Ensign Group Inc (ENSG) 2016 Q1 法說會逐字稿

Welcome to the Ensign Group Inc. first-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to Chad Keetch, Executive Vice President. Please go ahead.

Thank you, Sabrina. Welcome, everyone and thank you for joining us today. We filed our earnings press release yesterday, which can be found on the Investor Relations section of our website at ensigngroup.net. A replay of the call will also be available on our website until 5:00 PM Pacific on Friday, May 27, 2016.

Before we begin, I have a few formalities to cover. 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 a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing 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 terms we, us, our, and similar verbiage are not meant to imply that The Ensign Group, Inc. has direct operating assets, employees, or revenue, or that any of the various operations: the service center, the real estate subsidiaries, or our captive insurance subsidiaries are operated by the same entity.

Also 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 to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available on our Form 10-Q. And with that, I will turn the call over to Christopher Christensen, our President and CEO. Christopher?

Thanks, Chad, and good morning, everyone. We're pleased to report that we just finished another great quarter with an adjusted earnings per share of $0.34 which met consensus estimates. We're grateful to our operational leaders for their exceptional performance, both clinical and financial, who continue to work tirelessly on the transition of our newly acquired operations across the organization, including 18 new operations in Texas, while simultaneous driving improvements in our same-store operations. It's because of each of them that we were able to achieve these results.

As we have explained before, the talent, cultural vision and hard work of our incredible local leaders, their teams and the helpful support of the service center has served us well in all kinds of environments, including during periods of extraordinary growth. And as our results from this quarter demonstrate yet again, we continue to have significant growth potential across all of our operations. With the addition of 18 new operations in Texas a few weeks ago, we now have 69 recently acquired operations which is, by far, the largest number of operations in that grouping in our organization's history. This gives us the greatest organic growth potential we've ever had.

While we're pleased with the first quarter contribution of some of our recently acquired operations, the majority of our newer operations still have significant potential upside. For example, after removing the boost that we received from the performing assets we recently acquired, 75% of our operations in the recently acquired bucket are traditional turnaround opportunities with an average occupancy of 65% and an average skilled revenue mix of 45.7%, which is substantially below the average occupancy of 80.1% and 53.6% skilled revenue mix, respectively, in our same-store operations.

Even with mild operational improvements, we expect most of our recently acquired operations to make a meaningful contribution to the bottom line in the latter half of 2016. And remember that much of our same-store bucket is still early in the process of becoming an Ensign quality operation.

We're also pleased to increase our 2016 guidance yesterday. With the addition of the Legend Healthcare portfolio on May 1, we revised projections for 2016 to $1.625 billion to $1.66 billion in revenues, and $1.45 to $1.52 adjusted annual earnings per diluted share. We also want to remind you that, given the number of new operations acquired last year and so far in 2016, we're expecting most of the increase in performance in 2016 to occur in the latter part of the year, as it often takes several quarters for newly acquired operations to perform.

While there are many tangible and intangible metrics that we used to demonstrates the high-quality outcomes to the healthcare communities we serve, we're also pleased to report that the number of skilled nursing operations achieving four- and five-star ratings has improved again. As of the end of the quarter, 87 of those operations carried that designation, which was an increase of 11.5% over the prior quarter. These improvements continued despite the recent changes in the CMS Star Rating System that have made it more difficult to achieve four- and five-star ratings and remember that the vast majority of the facilities we acquire are one- and two-star facilities at the time that we acquire them.

While we are pleased with the quarter, there is still much improvement that could be made within our same-store operations. We experienced a little softness in same-store occupancy during the quarter which was primary driven by a strategic shift in payer source in a handful of our assisted living operations, and a short-term blip in two of our operations in the Midwest.

As our assisted living operations allow Medicaid patients to move out over time, they have been methodically replacing the vacated units with private pay residents at market rates which, over the long run, will have a positive impact on our results. We also expect our operations in the Midwest to bounce back and are pleased with the improvements they have made already in April.

We're pleased with the progress that we are making with our managed care relationships as well, as they continue to grow our membership in most of our markets. We continue to see a shift in payer source with our skilled patients as managed care becomes a larger part of our business. Even though we saw a decrease in our Medicare skilled mix revenue during the quarter, we experienced an increase in our managed care and other skilled revenue mix, resulting in a net increase in our same-store skilled mix revenue of 26 basis points.

As a result of the strength in our managed care relationships, the decrease in Medicare skilled revenue was more than offset by the increase in managed care revenues, largely due to the increase in our average managed care rates of 2.43%. In addition, we had increased volume in skilled patients during the quarter, with an increase in our managed care skilled days of 15.7%.

Our key local leaders have been and remain determined to become the preferred provider in all of our markets and we're seeing that occur systematically as they continue to drive superior outcomes. While we've not historically disclosed operating margins by recently acquired, transition and same-store buckets, our local operators pay very close attention to fiscal discipline in the managed care environment.

