Adeptus Health's (ADPT) CEO Tom Hall on Q2 2016 Results - Earnings Call Transcript

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Adeptus Health, Inc. (NYSE:ADPT) Q2 2016 Earnings Conference Call July 21, 2016 11:00 AM ET

Executives

Tim Fielding - CFO

Tom Hall - Chairman & CEO

Graham Cherrington - COO

Analysts

Brian Tanquilut - Jefferies

Paula Torch - Avondale Partners

Joanna Gajuk - Bank of America Merrill Lynch

Jason Gurda - Keybanc

Dana Hambly - Stephens

Operator

Welcome to the Adeptus Health Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. At this time for opening remarks and introductions I would like to turn the call over to Tim Fielding, Chief Financial Officer of Adeptus Health. Please go ahead, sir.

Tim Fielding

Thank you, Operator. Welcome to Adeptus Health Second Quarter 2016 Earnings Call. On the call with me today is our Chairman and Chief Executive Officer, Tom Hall and Graham Cherrington, our President and Chief Operating Officer.

Before we begin I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated. Including those identified in the risk factor section of our annual report on Form 10-K as such factors may be updated from time to time in our filings with the SEC which are available on our website. We assume no obligation to update any forward-looking statements.

In today's remarks all financial comparisons will compare to the second quarter 2016 to the same period in the prior-year unless otherwise noted. In addition will refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Following today's call an archived recording of the replay will be available on the Adeptus Health Investor Relations page for 30 days and with that I will introduce Adeptus Health, Chairman and CEO Tom Hall.

Tom Hall

Thanks, Tim. I would like to welcome and thank all of you for joining us for Adeptus Health second quarter 2016 earnings call. Second quarter results were in-line with the preview be provided in late May despite unexpected softer volumes in June. The buyin weakness was primarily in markets our facilities are not operated as Hospital Outpatient Department's or HOPD. We continue to execute on our HOPD strategy which is delivering positive same-store results in the Dallas-Fort Worth market.

We anticipate similar increases in patient volumes with the upcoming HOPD conversions in Denver, Colorado Springs and Houston as the hospitals in those markets open later this year. For perspective we had 89,000 patients in the quarter, we had mentioned that June volumes were soft. If we had an additional 1000 patients which what we had expected or more that would add a 1.6 million in revenue the vast majority of which would've dropped the bottom line for the quarter.

In May we announced a landmark joint venture with Texas Health Resources, one of the country's largest nonprofit health systems. In all of our facilities in the Dallas-Fort Worth market will be rebranded as Texas Health before year-end. As a direct result of this JV we recognize the $185 million gain on our contribution to the joint venture based upon a third-party evaluation which we believe further validates our business model. Partnership such as this further expand access to emergency care and remain the cornerstone of our growth strategy. This year our development team has been very busy, consequently we continue to have robust development pipeline and expect to announce additional partnerships before year-end.

On a different note recently we hired a new Chief Medical Officer, Dr. Ricardo Martinez. Dr. Martinez's significant experience in emergency medicine and delivering high-value patient centered care will help ensure that we continue to maintain the highest clinical standards. Operationally we remain on track to open 27 new facilities in 2016 including 24 patient emergency rooms [ph] and three hospitals.

We are reaffirming the full-year's 2016 guidance we provided in late May. We continue to expect system wide net patient services revenue which includes revenue from unconsolidated joint ventures of $640 million to $670 million. Adjusted EBITDA of $110 million to $115 million, and adjusted earnings per share of $2.55 to $2.65 for the full year 2016.

With that I will turn the call over to our Chief Financial Officer, Tim Fielding who will review our second quarter financial results. Tim?

Tim Fielding

Thanks, Tom. For the second quarter of 2016 system-wide net patient services revenue increased 36% to 142.4 million with expansion of the number of freestanding facilities from 69 to 93. Annual gross charge increases and growth of our hospitals in Phoenix and DSW and their hospital outpatient departments all contributing to the revenue growth.

System-wide patient volume totaled 89,001 patient for the quarter system-wide same-store volumes increased 4.3%, while same-store revenues were down 2.8% year-over-year. 61 facilities including one hospital were included in this quarter same-store comparisons and as Tom noted same-store volume growth was driven by strong growth at our DSW freestanding facilities which were converted HOPD's following the opening of first Texas Hospital.

The decline in same-store revenues reflected the softer volumes in the non-HOPD markets in June. Net operating revenue for the quarter rose 12% to $100.2 million which excludes revenue from 16 Colorado freestanding facilities, the Arizona hospital and its seven freestanding facilities and Dallas-Fort Worth hospital and its 30 freestanding facilities which were all accounted for as equity method investments.

