Genesis Healthcare's (GEN) CEO George Hager on Q4 2015 Results - Earnings Call Transcript

| About: Genesis Healthcare, (GEN)

Genesis Healthcare, Inc. (NYSE:GEN)

Q4 2015 Earnings Conference Call

February 23, 2016 08:30 AM ET

Executives

Lori Mayer - VP, IR

George Hager - CEO

Tom DiVittorio - SVP and CFO

Analysts

Frank Morgan - RBC Capital Markets

Joanna Gajuk - Bank of America/Merrill Lynch

Chris Rigg - Susquehanna International Group

Jacob Johnson - Stephens

Chad Vanacore - Stifel Nicolaus

Operator

Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Lori Mayer, Vice President of Investor Relations. Please go ahead.

Lori Mayer

Good morning and thank you for joining us today. We filed our earnings press release yesterday evening. This announcement is available in the Investor Relations section of our Web site at www.genesishcc.com. A replay of this call will also be available on our Web site for one year.

Before we begin, I would like to quickly review a few housekeeping matters. First, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements, and are encouraged to review our SEC filings for more a complete discussions of factors that could impact our results.

Except as required by Federal Securities law, Genesis HealthCare and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes that arise as a result from new information, future events, change in circumstances or for any other reason. In addition, any operation we mention today is operated by a separate independent operating subsidiary, that has its own management, employees and assets, references to the consolidated company and its assets and activities, as well as the use of the terms, we, us, our, and similar verbiage are not meant to imply that Genesis HealthCare has direct operating assets, employees or revenue or that any of the various operations are operated by the same entity.

Furthermore, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon at the exclusion of GAAP report. GAAP to non-GAAP reconciliations are available in today's press release.

To facilitate comparisons before and after the February 2015 combination with Skilled Healthcare, we have also provided certain non-GAAP financial information on a basis assuming the combination of Skilled Healthcare and Genesis HealthCare occurred at the beginning of each reporting period. This data is labeled Pro-Forma. Also, when we reference earnings per share, we are always referring to diluted earnings per share.

And with that, I will turn the call over to George Hager, CEO of Genesis HealthCare.

George Hager

Thank you, Lori. Good morning and thank you for joining us to discuss our results for the fourth quarter and full fiscal year of 2015 which were in line with preannouncement we made on January 25th. We reported fourth quarter 2015 adjusted EBITDAR of 161 million and adjusted EBITDA of 39.6 million, yielding year-over-year EBITDAR growth of just under 5% and EBITDA growth of over 14%, very strong growth despite increases in both bad debt and self insurance reserves recorded in the fourth quarter of 2015. For the full year 2015 adjusted EBITDAR of 733.2 million and adjusted EBITDA of 249.7 million, produced EBITDAR growth of nearly 6% and EBITDA growth of nearly 12%. In fact adjusted EBITDA growth exceeded 10% in each of the four quarters reported in 2015.

Genesis’ fixed charge coverage ratio which prior to the Skilled transaction was 1.2 times in 2014 grew to 1.31 times in 2015 and we expect fixed charge coverage to grow to 1.35 times at the midpoint of our 2016 guidance. This level of performance would not be possible absent the dedication, care and compassion of our employees, from the frontline caregivers to our corporate and regional employees, all of who make a significant difference in the lives of the more than 50,000 customers we serve each day. This level of performance would not also be possible if it not for our multifaceted strategy to drive growth and profitability in a changing business climate, a climate producing near-term pressure on organic growth in census and skilled mix.

Genesis is currently in a transformation phase as we position our operating model to thrive in a world that will increasingly reward value-based providers, a future where innovative providers having the best outcomes produced at the lowest cost will gain disproportionate market share of higher margin post-acute patients. Our focus on reducing avoidable hospital readmissions, managing down length of stay and voluntarily participating in value-based programs, do in fact challenge our near-term top-line, but they are absolutely vital to our long-term success.

We welcome a fee-for-value healthcare delivery and payment system. It is good for patients. It is good for the physical health of our nation and it will reward Genesis for the decades of investment made in our clinical, operating and information systems platform. And it will allow us to increasingly capitalize on our strong relationships with hospital and managed care partners. The very things that differentiate us from the competition in the markets we serve.