First and foremost, we have been working closely with our managed care partners to establish exclusions for many items that are not excluded by Medicare, including certain high-cost medications and certain specialty services. Second, we've also been able to offset some of the differences between Medicare and managed care with more predictable skill volumes, which often allows us to manage our staffing needs with less volatility, thus helping us with more consistent labor patterns.

We want to remind you once again that we've maintained a consistent double-digit earnings growth rate. The source for that growth has varied over time based on the volume of acquisitions. In large growth periods, newly acquired operations have represented a larger percentage of our earnings growth. On the other hand, in years where we take a step back from acquisitions to focus on organic growth, same-store operations represent a much higher percentage of our earnings growth. Given the amount of growth we've experienced over the last 12 to 18 months, we expect the larger percentage of our 2016 earnings growth to come from recently acquired operations and remember, even with the dramatic shift to managed care and the recent introduction of bundled payments, our margins have remained steady. We'll also continue to remain vigilant and responsive as changes occur around us.

In the meantime, we remain financially sound with one of the lowest debt ratios and strongest balance sheets in the industry, a solid cash position and very manageable real estate costs. Even after the most acquisitive years in our history, Ensign's rent adjusted net debt to EBITDAR ratio is still only 3.6 times. And as of March 31, we still had over $118 million of availability under our revolver, and 32 real estate assets we own free and clear, giving us plenty of dry powder to fund additional growth in 2016 and beyond.

And as EBITDAR and our cash flow from our newly acquired operations catch up, we're committed to maintaining our leverage at conservative levels, even if there are temporary increases as we pursue additional acquisitions. As always, we remain committed to keeping our cash flow strong and our debt relatively low as we look to the future.

Here are a few additional highlights. Our consolidated GAAP net income for the quarter with $9.2 million and consolidated adjusted net income was $17.8 million. Consolidated GAAP EBITDAR for the quarter was $51.5 million, an increase of 1.5% and consolidated adjusted EBITDAR was $62.6 million, an increase of 23.1% over the prior-year quarter.

Transitioning skilled revenue mix increased by 300 basis points over the prior-year quarter to 56.8%, and same-store skilled revenue mix increased by 29 basis points over the prior-year quarter to 53.6%. Transitioning revenue for all segments grew by 9.7% over the prior-year quarter and transitioning TSA revenue grew by 8% over the prior-year quarter.

Cornerstone Healthcare, our home health and hospice subsidiary, grew its segment income by 18.7% and revenue by $8.4 million to $26.7 million for the quarter, an increase of 45.6% over the prior-year quarter. And consolidated revenues for the quarter were up $76.7 million, or 25% over the prior-year quarter to $383.2 million.

Before we provide more details on our financial performance, I'm going to have Chad give additional detail on our recent growth. Chad?

Thank you, Christopher. During the quarter and since, the Company announced the acquisition of 18 skilled nursing operations, one healthcare resort, two hospice agencies and one home health business. All of the skilled nursing operations were previously operated by affiliates of Legend Healthcare, which has provided high-quality rehabilitation and care services across several markets in Texas since 2001.

With the addition of the Legend Healthcare operations, we added 2,177 skilled nursing beds across 18 operations, which had an average occupancy of 77% as of May 1, 2016. The operations and the real estate assets acquired were purchased with cash, with cash proceeds from Ensign's revolving line of credit and will be operated by Ensign's Texas-based subsidiaries.

We were able to work collaboratively with the sellers and our new partner, National Health Investors, or NHI, in an off-market transaction. We have been admiring the Legend team for many years and found their value system and their culture to be a very close fit with ours. This transaction has been in the works for quite some time and we were grateful to Legend's founders and NHI for providing us with an unusual amount of access to the operations and the operational leadership before the transition date.

With an acquisition of this size, this access was critical to allow us and our experienced teams of local leaders in Texas to begin collaborating with Legend on the transition several weeks before the closing date. As a result, at midnight on May 1, we were poised integrate each of these new operations on the day of transition.

In addition, because these operations fit so nicely into the geographies currently served by the 27 operations we had in Texas before this transaction, we were able to integrate these operations into our operating cluster model with existing Ensign and Legend leaders and with the addition of one of Ensign's best long-term leaders who relocated there. We are anxious to continue working with an outstanding team of caregivers and health care professionals to advance the exceptional work that Legend Healthcare has been doing for over 15 years.

As part of the acquisition, our operating subsidiaries entered into a new 15-year lease with NHI for 15 of the operations, totaling 1,806 beds. In addition, NHI separately sold the real estate of two of the Legend facilities, totaling 245 beds to two of our wholly-owned subsidiaries. The Legend portfolio consists largely of newer skilled nursing assets, with a median age of eight years, and 11 of the 18 operations opening in the last eight years.