Adjusted EBITDA which is the key metric we use to gauge performance of our business was 22.5 million for the quarter compared to 22.9 million from a year ago. This decrease was due to a decrease in equity and earnings of unconsolidated joint ventures and an increase of salaries, wages and benefits and other cost related to our growth initiatives. This was offset by increases in management and contract services revenue. We reported Q2 net income of $140.2 million of which $86.9 million was attributable to Adeptus Health compared to net income of $27.7 million of which $10.6 million was due to Adeptus Health for the second quarter of 2015.

The significant increase in net income was largely due to $185.3 million gain on the contribution of our DSW business to the joint venture formed it in Adeptus in Texas Health Resources. A $185 million is net of $9 million reduction in the pro rata portion of goodwill attributed to that business.

GAAP earnings per share was $5.80 and adjusted earnings per share was $0.48 for the quarter, adjusted earnings per share is calculated using a weighted average of both Class A and Class B common shares that were outstanding which was an aggregate of 21.076 million 9/11 [ph] common shares at June 30 of 2016.

Adjustments for the quarter included the gain on the contribution to the THR joint venture, preopening costs associated with new facility openings, stock compensation expense, other cost associated with our growth initiatives, public offering costs and an adjusted for taxes in order to establish a normalized tax rate of 35% for comparability purposes. At the end of the second quarter, we had cash of $3.7 million and $23.8 million available under our revolving credit facility. Cash flow used in operating activities was $8.6 million for the second quarter versus $13 million provided by operations in the prior-year. We are not comfortable with our current DSO, while a portion of the increase is due to increased payment plans, the remainder is due to our new third-party revenue cycle companies experiencing growing pains. They are working quickly to optimize our systems and adjust their staffing levels.

At June 30, 2016 we had total debt and capital lease obligations of $137.6 million we continue to add facilities under our master lease agreements with Medical Properties Trust and as of June 30, 2016 we have $72.9 million available for future development, which will fund projects through the first half of 2017.

With that let me turn the call back to Tom.

Tom Hall

Thanks, Tim. As we continue to execute on our growth strategy which is providing the highest-quality medical care, it remains our top priority. We're proud that our patients consistently rank us among the best nationwide and we're committed to maintaining the highest levels of satisfaction as we add facilities and expand into additional markets. Through remainder of 2016 and beyond we will continue to expand our existing partnerships with leading healthcare systems and create new ones. Open additional facilities and hospitals and convert more of our freestanding ERs to HOPD's. We remain confident in our strategy and ability to deliver on our growth plan as we remain focused on our core mission which is to expand access to the highest-quality emergency medical care to the communities we and our partners serve.

With that we would be please to answer questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Brian Tanquilut of Jefferies. Please go ahead.

Brian Tanquilut

Tom, just first question for you, in the last earnings call you talked about your expectation for same-store volumes in high single-digit range through low double-digit range for the year. Obviously Q2 was below that so if you don't mind just giving us some insight into your views on the same-store trends, the weakness in June, what's driving that and how should we think about the progression of same-store over the course of the year given a different moving parts with the JVs and the hospitals coming online

A – Tom Hall

Sure. Regarding June, it was interesting we had a good April and we had a good May and then June just got soft for some reason on us -- to give you -- as I mentioned to give you a perspective if we hadn't gotten an extra 1000 patients we actually anticipated more than that. Same-store revenue would been a positive 2% same-store volume would have been like 6.3%, for the year we thought about same-store trends for the year, recall there is a lot of positive openings coming out. We're really right in the middle of what I would describe to you as a transformation of our business.

We been announced the Texas Health Resource deal, we will be bringing that online before year-end with a total rebranding of our facilities across Dallas-Fort Worth market, there will be a lot of marketing that will around that, we’re also immediately go on all of their managed care contracts and we think that will be very positive. The hospital in Denver, we anticipate to come on near the end of the third quarter of this quarter. We expect that be very positive same-store sales and then when you think that we have a hospital coming online down in Colorado Springs, in Q4 and also Houston in Q4 the impact can be very dramatic. I mean Brian to give you -- this is simple math and I understand that but for folks maybe that haven't thought through it, if you think about for example Dallas-Fort Worth market if you said that you had 10 patients a day or nine patients a day you pick whatever the number is and people will speculate that we had a 3 or 4 patients a day or more and we had said simply that’s 30% same-store sales right. I mean it's powerful it's really, really powerful. And so when you think that in Denver we’re going to do that, in Colorado Springs we’re going to do, in Houston we're going to do and then of course the Texas Health Resource brand be putting all over our facilities in DFW. I can tell you that our new partner is very bullish and the impact they think they are going to bring to these facilities and they are excited about the access -- improving access to their patients and so there's just a lot of positive moving parts. I use the term transfer, it's really transformational.

