Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Skilled Healthcare Group, Inc. earnings conference call. My name is Lucinda, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today, Mr. Roland Rapp, General Counsel. You may proceed.
Thank you, Lucinda. Good morning. I'd like to welcome everybody to Skilled Healthcare's quarterly earnings conference call, and introduce our presenters: Bob Fish, Chief Executive Officer; and Chris Felfe, our Chief Financial Officer.
Before we begin, I'd like to note that certain statements and information that we discuss may be deemed to be forward-looking statements. They include statements relating to our objectives, plans and strategies, as well as things we expect or anticipate will occur in the future. Forward-looking statements are not guarantees and they are subject to a number of risks and uncertainties that are discussed in our filings with the SEC. Any forward-looking statements discussed on this call are made as of the date of this call, and we undertake no duty to update or revise any of those.
On the call today, we will refer to adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, EBITDAR and adjusted EBITDAR. We use these measures of performance. They are not considered measures of financial performance under U.S. GAAP. Definitions of these terms as well as reconciliations to the most comparable GAAP measurements are included in our earnings release that we issued yesterday. This report and our discussion today are otherwise presented on a consolidated basis under GAAP. Accordingly, references to the company, Skilled Healthcare Group, Skilled Healthcare, us, we and our, refer to Skilled Healthcare Group Inc. and each its consolidated subsidiaries taken as a whole.
I'll now turn the call over to Bob Fish, Chief Executive Officer. Bob?
Thanks, Roland, and good morning, everyone. Thanks for joining us today, and I hope you are all doing well through a busy earnings season. I want to spend some time in today's call to walk through our 2013 results, but I also want to use this as an opportunity to introduce myself, my background and what I've learned in the two months I've been here since joining.
First and foremost, I want to say that over the past 60 days and particularly over the last week, as we held our first in-person board meeting, I spent a good amount of time with our Board of Directors and we're closely aligned in terms of what we see as our strategic priorities in the months ahead. I use this call as an opportunity to detail these priorities and how we'll address them.
In terms of the fourth quarter, we had some items in the quarter that Chris will detail that added up to about $0.06 a share. As we finished the year, we took a hard look at the volatility of our bad debt, our workers comp cost, our hospice cap exposure, and we took measures at yearend to reserve ourselves as prudently as appropriate for these items.
These areas were clearly a problem through 2013, and I think this is one first step we can take toward addressing our risk profile from that standpoint. While these aren't necessarily one-time items that we would remove from our adjusted earnings for the fourth quarter, they were pretty specific, so I wanted to call them out.
Our fourth quarter results also show that we still got a lot of work to do to begin reporting consistent higher visibility quarters. And I think that's one of many goals of the strategic outlook we've been putting together. Since joining Skilled Healthcare late last fall, I and my team have undertaken a deep analysis of the company's strengths, weaknesses and risks.
And the first thing I want to say about that analysis is that I think we are fully capable of bringing the platform back to its former level of profitability. This won't be an easy or short process, and as you've all seen by now, we're not setting a guidance range for this year for that reason.
We've currently set levels of accountability for ourselves, and as you've hopefully also seen, we do expect 2014 to bring improvement over 2013, both operationally and financially. However, I want to retain as much strategic flexibility as possible and not constrain or focus the company on meeting short-term earnings targets. I hope you can understand that rationale.
In terms of our priorities, I'd like to address this from two different angles. First, I want to talk about the company's strengths. As a public company for the past seven years, Skilled has often been noted for its real estate ownership, its geographical concentration and its high acuity care capabilities.
These are definitely strengths of this platform, but what we also should appreciate are the relationships we have with referral sources and our managed care experience and involvement. From a strategic standpoint, I want to play to these strengths or more specifically I want to utilize them together, which I don't think we've done optimally in the past.
Now, obviously, we want to do so while addressing our weaknesses and reducing or minimizing our risks. I know that some of the earnings disappointments we've had over the past year have been seen as a result of the evolution of our payer mix toward commercial insurers. But the fact is, this is going to continue and it plays to our strengths in high acuity and relationships we have with managed care payers.
