Barclays Capital
But specifically it includes the benefit you got in the quarter from the lower taxes as well as I guess the negative impact of the higher bad debt.
Dev Ghose
Yes.
Brendan Strong - Barclays Capital
Okay. And then in terms of the higher bad debt is that -- is any of that recurring you know or is it all one time?
Dev Ghose
Well, there are three components there and let me speak to each one. Approximately $600,000 came from our rehab business and another $600,000 came from our hospice business. In both those as we do each quarter we took a hard look at our accounts receivable evaluating the collectability of it and we believed it was prudent to increase our provisions by $600,000 for each of those two businesses. And then finally we increased it by another $600,000 that had to do with our RAC program that I talked about in the prepared remarks.
Brendan Strong - Barclays Capital
Okay.
Dev Ghose
So together it is $1.8 million. We evaluate these at each period. We believe we have prudently reserved at this point in time.
Boyd Hendrickson
And let me just clarify or go back and tell you a little bit about the RAC. I think that all of you remember that they ran a pilot program only in the state of New York, Florida, and California with the RAC and what the RAC did is they went way deep. They went into a lot of prior periods and a fair amount of the RAC denials are ending up getting overturned as we go through the field process. We were one of the only companies in long-term care that really got impacted by that and here again, you know they’re going to start the RAC orders, again they have been delayed but probably sometime in 2009 but that will cover everybody and step it in different geographic areas as we move through the year and the look back period we will only go back to October of 2007.
In California we got, I doubt a little heavier blow with the RAC than a lot of the other companies did.
Brendan Strong - Barclays Capital
Okay, and then one just real annualized question detail. The bad debt apologies, which line does that end up showing up on?
Dev Ghose
It is in cost of services.
Brendan Strong - Barclays Capital
Okay. Thanks a lot.
Operator
Your next question comes from the line of Kevin Fischbeck of Banc of America. Please proceed.
Kevin Fischbeck - Banc of America
Okay, thank you. Just wanted to circle back on the impact of the hurricanes in the quarter. Other than the number you gave that was a cost number. Was there a revenue number associated with that too?
Dev Ghose
Well, the $350,000 we gave is what we could really definitively tie down to the direct loss of the hurricane. The nonquantifiable thing would be that we have a lot of our people including a lot of our management people in the state of Texas deployed to help with the evacuation. So, you’ll not only had the direct impact of the three buildings that had to be evacuated and the one in Beaumont, by the way had to be evacuated during both of the hurricanes, both Gustav and Ike. And so you lose a lot of operational focus while you are dealing with making sure that the patients were evacuated, that no harm incurred -- that no harm was incurred to any individual and that they all got back into the building safely. So, you’ve got that non quantifiable impact as well.
Kevin Fischbeck - Banc of America
Okay but --
Dev Ghose
Most of the patients were moved to our other building.
Boyd Hendrickson
Correct.
Dev Ghose
So, our other buildings picked up the patients from those 3 facilities and Jose can speak to this a little more but a very small percentage of our patients were discharged to their relatives, but for the most part the slack was taken up by our other facilities.
Jose Lynch
Yes, like 15% I think of the whole $350,000 losses of patients that actually went home with families during the evacuations so they just came out. The other balance of the patients went to 7 of our facilities which really put them to capacity and there was no new admission volume falling through in 7 of those active facilities. So, it is hard to estimate the exact impact of the volume drop, probably we estimated around 15% or 20% of our overall quarterly volume drop.
Kevin Fischbeck - Banc of America
Okay that makes sense and then just a real quick clarification on the $1.4 million retro active Medicaid issue. Was that due to 2007 or does that include some parts in the first half of 2008.
Dev Ghose
It is from September 2007 to the first half of 2008. That is the out of period piece if you will.
Kevin Fischbeck - Banc of America
Okay, when we think about the EBITDA impact for 2008, only a portion of that $1.4 million is clearly not in 2008?