In the meantime, as we work to position Genesis for long-term success, we are managing through the challenges via our multifaceted strategy to drive growth and profitability, strategy producing strong EBITDA growth, significant free cash flow and fixed charge coverage growth. With that said, I am extremely proud of our extraordinary accomplishment in 2015. They are the fuel behind our recent and anticipated growth.

In the area of strategic growth, in 2015 we completed the combination with Skilled Healthcare, greatly adding to our presence in attractive western markets and introducing us to new markets in the Midwest. We realized 30 million in skilled transaction synergies in 2015 and are positioned to take advantage of an incremental $11 million of synergies in 2016.

We expanded our PowerBack Rehabilitation brand, opening a second newly built state-of-the-art PowerBack Rehabilitation facility in the Denver market and acquiring two PowerBack facilities in Texas. We expect one PowerBack facility to come online in 2016 and we're actively pursuing five sites for PowerBack facilities to come online in 2017. We also opened in 2015 two new state-of-the-art hybrid short stay long-term care facilities in Maryland. One of these facilities is owned in joint venture with a strategic acute care partner.

In 2015, Genesis rehab services successfully added nearly 400 new therapy contracts and 22 outpatient sites, increasing our year-over-year site-of-service footprint by 31%. And we ended last year with the December acquisition of the 19 Revera skilled nursing centers and contract rehabilitation business adding high quality assets and density in existing core markets.

In the area of portfolio and capital management, during 2015 we completed five facility divestitures, one facility acquisition with our REIT partners for 19.7 million, resulting in 7.1 million of rent reduction and a loss of EBITDAR of only $1 million. In October, we received portfolio credit approval from HUD to access up to $760 million of low cost fixed rate long-term financing, making it impossible to significantly extend maturities of our recent acquisition related real-estate debt and reducing our overall cost of capital. And on January 01, 2016, we sold 18 non-strategic assisted living assets in the State of Kansas for $67 million 54 million of the proceeds were used to repay real-estate bridge debt.

And finally in the area of innovation, in 2015 Genesis voluntarily entered 32 facilities into the Model 3 bundled payment care improvement initiative or BPCI, critical to obtaining better quality outcomes and improved healthcare efficiency, while still early Genesis received preliminary results for its first 18 centers to enter the BPCI program in April and July of last year. In total, the financial results were slightly net positive as we expected, but the real value of this initiative is in the small financial gains, it is the access to real-time data and a tremendous learning experience as the industry moves further towards mandated value-based programs. We are very encouraged by the initial results and knowledge gained to-date in this program.

In January 2016, CMS announced new participants in an innovative initiative the Medicare Shared Savings Program Accountable Care Organization, designed to lower cost, while improving the care patient receive. Genesis Healthcare ACO was selected as of the 100 new ACOs providing Medicare beneficiaries with access to high quality coordinated care across the United States. It is our unique industry-leading, captive SNFist organization Genesis Physician Services that allows us to participate in this program. This is an upside only program and another example of where Genesis is positioning for success in the new world of pay-for-value.

We continue to make great progress with our new Vitality-To-You service offerings. Vitality-To-You extends Genesis rehabilitation therapy services into the community and allows patients to continue to receive therapy in their homes at a lower cost versus receiving therapy in the institutional setting. This capability will continue to allow us to reduce the overall cost of an episode of care and improve hospital readmission rates. Vitality-To-You just celebrated its one-year anniversary in January and now cares for approximately 1,100 patients per day, growing 10% since our last earnings call.

And finally in January 2016, Genesis rehab services announced that it joined forces with Apollo Education Group to develop scalable rehab therapy training program in China. China's healthcare needs are expanding at an astonishing rate and workforce training opportunities must be paced with that growth. We believe Apollo's support in executing our talent development programs in China will allow Genesis rehab services to excel at training next-generation of preventive healthcare leaders not only for our own growth in China, but also for helping to narrow training gap and with professional trained therapists across the country.

Before turning the call over to Tom DiVittorio, our Chief Financial Officer, I want to share three examples that illustrates the value Genesis brings to the table when hospitals are looking to partner with post-acute providers, a first example is around our Hathorne Hill facility, a brand new state-of-the-art 120 bed hybrid facility located in the Massachusetts marketplace. Upon opening, this building had extensive challenges due to significant market competition, including two skilled nursing centers owned by a major referring hospital. This referring hospital who participated to the Medicare shared savings program, set cost and outcome expectation that exceeded the performance of our center.