We're really taking our business and moving it from freestanding [indiscernible] and take only commercial pain to really being part of a hospital system and taking all patients and as we’ve said before -- people would anticipate that we [indiscernible] government payment -- well we have actually seen what we have done is we have done as we see more commercial pay also. And so that’s really what's behind our guidance on them.

Brian Tanquilut

Just a follow-up on that Tom as you talked about the uptick from Dallas right, the offsetting factor obviously is your other operations in the same store base. So as I think of that I mean clearly there's still running negative because it's a drag to offset the Dallas uptick, so on an apples to apples basis, commercial versus commercial what are you seeing in say Houston or Denver or Austin for that matter in terms of true same stores year-over-year in those markets

A – Tom Hall

The Texas market is -- we say everything outside of Dallas [indiscernible] and so that’s we’re not pleased with that, we're seeing it. Again our plan is when you think about of what's left outside of Dallas, Houston is basically the size of Dallas. How many facilities to-date we have in Houston?

A – Tim Fielding

30.

A – Tom Hall

30 facilities in Houston to give you a sense and so and how many in San Antonio and Austin?

A – Tim Fielding

11 between them.

A – Tom Hall

11, so I mean we a 41 facilities outside the HOPD and by year-end we will be down to 11. So by year-end we will have over 100 facilities in our portfolio folio and 11 of those would be outside of the Hospital Outpatient Department and so this trend that we've been experiencing we think we're versus dramatically in a positive way and that's been our plan and that’s the plan we've been working on so that's really how we see it.

With Denver, what's going in Denver if you remember we talked to folks about this, when we did the joint venture with the University of Colorado, we weren’t able to do a big marketing blitz because really our partner did not want to market until we had our facilities on a Hospital Outpatient Department. I can tell you that in the Denver market we’re in the training and certification phase right now, we’re right in the middle with this people with the goal of bringing that hospital online in Q3, near the end of Q3, and we anticipate a pickup for several reasons one is that they will truly become a HOPD's which we think will help us but two for the first time since we've had the partnership we’re going to be able to really market in a big way up there, and we anticipate that that will help us quite a bit.

Brian Tanquilut

Again for Tim, as I look at the P&L and you look at the equity and earnings line, you did $2.5 million this quarter, which is below what you did in Q1. How does THR factor into that? Because I know in the 8-K I think you said something like if we recast this with THR and they would've been like $9.8 million, so if you don't mind just bridging that for us Tim, like what were the moving parts on equity earning side?

A – Tim Fielding

Yes, so what you have to do is you have to look at the equity and earnings in conjunction with the revenue that we earn from the management piece and the contract services because you got to remember that these revenue streams are expenses to the JVs, so if you combine those two lines together you're looking at $17.7 million in 2006 compared to its $6.4 million in 2015.

Brian Tanquilut

Okay. I will probably just follow up online on that one. Last question for me for both of you guys, coming from a $44 million EBITDA in the first half, I mean how would you get us comfortable bridging that to guidance for the year on a $110 million low end of the guidance range? I mean just kind of what are the moving parts in your mind that will get us to guidance from the first half number?

A – Tom Hall

Well there is a lot of moving parts I mean as an example, we have Denver coming online which is going to make all those facilities HOPD and we expect that in Q3, we think that the Texas health rebranding is going to have a positive impact so we think that that should be very significantly although we have not modeled huge growth into that, we do believe that should be dramatic and then as followed up by Colorado Springs and then followed up by Houston where we’re going to put 30 facilities online, I’ve mentioned to you at conferences and things like that that perspective for people when we did the HOPD in the DFW area it's more than doubled our profitably in that market and so it's very dramatic that the impact that has on the market and so there's a lot of different ways you can look at it.

One way to look at it is if you look at last year our second half volume last year increased 27% over the first half of the year and that's with really we brought on DFW at the very end but that was really only thing we have going on from that perspective. When you think that we had three HOPD they are rebranding of Texas Health and our biggest market, and all the positive things that we got going on, depending on how you really look at it, our volume needs increase number between 31% to maybe 35%.

When you look at last year it was up 27% with none of those things, I realize it appears to be a very large bridge but there's a map to get there, and if these things exceed our expectations it could be map on a very positive and then also if you recall that fourth quarter is always our strongest quarter.