We're very good at working with these payers and I see this as a point of opportunity for us. What the board and I have discussed in the most detail have been four key themes that define our strategic initiatives. These are our people, our quality, our risk profile and our financial results.
What I'll be focused on from here forward are these four areas, and I want to talk you through them, so you can see the direction we're taking. In terms of people, one thing I can't say enough about is the level of dedication I've seen among the caregivers at Skilled. This company obviously has had a lot of distractions over the past few years, but the dedication to quality care has never wavered. In fact, we took a long look at our annual five-star performance as part of our strategic review.
There are a lot of ways we can improve in these ratings, but the one thing that stands out is the quality part, whether its specific comparisons like hospital, readmissions, falls, weight loss, et cetera, or the broader quality measurement of these ratings, Skilled consistently performs well. If there is a strength to work off for a long-term care provider, this certainly is the one I'd like to start with.
Second, on the people front. As you all know, Jose Lynch announced his departure from Skilled last month, and at that time we began a formal search for a replacement as Chief Operating Officer. Jose is a tough person to replace, but I can say, we've identified several top candidates and we are close to completing the search, and I hope to be able to announce a new appointment soon.
We've also formalized Chris Felfe's position as Chief Financial Officer. Chris has been a hugely valuable member of Skilled's financial team for a number of years, and he fully deserves not to have those interim and acting tags next to his title. Chris, thanks for all your hard work. So that's the people part of our four themes.
In terms of quality, as I said I am extremely proud at this company's quality culture. What I want to do is codify the ways we've been so successful, as individual facilities or markets, and create in this platform a protocol of best practices that we can define benchmark and disseminate, in order not only to maintain the quality we've demonstrated, but to improve on it and make sure that we do so on a company-wide basis.
We can say all we want about strategic plans or turnarounds, but it all hinges on our ability to take care of our patients and residents. I think far greater breadth of best practices dissemination, data analytics and benchmarking will make us an even better care giving organization than we are today, and the investments we'll make here will have a huge long-term return, which brings us to risk. In this industry, quality and risk are usually closely and related, but what I found during our strategic analysis is there is a big disconnect between our overall dedication to quality care versus our risk profile, as you all see it from a Street standpoint.
As I hope is coming through in these comments, I and the board see tremendous value in this company. But some of the biggest gating factors to realize in that value are not only some of the risk items I mentioned earlier, but also our legal and regulatory standing. This is one of the items I have spent the most time on, since joining the company. And I want to continue to engage and what I'll call productive discussions with the necessary parties, and to resolve the issues we've faced, so we can move forward as a company.
I'd like to have more specific updates for you on this front, but I do hope to be able to report progress in the not too distant future. What I can say today though is that it's been beneficial in this situation to see the new arrival at Skilled, and to be someone willing to revisit the discussions about these matters from a fresh point of view.
So finally, it comes down to financial results. Doesn't is always? I have often been told the old saying that, when it comes to a company's financials, numbers are a lagging indicator. But I'm not a big fan of asking for the benefit of the doubt. As I mentioned before, we're not giving financial guidance for 2014, but we have established clear lines of accountability for ourselves and to our board and we have also established for your expectation that this year should mark an improvement over 2013.
The issue I have with giving more specific guidance than that that I want to retain as much strategic flexibility as possible through the year. As I've said, since I joined Skilled, we've undertaken a deep analysis of the organization. We've looked at our overall platform, our geography, our care channels and our strengths and weaknesses. And what I'll say is that from a strategic standpoint, all possible moves are on the table.
We need to improve our results in certain markets, hopefully borrowing from our success and others. But we also need to actively consider our portfolio of geographies and services as a whole and decide what is the optimal configuration to be a lower risk, more adaptable and higher growing company. So I don't want to spend time here suggesting there are divestitures coming, in fact, the right answer might be acquisitions instead. But I want you to know that we would keep all the options over.
Finally, I want to talk about alignment. As shareholders and analysts, as well as many of our employees and other stakeholders, who maybe listening to this call, you deserve to know the background of my being named CEO here, because I think it can help you see how I'm coming to the job.