Through significant clinical coordination with the hospital, Genesis' dedicated physicians and hospital’s home health leadership Hathorne Hill realized the following groundbreaking results. The facility cut average length of stay roughly in half from 27 to 13 to 15 days. We reduced our readmission rates from 18% to 20% to a range of 8% to 10%. We increased monthly admissions from 40 to 80. We doubled our market share from 25% to 50% including patients redirected from the hospital owned SNFs and the facility realized top-line growth and an increase in EBITDAR per bed day from $30 to $65 per day.

Second example that I'd like share with you is around a recently established Holly aligned and collaborative relationship with a leading university health system located in one of our strongest Western markets, designed to drive value, quality and healthcare efficiencies for both parties. This agreement is predicated upon timely access to skilled nursing facility beds, the ability for the health systems to officially discharge patients who are currently exceeding the hospital’s targeted length of stay. And finally, the ability for the hospital to move managed care patients to a skilled nursing setting in advance of receiving a prior authorization in order to free-up bed capacity within the health system in a more timely manner. This three-pronged initiative allows the university health system to replace high cost acute days with high quality lower cost sub-acute days. This agreement is not only innovative and formed but will function as a sample for further collaborations with health systems needing to improve throughput and efficiencies throughout the country.

The third example, Genesis is in strategic discussions with a major referring acute care health system in one of our largest markets on the East Coast to reposition the hospital’s existing skilled nursing care asset. This project would potentially include the renovation and reengineering of one of the health systems existing skilled nursing centers on a satellite campus, as well as the construction of a replacement skilled nursing center on a new state-of-the-art hospital campus. The parties are working together to provide optimal clinical programming and services to patients. We anticipate these projects will be solidified through a joint venture agreement and would build upon on an already existing strong referral relationship with approximately six other Genesis operated centers in that market.

These are examples of progressive minded hospitals, aligning incentives with the lowest cost outcomes oriented post-acute providers in the markets they serve. We fully expect examples like these become the norm as acute care hospitals inevitability take more risk for the cost and clinical outcomes of patient care delivered outside the four walls of their hospitals.

And with that, I would like to turn the call over to Tom DiVittorio, our Chief Financial Officer.

Tom DiVittorio

Thank you, George. Good morning everyone. Detailed financials for the fourth quarter and full year are contained in the press release issued last evening. I will start with some highlights for full fiscal 2015.

We produced strong earnings growth with pro forma adjusted EBITDAR growing 5.8% to $733.2 million and pro forma adjusted EBITDA growth of 11.6% to $249.7 million. Realization of synergies and our focus on effectively managing operating cost through a 60 basis points of margin expansion with EBITDAR margins improving to 13% and 2015 recurring cash flow of $58 million nearly doubled from $33 million in the prior year. We ended 2015 with cash and cash equivalents of $61.5 million and availability under our revolving credit facility of $117 million. Our net leverage in 2015 on a pro forma basis for the Revera transaction was 4.3 times on a funded debt basis and 6.7 times on a lease adjusted basis.

Turning now to our 2016 guidance, we are reaffirming our full 2016 guidance released on January 25th. We're projecting revenues of $5.7 billion to $5.8 billion, adjusted EBITDAR of $765 million to $795 million, adjusted EBITDA of $267 million to $297 million. The midpoint of its guidance implies adjusted EBITDAR growth of 6.4% and adjusted EBITDA growth of 13%. We're projecting adjusted net income from continuing operations of $0.19 to $0.29 per diluted share. EPS guidance assumes 156.1 million diluted weighted average common shares equivalents on a fully exchange basis. Recurring free cash flow at the midpoint of the guidance range of $64 million and assumes cash interest of $81 million and CapEx of $85 million, and fixed charge coverage at the point of the guidance range is 1.35 times increasing from 1.31 times in 2015.

And last I would like to provide an update on our financing activities. The acute key capital planning priorities in 2016, first, a top priority is to refinance the real-estate bridge loans entered into the Skilled and Revera transactions, principally utilizing HUD guaranteed mortgages having 30-year terms and approximately 4% to 4.5% average cost of capital. As George mentioned on January 01, we repaid $54 million of bridge loan financing from the sale of the Kansas ALF portfolio, with $440 million remaining, we expect to close on the first series of HUD loan at or near the end of the first quarter and we're on-track to complete the bridge loan refinancing process by the end of 2016. This initiative will significantly extend maturities for nearly 40% of our funded debt capital and when fully implemented provided meaningful upside to free cash flow and fixed charge coverage.