And so when you think about going into the fourth quarter and holiday season with almost all the facilities as HOPD's, it can be very dramatic. And so that's really how we bridge it again to give you the math, last year not a lot was going on -- it was up 27% over the first six months and this year we’re looking at 31% to 35% and so is it a high growth rate? Absolutely but there's a lot of positive things going on.

Operator

The next question comes from Paula Torch of Avondale Partners. Please go ahead.

Paula Torch

My first question is on the Dallas market I was wondering if you could give us some color around the mix of commercial versus Medicare and maybe how that matches up to your expectations and do you have an idea of what the likely mix should be in the overall market

A – Tim Fielding

We continue to see that move because we're still not in a mature industry in the market so we don't have that.

A – Tom Hall

I would say that with the Texas Health rebranding I think we expect to pick up more commercial, I think that we expect that as we look at growth in that market, more with the [indiscernible] commercial when you think about all the direct contracts and the way all that works in the power and it's the number one brand in the market.

And so even [indiscernible] HOPD while our volumes were up nicely and we're pleased with them, we don't think they are anywhere near what they could be with the Texas Health brand on it. Now the real question is how long does it take to mature, how long does it take a people realize that it's Texas Health and understand that they have all the direct contracts and all of that I think that's the maturation process but I think our belief is that the majority of that growth will come from commercial.

Paula Torch

Okay. And if we talk about -- I know there was this softness in June but you did see that 4.3% bump most of that driven by Dallas, was the bulk of that also commercial or was is it little bit more government

A – Tom Hall

It was a little bit more government, it was a mix. I mean but what's interesting is and just so I had mentioned earlier that April was good, it was in line, May was good, June got soft on us just out of nowhere, it's the craziest business and July is back to about where we expected to be or maybe a little bit of where we expected to be and so it's the emergency room business, it can be very frustrating but the good news Paul is that July seems to be back.

Paula Torch

Okay, that's good. And then last quarter I think you mentioned that there's a blend of mix of about 60% commercial and 40% government so when opening up new facilities, or maybe even in your own facilities what is the number or patient mix that you think you need to break even under these new JV partners when you actually have a mix of government and commercial? Is it still the threshold a little bit higher now?

A – Tom Hall

If you typically do the math, you do the math and you come up with a bundled rate per patient and then you just divide that by basically $4 million.

A – Tim Fielding

I agree with that, I think that’s still what we’re seeing is that 60:40 split.

A – Tom Hall

And that’s in the market that we have where we are HOPD.

Paula Torch

HOPD, right. Okay. And then just wondering if you might be able to help us understand some of the cost that are going to be associated with the three hospital openings, when do you expect Dallas to breakeven and then what type of losses do we expect to incur in Colorado and Houston? Is it going to be similar to Dallas? How should we sort of model that?

A – Tom Hall

Well what's interesting is as we model that and I think I'll leave it to Tim and Kevin is probably not on this call to give you detail because there is a lot of details but we all know that DFW for example the hospital continues to lose money but it's ramping in the right direction, we anticipate there with the Texas Health partnership that's going to be extremely positive for that hospital, but even with that said this market is more than doubled its profitability. So you really have to look it from the whole market perspective. Regarding the others, Tim?

A – Tim Fielding

Yes. So I think they'll be comparable to that on the Broomfield, the Denver market will definitely be comfortable, the one in Colorado Springs is a little bit smaller, so it might have a little bit of a lower loss.

Paula Torch

Okay. And just curious, what type of volumes or same-store revenues is the low end to the high end of guidance predicated on for the year?

A – Tim Fielding

I don't think that we've given that and I don't think we’re prepared today to give it

Operator

The next question comes from Matthew Borsch of Goldman Sachs. Please go ahead.

Unidentified Analyst

This is [indiscernible] on for Matt, I wanted to go back to the DSO uptick in context of the bad debt, looks like the bad debt as a percentage of gross revenues improve kind of consequentially pretty significantly sequentially. Can you just share some color on why it's a case and if you are comfortable with those reserves there?

A – Tom Hall

Yes, in terms of the bad debt, the improvement there that you're seeing it really comes down to the change that we've seen with our new third-party billing company in terms of our payment plans. So we've seen our payment plans go up significantly compared to what we've had in the past, with respect to the rest of the DSO, like I said, earlier, the new company is having some transition issues. As an example, when you have a payer pay [ph] you on the facility side, they will oftentimes pay on a consolidated number rather than on the line by line item number and so what that creates for the billing company is they have to go in and manually adjust that on a line by line basis which is causing some of that increase DSO. So we're working with them to make sure they are optimizing their systems for our business, they are also increasing staff associated with that.