Dev Ghose
Right.
Kevin Fischbeck - Banc of America
Okay, and the last question. You mentioned that you are seeing increased competition in some markets, is this primarily Texas again or whether other markets where you are seeing increased competition.
Boyd Hendrickson
Yes, mostly Texas and Missouri. We had pretty much about 7 facilities that are impacted 5 in Texas and 2 in Missouri and it is all from brand new facility builds in the fill up process. So in our top twenty the largest of our facilities all 6 of the 7 hit in the actually in the top 10 list. So, while those facilities fill up, we continue to see struggle with growth. The other slowness in our quarter is just flat out a slowness in new admissions, not necessarily readmissions from the acute. From just flat out new admissions from acute hospitals we saw a pretty significant drop in just activity. 25% drop over the first quarter of ’08 and 10% drop over the second quarter in ‘08. We have seen in October-November months to date we have seen about a 6% jump over September. So we’re heading in the right direction again with skilled days up about 3% over the quarter average in ’08 in Q3 ’08.
Kevin Fischbeck - Banc of America
Okay, it was very helpful. Thanks.
Operator
Your next question comes from the line of Jason Gurda of Leerink Swann. Please proceed.
Jason Gurda - Leerink Swann
Good morning. Thank you. I had a question on -- a little bit on the Medicaid issues. Particularly do you have any time frame for when you will get your update on Missouri?
Boyd Hendrickson
Yes I think that the Missouri rate letters will be in shortly if they -- we think we already have them.
Dev Ghose
We have all but one.
Jason Gurda - Leerink Swann
Okay.
Boyd Hendrickson
California we are waiting. We were told on Friday that probably by the end of the week. The rates have already been calculated all we are waiting -- by the state. All we’re waiting for them to do would be to post them on the web site. And until they come up on the website it is very, very difficult to clarify you know, to what extent they are going to be the increases are going to be. We have a fairly good idea but we don’t know until we get the final posting.
Jason Gurda - Leerink Swann
Do you have any sense for what the there’s a lot of news out there and clearly a lot of economic activity that has been -- fallen off a cliff in October and November. And there is more and more stories about number of states being under pressure budget-wise. Do you have any comment on that relative to your big states, where you think they are, where you see any risks over the next year.
Dev Ghose
You know, I think that just over 40% of our Medicaid days are in the 2, second and third worst reimbursement states in the country that is Texas and Missouri. So, I think if you look at it from that perspective, I think you know it gives us a little bit of advantage. I think the highest reimbursed state we have is in the 32, and that is Nevada. That is probably the only facility, the only state we see as a potential challenge in ’09. California, it is hard to tell what happens there but I think if you just surely look at the states where we have had, our average Medicaid rate across the company is 140 and that is inflated kind of because the new Mexico retro. So if you look at it that way I think it should give you a little bit more comfort that we have (inaudible) states. Not to say that we couldn’t get a cut in the particular state. I think we were relatively comfortable from the states we operate in.
Jason Gurda - Leerink Swann
Okay, do you have any sense on the assisted living facilities, the economic sensitivity there?
Dev Ghose
We are seeing really nice growth in our assisted living model. We have -- our assisted living model is a little bit smaller. It is the not the high-end $5,000 to $6,000 a month market. It is more the sweet spot of the 3,500 to 3,000 a month and we think it is an affordable model. It is a profitable model and it is a simple model I think that particular model works really very well for us and we’re actually see nice growth in that quarter-over-quarter in that market.
Jason Gurda - Leerink Swann
Okay, thank you.
Operator
Your next question comes from the line of Chris Greenberg [ph] of Bearend Capital [ph]. Please go ahead.
Chris Greenberg – Bearend Capital
Could you please review the capital budget for the fourth quarter to bring on additional ERU beds and as you look into ‘09 it sounds like there may be five more ERU units coming and then the continuation of the build out of the two big facilities in Texas. Just kind of help us understand capital budget for ’09. Thank you.