Our second priority is to reduce overall funded leverage levels through a combination of non-strategic asset sales and free cash flow. We continue to make excellent progress towards the monetization of non-strategic assets with projected proceeds of $100 million to $150 million and expect to close on the first of these transactions in the second quarter.

With that, Darla, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Frank Morgan of RBC Capital Markets.

Frank Morgan

Good morning, there was some interesting insight on your -- some of the initiatives you're taking and I am curious as you looked at the early results of those bundles, I guess first, what are the specific conditions you're actually participating in? And then secondly what was the biggest eye opening revelation that you've seen so far particularly as it relates to how you may have to adjust staffing models in the future? Thanks.

George Hager

Yes, Frank, we're on the facilities of 33 that we entered, I believe is 38 bundles, Tom, we're participating in 38 of the…

Tom DiVittorio

48.

George Hager

Of the 48 bundles. We didn’t participate in all the bundles because we just did not have enough volume in those other 10 bundles Frank to make any sense. The total Medicare spend in the at-risk program is approximately $130 million. Now I say that from a staffing perspective not necessarily dramatic change, I think the real issue is how do you think about managing a patient through the continuum at a lower cost. So in all our bundled care centers we have deployed a care transition infrastructures well, so not alike our hospital partners we realized that impacting and following and ensuring a successful transition back into the community will ultimately reduce cost of the episode, utilizing Vitality-To-You to follow the patient back in the community but if you’re shortening the in-patient length of stay that patient in many cases can benefit by its rehabilitation therapy in the community once again trying to bridge that gap so we do not have an unnecessary hospital readmission. So I would say staffing models are only adjusted to the extent that length of stay in the near-term might drive which it has in certain cases, some length of stay reduction near-term pressure on total centers. But ultimately that is being recovered through the gain share process in the retroactive settlement under these programs, so not so much staffing change, but really building infrastructure to really impact total cost of the episode of care.

Frank Morgan

In that I think you mentioned a decline in length of stay from 27, roughly 27 days to 13 to 15 was that specific to this bundle program that you're participating or is there something else that related to -- that would influence that number?

George Hager

Frank that was specific to one building in Massachusetts, but it was a building that -- what we're trying to demonstrate in that example, it was a building that the key referring hospital entered into the Medicare Shared Savings Program, so that hospital was looking at really improving and driving reductions in total length of stay. But it would be important to focus on despite the fact that length of stay was cut virtually in half, we doubled our admission volumes from 40 to 80. We doubled our market share from that hospital and we increased our profitability on an EBITDA -- more than double our profitability on an EBITDA and per patient day basis. So you would think reducing length of stay initially is bad but once again a point that I think Tom and I have always tried to make in discussions of these value-based programs, those providers that can react and react is reducing length of stay, reducing readmission rates, reducing total cost of the episode, will ultimately be receiving a disproportionate share of admission volume and this is an example of that happening. Unfortunately, we're still in the very beginning stages of the evolution and we don't have enough of those examples to meaningfully offset some of the near-term pressure.

Operator

Your next question comes from the line of Joanna Gajuk with Bank of America.

Joanna Gajuk

So just a couple of questions here, in terms of the actual quarter you provide some stuff here, but can you talk us through the same-store performance in terms of the inpatient severance on the skilled mix and also occupancy?

Tom DiVittorio

Sure, Joanna, are you referring to performance for the quarter or for the full year?

Joanna Gajuk

Yes, yes for the quarter.

Tom DiVittorio

Sure, for the quarter, so if you -- and I’m glad that you brought that up and we have talked about this in each of our quarters, our key performance indicators at the end of our earnings statement are a little bit of apples-to-oranges because the prior year doesn’t include Skilled Healthcare, the current year does include Skilled Healthcare. So when you look at operating occupancy for instance quarter-over-quarter you see a 260 basis points decline in occupancy, on a same-store basis as if Skilled were in for both periods, there is still a drop in occupancy but it's 160 basis points, not 260. And similarly with respect to skilled mix on the face of the KPIs you see 110 basis point drop in skilled mix on a same-store basis that's a 90 basis point drop in skilled mix.