Over the past number of years and I'd prefer not to admit how many, I worked with a number of companies, as they faced transitional challenges. And I am happy to say the outcomes of these situations have tended to be more successful than none. The companies I had worked with in the past also have been very similar to Skilled.
So I think my knowledge base is good and relates to the fundamental core here. And as I touched on a little while ago and the time I've spent with our board, we found that we're looking at Skilled in a similar way, and were on the same page about what needs to be done.
But the alignment I am talking about is with U.S. stakeholders. The order of priorities I just walked through with you ends with financial results and for a good reason. Financial results are just that, results. As the newly named CEO, my compensation is directly linked to how our strategic initiatives create value for you as stakeholders.
So I think that we're all in the same team. And in that vein, I'll do my best to be as transparent as possible in terms of what we're doing and how we're progressing. The stronger the company becomes, the better for all shareholders and employees alike. So that's how I'm looking at Skilled Healthcare.
And at this point, I'll let Chris Felfe, our non-interim, non-acting CFO walk-through some financial specifics, and then we'll take questions. Chris?
Thanks, Bob, and good morning. I'll walk through some of our fourth quarter and 2013 financial results. But first, I'll highlight some recent items. First, we are able to strengthen our capital structure in the fourth quarter. We closed our 10 HUD loan, bringing the total amount financed through HUD insured loans to $88 million for the year.
As the HUD facilities EBITDA and debt are excluded from our credit facilities leverage ratio calculation and our brick-and-mortar facilities are leveraged more highly than the rest of the operations, this improves our leverage ratio. We also closed a $67 million financing with MidCap Financial that is treated as HUD financing under our credit facility agreement, and so provides additional covenant relief.
The expectation would be that these 10 facilities financed with MidCap would ultimately be converted to HUD financing. We are in the early stages of re-engaging with HUD, and will report on this process later in the year. The net proceeds of the HUD in MidCap transactions were used to pay down term-debt under our credit facility.
We also disposed off two skilled nursing facilities on December 1, 2013, an owned facility in Texas with a 136 license beds and a leased facility in California with 90 license beds. These dispositions are treated as discontinued operations in our financials we released yesterday. They had $13.7 million of revenue for the 11 months we owned them in 2013 and had an operating loss of $1.3 million for the same period. The net proceeds of $12.9 million from the dispositions where used to pay down term-debt, which also provided covenant relief.
Now, for our fourth quarter results. Yesterday, we reported a GAAP net loss per diluted share of $0.08 for the fourth quarter, as compared to net income per diluted share of $0.15 for the same period in 2012. Our adjusted net income per diluted share was $0.06, a decrease of 62.5% over the fourth quarter of 2012.
Revenue for continuing operations decreased 3.3% to $208.3 million in the fourth quarter of 2013 and adjusted EBITDA margin decreased 350 basis points to 7.6% in the fourth quarter of 2013 compared to same period a year ago.
The missed to guidance was driven by several factors. First, through the ongoing shift from Medicare to managed care, which frequently has a co-pay due, on day one, when Medicare doesn't have a co-pay until day 21, we have seen a decrease in collections percentages, which resulted in bad debt expense being higher than forecasted by $1.2 million.
Second, our self-insured workers compensation expense in Q4 was $1 million higher than expected due to increased reserves in older years as well as some actuarial adjustments to some greener years.
The balance of the difference was due to higher than expected hospice cap reserves of $1.2 million in the fourth quarter, along with the slowdown in our hospice operations as we experienced a census decrease, combined with a slowed reaction to adjust labor cost accordingly. These three items negatively impacted fourth quarter earnings by $3.4 million or about $0.06.
Turning to our reportable segments. In long-term care services, revenue increased 0.5% from $162 million in the fourth quarter of 2012 to $162.8 million in the fourth quarter of 2013. Adjusted EBITDA for the long-term care segment decreased to $17.4 million for the fourth quarter from $22.9 million a year ago, with the adjusted EBITDA margin decreasing to 10.7% from 14.1%. Long-term care services represented approximately 78.2% of total revenue in the fourth quarter of 2013, up from 75.2% in the fourth quarter of 2012.