Dev Ghose
Sure. Of course the capital budget for ’09 will probably ratchet down a bit because we don’t have obviously many ERUs left to do with the existing portfolio. That will drop down. We will get those numbers out. We in regards to the fourth quarter, we have about 551 beds, in a perfect growth it will get done. That is 15 units and 6 expansions. The delay that we have experienced, about 50% of those beds are coming from California but just continual delays with some of the earthquake requirements and permitting in that and just slowed the process. So, we are optimistic that we could 551 beds up. There is some sensitivity with some of them, but we believe we will get over more than 500 open in the fourth quarter.
Chris Greenberg – Bearend Capital
(inaudible) Jose, just roughly how much will those 500 beds cost and then also how much will the two facilities in the bigger units in Texas that you brought in, how much with those cost and how much of that will be (inaudible)?
Jose Lynch
Sure. We have about, I don’t have the numbers in front of me but we have about $5 million left on the Dallas property. The other facility in Tonganoxie in Kansas, I think about $1 million left for ’08 for Fort Worth, the other big facility in Dallas. I don’t think we will spend more than about $500,000 to $1 million for the remainder of ’08 just because the permitting is going a little bit slower there. In regards to the ERU spend, I would estimate about $3.5 million to $3.75 million will be spent in the fourth quarter, possibly a little bit more than that.
Dev Ghose
Plus the total spend on the Dallas property is roughly $21 million. And that will be fairly well completed by the end of the year, and then the Forth Worth project. We have already paid for the land but in total including the land you know, the project will be pretty much the same in parallel roughly the $21 million.
Chris Greenberg – Bearend Capital
Okay, thank you.
Boyd Hendrickson
In terms of expense [ph] it is about $15 million for the fourth quarter.
Chris Greenberg – Bearend Capital
That is $15 million for the fourth quarter?
Boyd Hendrickson
For everything.
Chris Greenberg – Bearend Capital
And if I’m hearing you right, next year’s capital budget is $25 million or so. $20 million for the big Fort Worth facility and $5 million for ERU and that kind of stuff.
Boyd Hendrickson
We will give you more definitive guidance in conjunction with the year end call but that is kind of what we see now.
Dev Ghose
And that wouldn’t include the routine CapEx that we do during the year.
Chris Greenberg – Bearend Capital
Got it. Okay, thanks guys.
Operator
Your next question comes from the line of Ralph Giacobbe of Credit Suisse. Please proceed.
Ralph Giacobbe - Credit Suisse
Great. Thanks. Just wanted to get into sort of the slower sort of volume on the new admits. Can anybody talk about what type of patients you are seeing that slowdown in and if there is any changes that you see sort of from the discharge planners in the referrals they are sending?
Boyd Hendrickson
You know, it is pretty much across the board, (inaudible) you could pretty much see a drop across the board and you see some slowdown in your more obviously in your obviously in the electives, because in the same summer months not only was it slow by the same physicians are on vacation et cetera. So, but I think it is across the board we saw slowness in the quarter, less infectious disease, less pulmonary, less cardiac, all of those types were down. Less wounds, less everything. So, I think it is just really a slow volume. Some of the -- and it is really kind of across the board in all of our markets.
Ralph Giacobbe - Credit Suisse
Okay, and I mean are you noticing any changes in terms of discharge plans. I mean, you know, in looking at some of the home care names, the volume stats have been sort of through the roof and I am just wondering if there is any that if you think there is some more being directed to the home as opposed to nursing home, anything there?
Boyd Hendrickson
I mean there is no question there is -- I don’t think necessarily think it is related to our volumes but we have been saying this for the last year and a half, two years. There is a definite government push and push to get patients home quicker whether it be via home health or whether it be assisted living or that. So, we are obviously seeing that and in months, in summer months, in good weather months, typically you see the ability for patients to go home more quickly than they would when during other months when they have more complications, i.e. they have an infection going with an orthopedic injury. So, we are continuing to see some of those pressures on home health but I don’t think it is anything different than what we have seen in the previous quarters.