Joanna Gajuk

So is there any color you might give us in terms of the drivers for the skilled mix for even same-store number being down as it - I guess what you just talked about in previous comment about additional pressure or length of stay from these [bumping] [ph] I guess demonstrations in some of your facilities or is there anything I guess like whatever color you might give on the drivers of their decline on a same-store basis?

George Hager

Joanna, I think it's reflective of the trend we've quite frankly seen for the last couple of years and really is principally a length of stay issue, and the length of stay declines are being really driven by to some degree the innovative programs like bundled payment, like Medicare Shared Savings where the incentives are very different. Also contributing to decline in length of stay is continued increase in managed care penetration where the payors much more aggressively manage overall utilizations and I think those are the key drivers. But once again, the examples that we tried to throw out to you this morning are examples of where we see the model working, where we see innovative acute care systems and payors take advantage of the unique features of our model to drive overall -- even though overall length of stay declines ultimately admission volumes and market share will offset that.

And once again we're dealing with an investment that we need to make for the long-term that has near-term incremental negative implications.

Joanna Gajuk

Right, so on that front your guidance I guess I’m coming up with the organic growth of less than 2% in your guidance, is that the right ballpark to think about for 2016 organic growth?

Tom DiVittorio

Joanna, when you say 2% what are you referring to?

Joanna Gajuk

I guess top-line and then I guess if we're trying to look through the numbers also EBITDAR?

Tom DiVittorio

Yes, well, the guidance at the midpoint does imply 2% year-over-year revenue growth. Our implied EBITDAR growth at the midpoint of our guidance is 6% and EBITDA growth 13%, very consistent with the profile that we performed at in 2015. Of course some of that's going to be driven by M&A activity that's already been completed like the Revera transaction and some of the other things that we've talked about from a growth point of view that we've been working on for some time.

George Hager

Those numbers also reflect though, Tom, the divestiture activity as well that we will be completing as we look at continuing our capital plan to divest those non-core assets.

Joanna Gajuk

Right, right so that's what I think when I was trying to I put all of these numbers together in terms of [Revera] [ph] acquisition and divestiture that already happened and those that you've planned, so I am coming up with a less than 2% sort of organic so to speak EBITDAR growth, so is that a right ballpark?

George Hager

Joanna I think the numbers that we've laid out in our guidance are for the most part same-store as you've normalized skilled in that for 12 months in both periods.

Tom DiVittorio

I think what Joanna is doing is bridging into 2016 and taking into account what information we have provided on things like the Revera transaction that the effect of the Kansas divestiture. So Joanna we can work with you on the model offline as obviously a fair enough of moving parts of there. I think it's safe to say that the organic growth in the business continues to be under pressure for all the reasons that we've described. We continue to believe that our Medicare rate growth year-over-year in 2016 will be below 1% that obviously effects the organic growth assumptions and we would expect to continue to see some pressure on occupancy and skilled mixed growth for all the reasons that George has described.

George Hager

But the organic growth rate is already as much higher than 2% Joanna and we'll get you through that.

Operator

Your next question comes from Chris Rigg with Susquehanna.

Chris Rigg

I guess I just want to step back here for a second and get your view on this George, I think the market generally at least right now thinks that a lot of these shared savings program is whether it’s BPCI or eventually CCJR or anything ACOs whatever, is generally bad for the skilled nursing industry, but at the same time on the call you're sort of offering us some data points that seem fairly constructed at least over the long-term, so is it just that this is a timing issue and that ultimately the distributor should benefit from some of these initiatives or am I just misinterpreting what you try to describe? Thanks.

George Hager

Chris, it's tough to predict the future but we have never -- our view of the future especially as it relates to sub-acute care is that ultimately we're going to be living in truly a managed care world a value-based pursuing world. And ultimately if you can replace a $3,000 acute care day with a $500 sub-acute day and achieve the same the outcomes, you will be successful in a value-based world. I think what we're seeing in the near-term is I think as we all begin to participate in these types of programs and new parties are introduced into the process like certain conveners that have for the most part just pure financial incentives driven around reduction of skilled nursing utilization has created pressure, near-term pressure in the industry but we believe in and some of these examples demonstrate is beginning to happen is what value-based healthcare reimbursement will ultimately drive is an accelerated bifurcation of the industry. So those post-acute providers that deliver lower cost on a care transition’s infrastructure, a physician infrastructure, home-based rehabilitation therapy infrastructure some unique figures of Genesis, but we can truly impact total cost of the episode of care and deliver as good if not better outcome for the patient.