Moving on to the other two reportable segments, Hallmark Rehabilitation and Signature Hospice and Home Health. In the fourth quarter of 2013, our third-party therapy revenue declined $2.6 million or 11.1% to $23.1 million. This revenue decline was primarily due to us exiting third-party contracts that no longer made good business sense. Our Signature revenues decreased 19.1% and represented 10.8% of total revenue for the quarter.
Our interest coverage and leverage ratios continue to be in compliance with our debt covenants. As of December 31, 2013, our fixed charge coverage ratio was approximately 2.2 compared to the minimum requirement of 2.0 and our leverage ratio was about 4.5 compared to the maximum of 5.0. DSO was 45.9 days at December 31, up from 45.8, last quarter.
As Bob discussed earlier, we won't be providing earnings guidance for 2014. We do intend to improve our operating metrics and to comply with our debt covenants for all of 2014.
With that I'll turn it back to Bob.
Thanks, Chris. Since this was an introductory call, I hope he didn't go on too long, but he did want to give you a sense of how I've come to see things since joining Skilled Healthcare. What I want to do is as we move forward just keep our discussions as transparent as possible and not beat around the bush about the things we have to do here.
As I said earlier, there is tremendous value in this organization. We've identified good ways to get it at that value and that's the basis for our strategic plan moving forward.
With that, we're ready to take questions.
(Operator Instructions) Your first question comes from the line of Frank Morgan with RBC Capital Markets.
Frank Morgan - RBC Capital Markets
A couple of questions. First, could you break out on the worker's comp reserve, how much of that was prior period versus for the current year of 2013 versus our prior year?
Frank, this is Chris. I don't have that information in front of me, but it's primarily the older years. We've increased some reserves and some very old years and most of the balance related to 2012 and prior.
Frank Morgan - RBC Capital Markets
And then secondly, just looking at the hospice, the census decline there, the 15%, could you give us a little bit more color on kind of admissions versus length of stay? I know there was some references in the release about home healthcare, but talk a little bit about the admission trends in hospice? And was it more admissions or what was going on with the length of stay as well? Any thoughts there?
Frank, this is Laurie Thomas and I can address that question. Some of the change that I think has impacted census the most has to do with the change in what's allowed at admitting diagnosis. And starting at the end of June, start of July, we started not admitting patients that had debility or failure to thrive as admitting diagnosis is in preparation for the requirements just going into place in 2014. And I think that's probably the biggest shift is that we're shifting our attention to some of the shorter-term patients, when we're looking at our census development.
Frank Morgan - RBC Capital Market
Maybe I'll ask a couple of more strategic questions, and then I'll hop off, and let somebody else ask a question. But I guess, Bob, as you think about the business now that you've been there, how do you really assess the merits of some of these ancillary businesses, say, the home healthcare hospice versus, say, the rehab side of the business? And then my second question and then I'll hop off is just, you've been in this business in the past, you've been away, you've come back to it now. Any thoughts about what you have seen that are the biggest changes, that you think have been the biggest changes in the business? I'll hop off.
Certainly the ancillary businesses are a focus as we look at the total platform and it's probably premature for me to making a statement about the alignment of those businesses with the rest of the activities that we have going on here right. Primarily, we're a long-term care company, and so goes long-term care, so goes the future of the company. So obviously that's a primary focus.
As far as rehab is concerned, it's always been my feeling that rehab is very closely aligned with the day-to-day in the homes and therefore we actually have an excellent rehab company. In terms of our earnings, it's a bright spot. So certainly want to continue to have an active rehab component and to grow that business.
Looking at my prior experiences versus this situation I think probably the most important thing to know would be the increase in managed care. I see that as a strength here, especially in our California facilities, but growing in the other areas as well. So I think that we need to continue to lead in that area and to increase our knowledge base, and the fact that we can actually do that on a very profitable basis. So that that would probably be the highlight of what was different today versus when I was at Genesis few years ago.
Your next question comes from the line of A.J. Rice with UBS.
A.J. Rice - UBS
Just maybe, first of all, sort of following-up, continuing along the lines of the strategic thinking, is there some obvious places that you can see, that you can go to for a low hanging fruit to improve performance? And then maybe, obviously, I don't know if you have identified longer-term things, that would mean meaningful improved performance and maybe this has to wait till new CIO comes on board, but any thoughts along those lines?