Dev Ghose
And you got to remember that the flip side of that coin would be that we are encouraged by the number of the higher acuity admissions that we are getting of the acute. I think more and more people are being pushed down to the SNF segment and particularly as we continue to work with the managed care environment.
Ralph Giacobbe - Credit Suisse
You know, and just going back to the competitive pressures again. You know, it sounds like you all sort of think of it as a short-term issue, when do we I guess begin to see improvement. Is it just sort of an anniversary or something, or how should we think about some of the competitive pressures.
Boyd Hendrickson
Of the 7 facilities that we have that are in the competition, we will probably see about 3 or 4 drop off by Q2 ’09. The unfortunate part is we will have one add back on right around the same time in the Beaumont area, a couple of new builds going up there.
Ralph Giacobbe - Credit Suisse
Okay, and then just my last question. You know, I guess when we look at just the base business. Can you maybe talk about the capability to sort of expand margins and will we see the margins sort of grow at the New Mexico facilities and thereby sort of overall bump in the overall margins up?
Dev Ghose
Sure. But most of it is wrapped around our drive and volume and we obviously with the pressures this quarter, I mean it is a huge tension on delivering on the incoming new admits and increasing that volume by obviously our leadership, our good clinical outcomes as well as sort of that wraparound strategic capital side with our Express Recovery Unit. For every one percentage of skilled mix we add we deliver a pretty significant amount in EPS in the bottom line. So that continues to be our focus and as well as the total agency focus and I think operationally some expenses. I don’t think there is a whole lot of opportunity there. We do have some opportunities with some ancillary contracting that we will see the fruits of in the beginning of ’09. But outside of that it is continuing a focus on growth on the top line.
Boyd Hendrickson
Your fourth quarter will probably get back to a more normal EBITDA margin with what we are accustomed to running in fact maybe you got to remember that we will be picking up revenue in the fourth quarter that we didn’t get in the third quarter. So that will kind of you know, maybe even push the margin unusually higher in the fourth quarter. Like I indicated before we are encouraged with -- and Jose mentioned that we are encouraged with where we are headed now with occupancy and with the skilled mix coming back.
Ralph Giacobbe - Credit Suisse
Okay, great. Thank you.
Operator
Your next question comes from the line of Robert Mains of Morgan, Keegan. Please proceed.
Robert Mains - Morgan Keegan
Thanks. Good morning. But I wanted to amplify on that last comment of ours, because if I look at the third quarter, I kind of chew up for all the things that you mentioned in your tax rate and RAC audits or what not, you get an earnings number that is I think pretty much below where people are looking for, but if I look at your guidance and you are kind of seeing fourth quarter bounces back on track. Is there, just in terms of how the business progresses. Are we seeing this year’s seasonality in the third quarter that you think it is going to be with you that you know that Sun Healthcare [ph] has a kind of slow third quarter, you historically haven’t had a big dip in earnings, or do you see this third quarter is kind of a confluence of some things that is not nonrecurring. Unusual enough that we wouldn’t see this sort of drop off sequentially in earnings from Q2 to Q3.
Boyd Hendrickson
We had unusual things and remember we only give annual guidance but if you look at the way that we budget and we model our company, we -- typically the and I think we have always alluded to that the third quarter is typically your lowest quarter of the year and then in the fourth quarter you begin to pick up and first quarter of the year is normally your better quarter and we are finding that is the only thing that we -- the third quarter did dip more than what it normally does. So, it looks like it became a little more distorted than even what we had budgeted for, but typically you do have the fall off in the third quarter with fourth quarter picking back up and then peaking in the first quarter. You have got, you know, if you take out the unusual items and look at the fourth quarter, the revenues that I alluded to would be -- here you got the California medical you are going to pick up for August and September. You have got the Missouri money that you are going to pick up. And then if you remember we talked about the tuck in programs going through a different methodology that they went from the old tower program to the RUG methodology and they didn’t have the capability of doing the conversion all in one month. So, in the month of September when that went into effect we only got a portion of what we are going to ultimately end up getting and over a 3-month period that will normalize out and at the end we will end picking up what we didn’t pick up in September in the fourth quarter.