We ultimately will receive a disproportionate share of the short-stay population, therefore driving increased growth in short-stay overtime, we will still always have a significant long-term care component to our business, but we think that there will be winners and losers even in our own portfolio. We're positioning certain assets in certain markets be principally only long-term care assets, so we do not believe that they are prepared to compete in the short-stay business and we still will be committed to providing long-term care services because it’s a critical part of the mission of the Company. So yes I think that it clearly has had negative impact on most providers in healthcare services continuum as we move from a pure fee-for-service world to a value-based world, but overtime we see bifurcation, we see market share gain despite the fact that things like length of stay will most likely would continue to margin decline to some period of time.

Chris Rigg

Great that's good color and then just clarifying follow-up related to the proceeds from assets sales, Tom, I think you had said you expect $100 million to $150 million, can you give us the corresponding EBITDA associated with the expected proceeds or has that stuff already been moved to discontinuing operations? Thanks.

Tom DiVittorio

It has not been moved to discontinued operations, of the businesses that we have that are subject to sales the EBITDA Chris is somewhere, the annual EBITDA is somewhere in the $13 million range.

Operator

Your next question comes from line of Dana Hambly with Stephens.

Jacob Johnson

Hi, guys this is Jacob Johnson on for Dana. I guess first question on lease coverage is the goal to get to 1.35 times by the end of year, is there anything you guys can give us on how we should think about this longer term, where you would like to see it go?

George Hager

Yes just to be clear that the 1.35 times is fixed charge coverage so it includes cash interest cost as well as just cash leased cost. Look clearly we would like to take this at a level of 0.1 expansion at a time, so we expect to get it to a 1.35 in 2016, the benefits of our HUD refinancing program will see some of that in 2016 but we'll see a lot more of it because we'll get a full year impact of it as we look ahead to 2017. So overtime we're going to work to get that number to a 1.4 and beyond, it will take time. But we're going to continue to expand the fixed charge coverage by reducing our overall cost of capital and ultimately by reducing our overall leverage levels.

Jacob Johnson

I guess following up on that so you guys have talked about the bridge loan and sort of plans for that, but I think there is a term loan due next year do you guys have any comments on plans of what you're going to do with that?

George Hager

Well look our immediate priority as we've discussed is to first reduce our overall cost of capital and replace the short-term real estate bridge loans with long-term mortgage debt principally HUD and we're well on our way to doing that with the Kansas ALF sale and the HUD financing program. The second priority is to bring the overall leverage level down, which we’re also well on our way to doing through the non-strategic asset sales and by growing our earnings and our free cash flow, so as we look ahead, we are confident we will be able to refinance the second lien term loan that doesn’t mature all the way until December of 2017, but we are confident we will be able to refinance that when the time comes.

Jacob Johnson

Great, and I guess if I could sneak one more in, guidance looks like it assumes about 50 bps of market improvement, is this sort of continued improvement on the compensation line or is there anything else that you can point to sort of for modelling purposes?

George Hager

Well at the midpoint of the guidance it's closer to 30 bps a 780 EBITDAR next year versus the 733 EBITDAR this year on the midpoint of the two revenue ranges. And look at it's really what we continue to do to operate this business efficiently we will be able to take advantage next year of an incremental $11 million of synergies that has very significant impact to margin improvement. And all of the things that we do day-in and day-out to manage our costs are ultimately drivers of margin expansion.

Operator

Your next question comes from the line of Herald [ph] [indiscernible] with The Cochran [ph] Group?

Unidentified Analyst

Just real quick question, while referencing you touched upon the bad debts early on in the conversation George touched upon bad debt, is there a particular driver for that as what occurred and what do you see in terms of going forward in terms of time taken to collect whether it's reimbursements or just in general debts and its impact on cash flow what you guys are seeing and how it's being dealt with?