I think the quick answer is, yes, to both. I think there are some things we can do immediately that will have an impact. Obviously, had a good deal of experience in the long-term care pharmacy area, so spend some time looking at those issues, in terms of the way we control labor, in terms of some of our other operating metrics.
Yes, I think there is some improvements that can be made in a fairly short time frame. On the longer-term, we are deeply involved in looking how we can change a number of things that would I think improve the performance of the company. A little soon for me to get more specific, but yes, I think there are opportunities in both areas.
And to your last point, obviously, finding just the right person to take over the COO role is very important. I've been spending a lot of time interviewing. And as I mentioned, I have identified several very, very qualified people that I'd be happy to have join the company, so working to closure on that issue.
A.J. Rice - UBS
And then you addressed in the prepared remarks, but obviously a lot of discussion last year about the pressure points has been the growth that you just referred to of the commercial business. And yet as you say, it sort of plays through the strength in the company, but you can treat these higher acuity, higher turnover patients well. What's the answer to that? Is it just that you got to manage through the ongoing headwind or is there some better way to reconcile the opportunity with the challenge as well?
Yes, I think it all comes down to productivity and the fact that that we have to be able to make a margin in that book of business. Not to go too far into the history, but I've spent 20 years running hospitals and lived through the entire evolution of managed care in California. So I do know what it takes to figure out where your business is coming from and what your profitability is in each line of business, and how you can organize yourself to provide those services in a way that give the patient and the caregivers everything that they need, but at the same time allow you to make a dollar doing it.
A.J. Rice - UBS
And then maybe this is a final sort of strategic question. But you're referencing that this sort of a portfolio review process about potentially where you might invest, but also where you might add. Is that just the natural ongoing process or is there something that specifically underway that has a sort of finite or targeted timeframe? And if it's more in the latter, can you give us some sense of when you think you might have come to some conclusions there?
Yes. Certainly, being the new guy in the block, it's just important for my own knowledge base, but also just as I think anybody in my situation would do, would be to look very carefully at where we're operating, what the profile of each of those markets is, where we're making money, where we're not making so much money, and figure it out, where we can do better. And if we were to realign or reallocate our resources, how we might do that in a way that would benefit the company.
Again, with the idea that, the stronger the company is, the better it is obviously for those who invested in it, but also those who work in it. With regard to timeframe, it will be complete by the time we talk again next quarter. And whether or not we have made any decisions by that point, I can't say.
Your next question comes from the line of Kevin Fischbeck with Bank of America.
Kevin Fischbeck - Bank of America
I guess just wanted to understand a little bit of the other comments you made a couple of times, that you think you can bring this business back to its historical profitability, which is pretty big I guess move within the business, if I think about the fact that margins have been down every year expect for one since 2005. I mean there's a huge delta between what you're doing now and what you've done historically.
So I just wanted to understand when you look at that gap versus what you're doing now, what the opportunity is, is it a revenue opportunity, is it a cost opportunity, mix, changing the business mix a bit over time? And I guess, before you'd say it's all three of those, when you do, if you could just kind of maybe just order of magnitude size, which ones are the biggest driver to kind of returning back to that historical profitability?
Probably a little early, 60-plus or minus days in to get too granular on that, but I think certainly the company or anybody in this field is probably not going to be returning to 2005 numbers. But if we're talking about 2010, 2011 numbers, then yes, I think that level of recovery is very much in hand.
So the drivers are in this business, and you know this very well, they're occupancy and mix. This company has very high occupancy in a number of its markets and it has a couple of markets that have some lagging occupancy. A couple of those situations are very easily defined in terms of particular buildings that have stumbled for one reason or another. But we are looking very carefully at how we can move that needle.
And so far as the mix question, meaning acuity mix, the company is one of the leaders in terms of providing shorter stays and more acute services. And we have excellent relationships with a number of hospitals, medical groups that depend on us for those short stays. And we'll continue to try and leverage those relationships.