Robert Mains - Morgan Keegan
Okay.
Boyd Hendrickson
Like I alluded to earlier that everything is trending up like it typically has in the fourth quarter.
Robert Mains - Morgan Keegan
Okay, and I understand historically the impact of the third quarter has been quite as pronounced as we saw this year but --
Boyd Hendrickson
It is true.
Robert Mains - Morgan Keegan
Okay, just on straight on this. Some of the revenues that you are going to be picking up next quarter that you didn’t collect in the third quarter are we talking top line income statement revenues or is this just cash receipts.
Dev Ghose
Revenue. We didn’t record for instance the projected increase in the California medical rate. We didn’t receive the rate latter. So yes, you will see top line increases on those for those items as well as for the Medicare rate increase.
Robert Mains - Morgan Keegan
Okay, right .And then my last question was if you look at the breakdown that you provide of the rates by payer source. Managed care was down sequentially. Is that mixed acuity -- what was the reason for that?
Dev Ghose
It is up a dollar I think right.
Robert Mains - Morgan Keegan
I am sorry. I am not quoting you right.
Dev Ghose
Yes, it is 356, around 355 I think.
Boyd Hendrickson
Yes.
Robert Mains - Morgan Keegan
Okay, sorry I must have transcribed something wrong on my spread sheet. That is all. Thanks.
Operator
Your next question comes from the line of Gary Taylor of Citigroup. Please proceed.
Gary Taylor - Citigroup
Hi, good morning.
Boyd Hendrickson
Hi Gary.
Gary Taylor - Citigroup
I guess, you know I am still trying to make the bridge from the 3Q results to the 4Q guidance as well and I guess you are saying California and Missouri can be a million or more than million dollars but it seems to be that you have got about a $26 million number of EBITDA this quarter in your guidance for the 4Q is $31 million to $35 million. So a $5 million to $9 million sequential pick up in EBITDA seems like a big, big, sequential increase given history and what you are suggesting Missouri and California.
Boyd Hendrickson
You got to remember to that Medicare is big for our company. You know the 3.3 really in, if you look at it, when it related to Skilled Healthcare Group it would be about 4%. So, you have got the 4% Medicare increase. So, you are going pick up beginning in October, which over the number of Medicare days seems it is a fairly good number, fairly big number. You have got the California in and the way that we came up, we don’t have the rate letters on California Gary, but the way that we came up with the number, we look back at what we got last year and we got about 400,000 a month. So, you have got that and you have got that pick up from that in August and September and then you have got the ongoing October-November where you are going to looking at the higher rate. Missouri is about 80,000 a month and then Texas we don’t really know how that quantify that but all fairly good rate. Medical rate increase and so you will see full recognition of it in the fourth quarter along with Medicare that as it would relate to our company turns out to be higher than the national average. And then you have got the improved metric. You know we would anticipate that occupancy will continue to climb and primarily pushing skilled mix up.
Gary Taylor - Citigroup
It looked like Medicare could be worth I don’t know $3 million of $4 million to the fourth quarter. I guess.
Boyd Hendrickson
Yes. Based on the Q3 ’08 date it is like $9.3 million annually.
Gary Taylor - Citigroup
Maybe a different way of asking is you know if you look at the margins down, you know we try to normalize what seems to be recurring and nonrecurring. Sequentially margin is down about 170 basis points, EBITDA down $2.7 million sequentially at your – occupancy was only down 10 basis points sequentially. Your expensive categories were up 70 basis points. And your Medicare per diem was up $15 sequentially. So those seem like pretty good metrics, which aren’t particularly out of the range of your typical seasonal experience, but there was a pretty substantial sequential decline in EBIDA and margins. So I guess, you know what happened in the quarter that was below your expectations. Anything on the cost side, outside of just, you know the small hurricane impact.