George Hager

Herald the bad debt issue that we experienced in the fourth quarter frankly wasn't all related to the fourth quarter, it was arguably associated with the entire 2015, but it was concentrated in the newly acquired skilled portfolio and is really caused by just some of the integration issues in bringing a large portfolio like that online, changing their billing and collection systems from what with their systems to our systems, and Skilled Healthcare ran a very different approach to managing their billing and collection function it was a very decentralized model and Genesis uses a centralized model. So transitioning their operating model from a decentralized model to our centralized model while we're also changing information systems, this was terribly disruptive to the collection process and it created some risk around the collection of receivables as we were earning them and accruing them over the course of the year.

We believe that we will be able to recover some of that more heavily reserved AR that we booked in the fourth quarter, it's going to take some time, it's going to take some effort and we have a number of initiatives focused solely on recovering those reserves of course. We did say in our guidance for next year that we expect bad debt levels to persist at the same level in 2016 because we do still have some integration work to do with the skilled facilities. At this point we've gotten them all on our information system platform. And we have about half of the buildings in our centralized billing and collection model, but we still have about the other half of the buildings to go in terms of integrating them into what we do and that will take us still about June to complete.

So we believe we have got our arms around it, we believe we have an opportunity to recover some of those more heavily reserved bad debts and we're working very hard at it, but our guidance for next is for the time being that we'll see bad debt levels consistent with what we saw on ’15.

Operator

[Operator Instructions] Your next question comes from the line of Chad Vanacore with Stifel.

Chad Vanacore

So it sounds like you're going to likely see the 100 million to 150 million dispositions before you complete the HUD financing, now would you use those funds to repay the bridge loan first or can you repay other debt with that?

Tom DiVittorio

Chad, we would look to repay other debt with that, I mean I think we feel very good about the fact that we have very viable financing sources to take out the real estate bridge loans and we would look to use the non-core asset sale proceeds to take down other debts.

Chad Vanacore

And then guidance is fairly wide range, so what are the primary factors that could spring results from high to low-end?

Tom DiVittorio

Well, it's the typical things right, it would be Medicare or Medicaid rates growth that's outside of the range of our expectations, if we have occupancy or mixed trends positive or negative that are outside what we've seen an opportunity clearly I just mentioned is to do better on the collection side and on the bad debt side that could certainly influence where we land in that range positively.

George Hager

Yes but Chad if I had to focus on one thing it would be occupancy rates.

Chad Vanacore

Okay.

George Hager

And so occupancy rates would be I think the most pivotal issue here and as we think we can begin to see the benefits of the investments we have made on some of the value-based programs hopefully in this phase stabilize and move back in a more positive direction, so I’d say that is the one issue that we focus on a very significant amount here.

Chad Vanacore

George, is it safe to assume that you're assuming occupancy build in the year coming off of a very low fourth quarter?

George Hager

Yes, Chad I think that the occupancy that we're assuming as we think ahead for 2016 just looking at it on a sort of a year-over-year basis is relatively flat yes.

Chad Vanacore

And then just one more, on the skilled integration let’s talk about how that's going it's been about a year, but judging from your same-store number that seems to imply skilled performance is lagging legacy Genesis, so what do you think you could do to close that gap?

George Hager

Yes, Chad that's we think a real opportunity for us. First of all one of the decisions that I think we could have made sooner was what we did from an operating management perspective, we moved our most experienced operating executive out in the West to run obviously a big piece of the Sun and skilled merged portfolio into the West, he has assembled parts of his team here upon the East out West with him and brought in some new very talented staff. So we have a stable executive management team out in West first and foremost. Second, the assets were capital starts and as we look at in the free cash flow projections that we have in our forecast you’d see that we have increased our CapEx spending expectation about $50 million that increase is disproportionate with the expense in the West we see some real opportunity with some capital investments to really increase our market share in some of our key markets. And one of the examples I gave in my comments was a major market in the West for us where we have significant opportunities with some of our acute care and managed care relationships which really hadn't been fully developed by either skilled or Sun.

Operator

And at this time there are no further questions. I will hand the floor back to you for any closing remarks.

George Hager

Obviously, I appreciate everyone's interest and support and Tom and I are obviously -- Lori and all are available to respond to any questions offline. Thank you.

Operator

This concludes the fourth quarter and full year 2015 earnings conference. You may now disconnect.

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