Unidentified Analyst

And quick follow-up question, can you comment on wages? Looks like wages increased sequentially year-over-year as a percentage of revenue. In terms of being able to see more government patients like in staffing requirements there is have something to do with that or any color there would be appreciated

A – Tom Hall

I think regarding seeing more government patients that hasn’t really impacted our wages [indiscernible] typically we get by -- we give some of our folks a 3% raise at the beginning of the year, and we constantly are looking at wages and being competitive in the market, but I don't feel today like Graham are you seeing any wage pressure on that?

Graham Cherrington

No, not really

Operator

The next question comes from Kevin Fischbeck of Bank of America. Please go ahead.

Joanna Gajuk

This is actually Joanna Gajuk filling for Kevin today. So just coming back to the DSO discussion and the commentary about cash flow being at different quarter, so do you still expect about 20 million or so for the year

A – Tom Hall

Yes so we're still -- we're not changing our estimates on the cash flow. You do have to remember that as we go through the openings of these hospitals that is a drain and then we come out on the other side generating cash.

Joanna Gajuk

Okay. Actually on the front also, question on the preopening expenses that were higher this quarter versus Q1. Is there anything in particular thing about here or is it just more cost associated with the hospital in Q4?

A – Tim Fielding

Yes, it's associated with the hospitals, the Denver Hospital is about $1 million of that.

Joanna Gajuk

And then I guess the last question here, to clarify in terms of their same-store revenues with the same-store volumes being positive. So is that the way to think about it that actually there are same-store commercial volumes were actually negative in the quarter?

A – Tim Fielding

They were negative in the non-HOPD markets and positive in HOPD markets.

Joanna Gajuk

All right. So there is bifurcation, so is there anything in particular that you can point to why there are those standalone ER facilities are being heard somehow more than other markets?

A – Tom Hall

You know they were just soft, it was just soft. Tim, I don't know?

A – Tim Fielding

Yes I think -- couple of things you're looking at the Houston market specifically right I mean, that's the main driver and so you're looking at the competitive market, and that's the reason why we're shifting over to the HOPD concept is because when you're able to take all payers, then there is no discussion on whether I can go here or can I not.

A – Tom Hall

But again it was just soft, if you think about, it was so close to being positive in the quarter. As we said here at the end of May having visibility in April and May, it was looking very good, and then June just got soft on us as I mentioned earlier, almost July bounced back, it’s the emergency room business.

Operator

The next question comes from Andrew Schenker of Morgan Stanley. Please go ahead.

Q – Unidentified Analyst

This is [indiscernible] for Andrew. Just going back to that cash flow outlook for the back half of the year, just thinking should we be expecting larger cash distributions from the JVs or what are the moving parts that get us to the low-end or high end of cash flow guidance and

A – Tom Hall

Yes that's correct, I mean a couple of things one we’re obviously going to be working on our DSO and trying to bring that down that will have an impact on that, and then as we -- one of the issues that we have on the JV with DSW is the fact that when you start a JV, you still incur that upfront cost of the fixed cost associated with those facilities but you've got a lag of the revenue because it basically starts over. So once we bring the DSO down we should be in good shape

Q – Unidentified Analyst

All right and then I guess just going back to the profitability question on the equity income line item, obviously the restated or AKU you put out said the JV was fairly profitable like $7.3 million, was that consistent in the second quarter or were there cost baked in maybe impacted that number?

A – Tim Fielding

Yes that was consistent, I think what Kevin and I reach out and kind of walk you guys through how it works to -- how you have to look at it with the management teams and contract services associated with that because every time you have a management fee it's coming out of the profitability which is in the equity and earnings of those joint ventures

Operator

The next question comes from Jason Gurda of Keybanc. Please go ahead.

Jason Gurda

Most of my questions have been answered I just wanted to clarify a few points that you went through earlier, so the DFW market what sort of volume increased did you say that you saw there?

A – Tom Hall

I'm trying to recall what we said as we been out and about, I mean we basically said I think Tim you--

A – Tim Fielding

You were talking about 3 to 4 governments and 1 to 2 commercial.

Jason Gurda

On top of the base of like 9 to 10?

A – Tom Hall

Correct

Jason Gurda

Okay. So that's where they led to the profitability basically doubling, now given what's happened in Houston, I mean looking at where the EBITDA -- your EBITDA came in, essentially that market almost lost just as much is that fair to say?