Boyd Hendrickson
Yes. We had a little bit Gary. You know with 283 drop in total, you know right around that number since you have some potential pressures with just small movement in the ability on labor on a per patient day basis, but it is not large enough to talk about, but it is you know it moved beneath a lot little bit.
Gary Taylor - Citigroup
Okay.
Dev Ghose
Obviously the hurricane which we spoke about and our abilities there and that direct hit and just the sidetracking of you know (inaudible) operation for about a month and a half. That was obviously a big issue for us.
Gary Taylor - Citigroup
Okay. Just a couple quick ones. On Kansas, what is the seven-assisted living, what is the trailing annual revenue or your expected annual revenue, Could you ball park that course.
Boyd Hendrickson
Dave do you have that in front of you?
Dev Ghose
I don’t actually. I can get back to you Gary with that.
Gary Taylor - Citigroup
Okay.
Boyd Hendrickson
Yes. We expected to do about a million, $1.1 million to $1.2 million in EBIDA in ’09. We bought in $3.5 million on unit basis, but we would expect the target to be around $1.2 million in EBIDA for ’09.
Gary Taylor - Citigroup
Okay. And then my final question just going back to the bad debt. I guess really on all three elements. Maybe you know starting with the RAC. Is there a chance we see more of those audits and we could see some more of this bad debt, and then on the rehab and hospice, who -- are these allowances against commercial payers or on the copays or what’s actually happening that has caused you to increase the allowance?
Dev Ghose
On the RAC first, you know, we continue to do an assessment each quarter. Now the program that we were being audited under has ended. This is what is -- this is what remains. So as we sit here, we don’t anticipate significant increases to that category. With respect to Hallmark and hospice, I will let Mark Wortley speak to that, but again we look at it on a quarter-by-quarter basis on the rehab side, it would be commercial customers and in the hospice side it would be you know, Medicare or Medicaid would be where we would have had to have build it, and when we have the receivable outstanding for that period of time, you look at it and you say are you going to collect it, and based on our assessment, we believe that it was prudent to increase those two categories.
Mark Wortley
Right Dev, thank you. This is Mark Wortley. Of the bad debt for Hallmark. We took a 300,000 increase in AR. As Dev mentioned, we took a hard look at some of the old receivables and looked what we believed to be adequate. Keep in mind that with our third party business, we have lot of chain business, but we also have a lot of single facility owners, and when they have a disruption in their cash flow, they don’t have the sophistication in our chain customers that certainly Skilled has. So when they have an interruption in their cash flow, it certainly ripples down quickly to their contract providers resulting in slower payments, but having said that we believe we have taken enough to be adequately reserved. In addition to the RAC claims, we have had some other claims that we have taken an additional $200, 000 worth of additional reserve for other types of denial. So we’ve been fairly assertive on making sure that we were adequate in the Hallmark section. For hospice, we had a significant growth spurt in hospice, and we really needed to tighten up our procedures and approaches for billing and collection. So some of the claims had gotten ageing out beyond what we were comfortable with and took that additional reserve to make sure we were okay with that and we do not anticipate needing more in the fourth quarter.
Gary Taylor - Citigroup
Okay. Thank you.
Operator
Your next question comes from the line of James Bellessa of Davidson & Co.
Please proceed.
James Bellessa - Davidson & Co.
Good morning. On the revenue per patient day, I am looking at the second quarter press release and it shows up that managed care was printed at $366 per day. Are you saying from another questioner’s view that it’s really supposed to $355 in the second quarter?
Dev Ghose
I’m sorry James. What was the question?
James Bellessa - Davidson & Co.
The revenue per patient day in the second quarter press release for managed care shows up at $366 per day and in a previous question and the response given, it was said it was $355 per day.