Kevin Fischbeck - Bank of America
And then I guess when we think about going back to the hospice answer, about centers being down, because moving away from a couple of the longer-stay admission criteria. When do you think that number starts to stabilize, obviously, it's going to take some time for that longer-term centers to kind of roll-off of your rolls. So how do you think about that business reaching stabilization and starting to grow again?
This is Laurie, and I think we'll have better visibility on that over the next quarter or two. Now as that requirement's in place, and the market, the entire industry is being impacted with kind of adjusting accordingly. I think we'll have a better idea, as we reestablish our relationships and the expectations with our sales force.
Kevin Fischbeck - Bank of America
And I guess to that end, I mean I could envision that's an area where obviously the hospice cap starts to come down significant, as you focus on shorter-stay patients. And I guess, how do you think about that dynamic, where now everybody has to kind of refocus on those patients to make their business successful? How you think about the competitive dynamic there?
I am not real clear what you're asking, but I think it's an adjustment just like any change in the industry, where you can step back and you look at where our priorities, what kind of patients are we targeting, what's the best fit for eligibility for hospice, and making sure we're doing the right thing there. I agree that lower is the cap exposure on a go-forward basis. And so that's where our focus is, just making sure that we're taking the right kinds of patients, taking good care of them, while we have them. And I think we'll see some return to stabilization.
Your next question comes from the line of Gary Taylor with Citigroup.
Gary Taylor - Citigroup
Just a couple of questions. One, I know you're not giving guidance, but you did at least make a comment on adjusted EBITDA improving from 2013. So just not to put too far and a point on it, but I just wanted to make sure I understand what I think that means. It means you're full year $69.5 million EBITDA, you're saying you will earn more than that on a dollar basis in '14, right?
Gary Taylor - Citigroup
And then just on this issue with the payer mix continuing to evolve. We've certainly appreciated the challenge that is with Medicare Advantage paying less than Medicare fee-for-service, and apparently there's plenty of nursing homes willing to take those lower payment rates. And then on the labor and productivity side, you're somewhat constrained by some of the staffing ratios, et cetera. So as you kind of look at that issue, do you think there is opportunity somehow on the rate side and are you implying that you do think you still have room on productivity despite some of the staffing ratios?
The second part first. Certainly, we do have ratios that we have to maintain and those are appropriate, and we pay very close attention to them. We have to make sure that we are staffing with the lowest cost person that we can put on in each shift. And whether we're using overtime to fill shifts or registry to fill shifts or people on our regular pool to fill those shifts has a great impact in terms of what it actually cost to provide those hours of care. So I spend a lot of time looking at that.
With regard to the continuing shift, we have a lot of current negations going on with various payers in terms of rates. Those rates have been improving. And so we're happy about those conversations and continue to work closely with those partners. And I think whether we're able to carve-in or carve-out various services through those negotiations has a big impact as well.
And finally, it's the evolution of our working closer and closer with medical groups and hospitals about what their needs are, and collectively being able to manage the care of the patient, that will actually allow us to be more efficient in the care of those patients, and therefore have a better financial result.
Gary Taylor - Citigroup
Last question, have you spent much time thinking about the new LTAC, long-term acute care hospital regulations. And is there any significant LTAC overlapping your market such that you have a view on how that might impact occupancy? And is there an opportunity to take some of these shorter stay patients that may no longer qualify for LTAC over the next few years?
I think you basically just answered your own question. I think there is an opportunity. We do have overlap in certain markets. I'm a big fan of sight-neutral point-of-care. I find it hard to understand, why providing services in a nursing home that's essentially the same service that might be provided in another care setting is reimbursed 30% of what it might be someplace else.
And I think just the very nature of that dichotomy will drive the regulations and the patients into lower cost of care. And I think that benefits the long-term care.
Gary Taylor - Citigroup
Do you see significant LTAC overlap outside of California?
Yes, we do in Texas especially.
Your next question comes from the line of Chad Vanacore with Stifel.
Chad Vanacore - Stifel
Just thinking about Medicare Advantage rates for a second here, with the shift toward more Medicare Advantage. How should we be thinking about the trend in rates and length of stay?
We talked a little bit about that last quarter. Our rates right now are just south of $400 a day and they have been trending up the last several quarters. So we're optimistic that they will continue going up.