A – Tom Hall

No there is a lot, we talked about [indiscernible] on the road also in the conference. There's been a lot of expenses going on to get ready for our ramp, if you can imagine bringing three hospitals online, my gosh, and of course with all new facilities we got and it's not just things that are added back in preopening, Graham and his team from a corporate perspective has been adding a lot of capability. A simple example of that is as we just added Dr. Martinez, he wasn’t for the full quarter but there's an example somebody you can see the high-profile physician like that is not inexpensive to say the least and so we're adding those type of people. I mentioned to you before into the group that we have a lot of JV activity -- potentially JV activity going on right now and Graham is hiring people to make sure that we can handle it.

And as we start to announce these things, these people it's pretty exciting, there's a lot of activity there, and so Graham's got to make sure that he has got people trained up to send out and run these new regions and build these new region's and do all that stuff and so you know he has adding several of those people and there has been a lot of that type of stuff. It's kind of like a stuff phase in our business. We were tiny not that many years ago, we added our senior team and then we got to 200 million and we added another group to get to the next and now we all what our revenues are this year, you can all project what you think our revenues are going to be the next year but they are pretty big, right?

And so this is all [indiscernible], we’re not doing acquisition, we’re not going on buying stuff, we’re building this stuff. And so we have tried to do a good job stay ahead of it. I would tell you right now I think compared to what we've done historically maybe we have a little disproportionate amount of cost than we would have done historically but it's just because we have visibility to these JVs and always these activities in new states and we just see there is a real opportunity to seize the moment and seize markets and stuff like that and so we're trying to prepare for that, we are prepared for that, we got people online, we're training and we have got – Graham's got guys -- some of his team was been in Houston this week working on the hospital, working to train certification phase in Denver, getting ready to get that phase up in Colorado Springs, there's just and then there's a lot of JVs we actually took Graham's one of his top lieutenants respect, he has two top lieutenants, we took one of them and put them full time on the deal side to give an idea, [indiscernible] very senior executive in our organization, and he has moved over full-time to work on deals that you don’t even know about it yet because there is just that much activity going on and so it's a lot of those type of investments that when we start to make the announcements we think people will be very pleased

Jason Gurda

I just wanted to clarify the timing of some of the upcoming events, the rebranding when is that expected to occur?

A – Tom Hall

We expect it before, I would tell you that more sooner than later, every time we say we jinx ourselves and so are little careful on that, but we're very helpful it will be early Q4.

Jason Gurda

Okay early Q4, and for the Denver Hospital, is that late Q3 or?

A – Tom Hall

Late Q3, yes

Jason Gurda

Late Q3, and therefore Houston and the other Colorado Hospital, are those more early Q4 I think in order to get to your volume numbers?

A – Tom Hall

I think it's mid-Q4

Operator

The next question comes from Dana Hambly of Stephens. Please go ahead.

Dana Hambly

Tom, I wonder on the performance of the non-HOPD market, if you kind of think of the viability of a standalone freestanding emergency company, is that a challenge for companies going forward or do you think that you could exist and I know you're moving away from it but could others exist it's just a freestanding emergency room company

A – Tom Hall

Dana, it's a great question, if I say something negative it will discourage my competitors, I'm not going to do that. I think every company runs a unique business and people may be in positions to be very successful running non-HOPDs I think we just have to see how that play out. I can tell you that for us, I’ve used the word this morning transformational, I mean it's really transformational. When I think about what partnering with Texas Health has done for our DFW market and what we think it's going to do and how it just position us in the right part of healthcare which is with a premier brand with a great partner, improving access, reducing cost on the system, all the things that we've seen it's just a great place to be, we’re really focused on doing that, and we think as shareholders we believe that really derisks our model, and has a lot of upside and so that's why we are doing it.

Right now we’re going through growing pains and by that growing pains I mean Graham and his team are executing beautifully on this, they are working extremely hard, and it's going well but you know we're in a real world with real businesses and things are up and down and we were disappointed in June, surprised by June but July has bounced back, I’ve running this company 4.5 years now and it never ceases to amaze me how the volumes bounce around month by month or quarter by quarter, as I mentioned you before what seems to happen over time as it all seems smooth out over the course of the year. It was interesting we had our board meeting this week obviously and we had one of founders in the meeting, he ran the company for 11 years, and when I asked him about he just smiles because he saw the same thing for 11 years as it moved around on him.

But regarding the competition and the viability of the model, there's a lot -- once you get outside of the markets that we’re in today there is not a lot of markets to go up if you’re not HOPD if you don’t have a partner.

So how we see it as we see as we're trying to be part of the solution, we truly believe we reduce cost Dana, and we have got some interesting studies going on right now in Arizona that actually shows that we're able to compare with our partner and shows how that when people come to our facilities they actually order less test than they do and this is actually our own government patients, they order less test and they do when they go to the core big hospitals and the reason for that we think and what the research is showing us is that they have more time to spend with the patients.