Dev Ghose
Yes. We were speaking to the quarter annual of a quarter annual. That is true in regards to the jump that the $9 drop in quarter-over-quarter. You know, some of that I think it’s anything pointed at the state in particular. It’s you know, we had some increased volumes coming out of New Mexico, dropped that rate a little bit and we had a few more contracts that accelerated you can swap in California with (inaudible). But I don’t think it’s anything (inaudible) it’s something that we watch, I think we build off the exclusions as part of those contracts in there, but it’s running really consistent with where our year-to-date average is at $357.
James Bellessa - Davidson & Co.
In a press release above the Kansas acquisition of assisted facilities, assisted living facilities, it says that there is going to be an increase of over 200 beds and I see sequentially the change quarter-over-quarter was 256 beds. Is that all just a Kansas pickup, or did you have assisted living facility additions elsewhere.
Boyd Hendrickson
No, it’s primarily the Kansas facilities.
James Bellessa - Davidson & Co.
And can you tell us about the rehabilitation therapy units, how many you may have outstanding both by owned and unaffiliated facilities.
Mark Wortley
Yes, this is Mark Wortley again. We have a 120 unaffiliated third party. We have 65 affiliated plus 10 on the affiliated that we do as a management agreement and those are the 10 in Mexico due to a state gross tax.
James Bellessa - Davidson & Co.
And then finally like to go over that ERU bed count. If I’m understanding correctly from Boyd’s comments there were 1324 beds now that our ERUs. You’re thinking that in the fourth quarter you’re going to add 551.
Dev Ghose
Yes we have 38 units now, 1244 beds. Our goal is to go to 53 with 1795. It is an addition of 551 beds.
James Bellessa - Davidson & Co.
Okay. I had that first figure wrong then. Thank you.
Operator
Your next question comes from the line of Andreas Dirnagl of Stephens Inc. Please proceed.
Andreas Dirnagl - Stephens Inc.
Actually all of my questions have been answered.
Boyd Hendrickson
Thank you.
Operator
(Operator instructions) Your next question is from the line of Rob Mains from Morgan Keegan. Please proceed.
Robert Mains - Morgan Keegan
Thanks for taking this second question. Glad I got the PPD question out of the way. Dev, the availability you said $47 million.
Dev Ghose
Correct.
Robert Mains - Morgan Keegan
In terms of how you might use that pretty fair amount of buzz that while that is not a lot that is on the market, but in that valuations for SNFs coming down. What’s your appetite if not for something the size of Laurel doing perhaps tuck in type acquisitions or that we more likely see do that in assisted living or is would you rather in this credit market just hang on to you cash.
Dev Ghose
Yes. I think we’re going to look for our opportunistic opportunities and I don’t know you would have to share with me where -- I think valuations are going to come down, but we haven’t seen them come down yet and you got to kind of way [ph] if you know traditionally we’ve been paying for an owned property somewhere in the neighborhood at seven times EBITDA and that would be if you are going to get the real estate included and when you look at you know, now that we are borrowing money from -- for today, but when you look at the cost of new money, the valuations are going to have to come down to be able to make the deal really work, but I haven’t seen valuations come down yet. So, we’re continuing to look for opportunistic opportunities and if something like New Mexico came along, we would try to figure out a way to make it work.
Robert Mains - Morgan Keegan
Would it be more likely something like that or one off type of deal?
Dev Ghose
Probably it will be more like a one off, one two here there.
Robert Mains - Morgan Keegan
Okay. Fair enough. That’s what I needed. Thanks.
Operator
There are no further questions in the queue. I would now like to turn the call back over to Mr. Boyd Hendrickson for closing remarks.
Boyd Hendrickson
Okay. We would just like to thank everybody for joining the call and once again we’re encouraged by the trends that we are beginning to see for fourth quarter and hopefully you know occupancy will continue to pick up as well as the Medicare and skilled mix. And with that once again thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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