Chad Vanacore - Stifel
You had mentioned that you've taken a reserve in a quarter for hospice therapy cap by about $1.2 million, any bumping up against the Part B therapy cap?
We have seen a slow down in our Part B revenue throughout 2013 as compared to 2012. That has negatively impacted the business.
Chad Vanacore - Stifel
And then just the last question. Anything we could takeaway from, what you've experienced so far in Q1 as far as Medicare trends or are you seeing any impact from our late flu season?
Our hard census and Skilled mix is usually -- Q1 is usually our best quarter. And I can't say that our occupancy and Skilled mix are meeting our forecasted numbers so far this quarter.
Chad Vanacore - Stifel
And what about any impact from flu?
I'm not aware about how that's impacting occupancy right now, but that is typically a driving force in the first quarter.
Your next question comes from the line of Dana Hambly with Stephens.
Dana Hambly - Stephens
Couple of things from me. Again, I know you're not providing guidance I just want to think about free cash flow and free cash flow deployment for the year. I assume operating cash flow would trend up if EBITDA should trend up. Try to think more about CapEx, and I know Bob, you talked about investments that need to be made, can you just tell me in the last couple years, has the company been underinvested or is that fine or you just kind of, where do you feel from a system standpoint, where you need to get to kind of move to the company to where it needs to be in a couple of years?
Yes. I think our CapEx budget for '14 is similar to our CapEx in prior years. Although, I don't believe the company actually spent its entire CapEx budget in prior years. We'll be more focused in terms of how we deploy that capital in terms of trying to use it prudently and in towards growth. We certainly do have maintenance issues and have a maintenance CapEx budget that we have fully-funded as well.
In terms of free cash flow, I think your assumptions are correct. And obviously in our environment right now, delevering is the key, and so we probably deploy at there first. If however, we had an opportunity that was more strategic, we would certainly look at that carefully as well.
Dana Hambly - Stephens
Are there required debt payments this year and if so how much?
Our HUD debt is fully amortizing debt. That's 30 to 35 year fully amortizing money. The MidCap loan amortizes over at least 29 years, but it has a balloon payment due, it's a three-year term. And there are increased principal payments beginning in six months of about $250,000 a quarter over the amortization payment.
And our credit facility debt has a required payment in December of this year of $2 million, because of all the prepayments we made last year. We don't have all the scheduled quarterly payments due that we had in the past, but what we'll do is we'll continue to pay down debt as our operating cash flow allows us to do.
Dana Hambly - Stephens
Last one from me. Bob, you touched on it, achieving five-star quality for the facilities. Please let me know, of you facilities now? Who's at the four and five-star level and then who's at the one and two-star and how long will it take? What's the process from getting those lower star ratings up and what does that do for you from a financial results standpoint?
I am not one of those people who would probably be a big cheerleader for the metrics involved in the five-star systems. It's difficult for all long-term care providers to get excited about the methodology, but it is what is. And to the part of your question, it is I think becoming more and more of an issue for patients and for referral sources and for medical groups to look and to consider what are various facilities or providers' five-star rating is.
It basically starts with survey results and then your rating can be modified based on your quality score, based on your staffing score, so it's a bit of algorithm. And it does take time when you have a facility that has had a low survey score for that to burn-off in the way the algorithm works. So moving a facility up in its terms of its five-star rating will take two to three years.
And I don't have in top of mind the buckets that our facility has fallen in terms of each of the five-star ratings. I can tell you that it's significantly lower than I would like it to be. We have had what I would classify as some significant and pleasant movement in terms of moving facilities from lower ratings to higher ratings over the past year and I want that to continue.
I guess, the last aspect of your question is what it does it get you in terms of financial results. Well, it probably goes back to an earlier comment, which would be, on the margin, it gets you patients who are looking at that as a decision criteria in terms of where they would like to be admitted and also medical groups in hospitals that use that as a criteria to decide who they're going to work with.
And there are no further questions at this time.
Thanks everyone who is been on the call. We look forward to speaking with you individually, if you have questions and certainly during the next quarter. Thanks very much.
This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!