And so when you walk into a very busy Hospital Outpatient Department, emergency room and there is swamp, they just order all these test and wait for them to come back. In our facilities, our physicians are able to spend sometime with the patients and we’ve been able to document that they order fewer test, we're actually working with some all-time sell side third parties right now that validate these type of studies let them do their own studies on it but it's pretty powerful, Dana. I mean -- one of the sites we saw recently just internal, so we got to validate it externally but we reduced cost 30%. And the same type of patients and that’s just one internal cost and that we have in terms of study and [indiscernible] who knows but it's interesting, it's fascinating and it's also new as you we're inventing this market but we're working diligently on that because we think that's part of a the answer Dana, we think part of the answer is not just access the care which is wonderful it's not quality care which is wonderful, it's also reducing the cost and the cost continuing and we think we do that I think our partners think we do that and so now we just have to be able to come up with a way our mechanism to have independent third-party look at it and they communicate to people that we do it.

Dana Hambly

Yes I think that would be part of the next question, and maybe it's not a question but I think that kind of data coupled with lower admit rates to the extent you can document that and prove it to your investors I think that would be hugely helpful. Anyway, just a couple more. Tim, on the DSO, what should we be targeting kind of the second half of the year?

Tim Fielding

Well, my ultimate goal is to get it back down to the 60 day range. And so that's what we're working on. I'm actually going to go out there on Monday to sit down with it.

Tom Hall

Well, maybe like low 60, just because of those things [ph].

Tim Fielding

That's what I mean, 60 days -- absolutely, to get it down there.

Tom Hall

The good news is we're collecting money on the premiums plans, I mean by definition they push out the DSO over.

Unidentified Analyst

Okay, all right. And then just on the valuation of the gain on the contribution to THR, I don't know if you'd be willing to walk through some of the inputs to that calculation and in particular, maybe the multiple that would have been used to get to that valuation?

Tom Hall

Yes, and it was actually a third-party, we had to do the detail offline but there was a third-party that did the valuation. It gets signed off by our auditors, but it's a typical valuation where you're looking at it over a five-year period and discounting it back.

Unidentified Analyst

Great, thank you.

Operator

The next question comes from Brian Tanquilut, a follow-up from Jefferies. Please go ahead.

Brian Tanquilut

Tom, just a couple follow-up. So on the THR partnership, what are you seeing so far? I mean have you seen any pick up? I know we haven't done the rebranding yet but is there any gain or any benefit that you've already seen say to-date from the THR joint investment?

Tom Hall

Not really because of two things; one, we've done no rebranding so we haven't really pulled anybody. I mean it was in the newspaper article but that was it but our facilities still see a first choice and all that. And secondly, we've not changed the secured contracting and all that. And so Andrew Jordan was our Chief Marketing Officer, he has been working with their folks. We have a whole group of people in from THR the other day, I know Andrew and our teams have been over there, and there is a big splash being a planned when we announced this and everybody is very excited about it.

Brian Tanquilut

Tom, just on that comment on managing your contracting, how should we think about that playing out in terms of flowing through P&L?

Tom Hall

Well, I'll leave the accounting to Tim but what happens is, some of their contracts are reimbursed higher than ours, some of them are versus lower than ours. It's really a mix and a blend issue, the positive of it is that there is just all kinds of direct contracting of larger players and all that. So we think it's really going to help us, it's going to simplify -- I think it's going to be better for patients and better for us, I think it's going to be better for everybody. And we think we're going to see more patients because of it, I mean it's just -- it's very mainstream. Tim?

Tim Fielding

Yes, I agree with that. I think they will all be in direct contract when we transition over on day one, so that's going to be important. And then the other thing I would add to that is, on the hospital itself -- because of these direct contracts it's much easier to get the services over there to do -- to practice in terms of surgeries and putting the in-patients in the bed.

Tom Hall

So I mean, they believe -- THR is very excited about our new hospital and where it's located. They don't have one right in that market and I know Graham's not -- has here right now that our folks at the hospital having a lot of conversation there and so we think there is a little overdramatic impact on the hospital, very positive.

Brian Tanquilut

And then last question for me. Tom, you talked about the partnership opportunities and how Graham's team is busy. How should we think about your view on a three to five-year basis in terms of where the JV structure could lead in terms of sizing and what kind of -- are you looking at new potential models that you could pursue as you try to partner with other hospital systems?

Tom Hall

Yes, the majority of new JVs that we'll be signing will not have a new hospital attached to them, it will not be in hub [ph]. We're working on the new model, we'll be announcing it later this fall when we announce our first joint venture under that model on how we work with partners. And we think it will increase speed the market, it will also help us get into markets where they have for example, allow to build new hospitals so their ceilings [ph] -- and I guess hospitals and stuff like that. And what it really is and it just really simplifies it. I think it makes it even more obvious for all the constituents that what we're really doing is partnering with these big health systems to improve access to quality care reduced costs. And so -- because they are going to the drivers, they are the majority shareholders, the economics should look very, very similar; not exactly the way they look today from how the economics are shared but we think it will improve speed to market.

If I think three to five-years, it's an evolution a lot of conversation is going on. What we tend to find is as we announced new deals with prominent partners it helps the momentum. And so when we announced the THR deal there were people we were talking to and they were taken back by -- they were very impressed, let me put it that way. Everyone knows it's a wonderful brand, everyone knows it's an extremely high integrity brand, and with wonderful management leadership, a conservative group of folks. And so the fact that they partner with us was just a big endorsement that who we are and how we operate our business, and how we take care of our patients and all that. So as we continue to grow, we think that will continue to help the momentum.

What does it mean in size and all that? I don't know that -- anyone knows exactly, I would tell you this; there is -- depending on the markets there are speculation that the facilities may see more patients. There is just a lot of speculation in some of our partners because some of these markets are so underserved that they think that the average patient counts -- I've mentioned many times that, for example in Arizona, we're well over 20 patients a day, in that's Phoenix market I can tell you that we have partners that are adamant today as the numbers are going to be those numbers, only time will tell. So we have to see how they perform but I would say in general, we anticipate the thing and where the partner is, and where the market is. We just think of our average unit economics going up, I guess I will put it to you in this way, if you could wave a magic wand today and say all the facilities are HOPD, they are all part of somebody, the direct contracts and all that, and let's just jump five years out just because it's -- it's not tomorrow. I think we fully expect our facilities will average 20 plus patients a day across the portfolio.

And so how long it takes us to get there? Everybody can model it and figure it out and it can be more but we think that's a baseline. And so you can imagine what that does, you can run the numbers when it does for the average profitability per unit, what it does for profitability across the portfolio. And then however that is when you get there, you truly partner with the big brands. We've all seen this moving before you saw it in the 30% of space. And so just delever -- de-risk the model and improves access to reduce costs, I mean it's a win-win-win for everybody, and so that's kind of how I see it.

Brian Tanquilut

Got it. Thanks, Tom.

Tom Hall

Thank you.

Operator

[Operator Instructions] The next question is a follow-up from Paula Torch of Avondale Partners. Please go ahead.

Paula Torch

Hi, I wanted to talk about Louisiana. I thought that the hospital was expected to open in the fourth quarter, so curious where we are on that and then maybe how many free-standings are going to accompany that? And have you already begun to negotiate rates with payers in the market and are they similar to rates across the rest of your portfolio?

Tom Hall

Paula, I'm not going to involved in that detail with you. I would tell you this that our expectation is that we will open freestanding facilities in Q4. In Louisiana, there are discussions going on right now with the part about possibly going to our new model, and that's why we didn't hear us announce the hospital in Q4 with those folks. If you recall, I think we told you that we're going to start off the hospital and hospitals which is basically taking one of their facilities and modifying it, to allow us to get the license and move forward more quickly in the marketplace. When we signed that joint venture we didn’t have our new model vetted, we have our new model vetted now and we approach them on it and they like the idea. So as I said here today, we either move forward with the hospital inside the hospital [indiscernible] or the new model. I think as we said here in front of you today we think it will be the new model, but what does that mean economics or anything? Nothing will change, it's just -- we're right in the middle of that right now. I can tell you what our plans are, our facilities are under construction and we plan to bring it online the facility in Q4, at least one or maybe a couple.

Paula Torch

Okay and then maybe just a little bit more of a higher level question regarding the Colorado market, we did read recently that UCHealth I think acquired an urgent care in Colorado Springs, so I'm just curious if you expect to have an impact either positive or negative in that market once you open the hospital?

A – Tom Hall

I don't think we expected to have negative impact I guess it can be a positive impact as they really a part of the whole system now it can refer to us, we’ve been referring to them, and so we’ve already been doing that and so I guess it could be somewhere from no impact to positive impact, I think that's how we see it

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Hall, Chairman and CEO for any closing remarks

Tom Hall

I would like to thank everybody for joining us today and we look forward to seeing you when we’re out about at different conferences and meeting more people. Thank you everyone. Bye.

Operator

Thank you for joining the call. You may now disconnect at this time. Thank you.

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