In addition, our operating subsidiaries have also agreed to sublease four newly constructed skilled nursing facilities from Legend, one of which is open and operating, and three of which are in various stages of development and are expected to be completed in 2016 or early 2017. All four of the subleased facilities are expected to be purchased by NHI approximately one year following the completion of construction and will be added to the NHI lease upon the consummation of the purchase by NHI.

We are very excited to open our third healthcare resort during the quarter and expect to open several more in Texas, Kansas, and Colorado during the second and third quarters of 2016. These newly constructed healthcare campuses add an important strategic service offering and will complement our growing number of healthcare operations in several markets.

These state-of-the-art resorts feature private transitional care beds and private assisted living suites. During the quarter and since, Cornerstone Healthcare Inc., our home health and hospice holding company, completed the acquisition of Buena Vista Palliative Care and home health, home health operation located in Ventura, California; Journey of Hope Hospice, a provider based in St. George, Utah; and Hospice for Wright County, a county-owned provider in Clarion, Iowa.

Each of these acquisitions allows us to continue to build the continuum in markets where we have a post-acute presence. These additions bring Ensign's growing portfolio to 204 healthcare operations, 34 of which are owned; 16 hospice agencies; 16 home health agencies; 3 home care businesses; and 17 urgent care clinics across 14 states.

We continue to actively seek transactions to acquire real estate and to lease both well-performing and struggling skilled nursing, assisted living and other healthcare-related businesses in new and existing markets. We remain very excited about the many opportunities we see before us and continue to believe that our unique and disciplined approach continues to be scalable in both distressed and performing operations.

And because of the many acquisitions we have completed, we have one of the best and most experienced teams in the industry. And we get better with each and every transition as we further refine and improve our process. With that, I'll hand it back to Christopher.

Thanks, Chad. Before Suzanne runs through the numbers, I would like to offer a few examples of how our key field leaders and their teams are able to drive improvements in recently acquired operations, including acquisitions where we had performing teams already.

In December of 2014, we made a strategic acquisition in San Diego County, including The Cove in La Jolla, California. In its first full quarter of operation following the acquisition, the co-census was 65% but the skilled mix revenue of the SNF was 87% and its EBITDAR was a healthy 12.5%.

Led by Executive Director Jenna Ramesh and Director of Nursing Arvie Mora, these leaders methodically and relentlessly improved their operation's reputation of quality in the greater San Diego medical community. With long-term success as their goal, Jenna and Arvie have retained and recruited the best talent in the community and have empowered their team to take ownership for achieving high-quality outcomes.

As a result of their focus, they have improved their reputation in a highly competitive market and have seen skilled mix revenue still increase by another 358 basis points to 91% of revenue as compared to the first quarter of 2015; this has led to a 61% increase in EBITDAR quarter over quarter.

In April of last year, we acquired Coral Desert Healthcare in St. George, Utah, A newer constructed facility near the campus of the Intermountain Healthcare's major hospital in southern Utah. At the time of acquisition, the operation provided services to skilled patients only and had a 99% skilled mix at the time we acquired it.

CEO and new market leader Tyler Hoopes, and Director of Nursing Carrol Andersen began using their reputation and trusted relationships with the local healthcare community to drive significant improvements in occupancy from 68% at the time of acquisition to 78.3% for the quarter end. Due to their consistent efforts to increase capabilities to take on the highest acuity in the St. George market rather than focusing on joint replacement patients, occupancy at Coral Desert has continued to climb to 88% as of May 1. As a result, Coral Desert has become a go-to partner for IHC and other key managed care providers in their market. Additionally, they have maintained skill mix while growing occupancy. This has led to an impressive EBIT growth of 14% quarter over quarter.

Both of these examples demonstrate that even if an operation has a strong skilled mix and a solid reputation at the time we acquire it, we are able to drive organic improvements in performing assets by focusing on our local approach to healthcare and leaning on our outstanding leaders in these markets.

Lastly, we want to share an example of the upside potential within our assisted living portfolio. At Desert Springs in Las Vegas, Nevada, CEO Simona Cocea, and Wellness Director Erika Tindall transformed the clinical, financial and cultural performance in an operation we've operated since 2011. Together, Simona and Erika have assembled an outstanding leadership team that has focused on improving the clinical results, food quality, communities involvement and resident employee survey results, all while maintaining fiscal discipline and market rates. As a result of their leadership, the reputation for this community has improved and occupancy has increased 953 basis points to 90.7% over the prior-year quarter, and EBITDAR increased by 36.8% quarter over quarter. We're very encouraged by these stories and many others just like these that are happening across the organization. Next, I would like to ask Suzanne to provide more detail on the Company's financial performance. Suzanne?

Thank you, Christopher. And good morning, everyone. Detailed financials for the first quarter are contained in the 10-Q and press release filed yesterday.

Highlights for the quarter ended March 31, 2016, as compared to the quarter ended March 31, 2015 included: record GAAP quarter revenue of $383.2 million, or a 25% increase. Same-store TSA revenues increased $8.2 million, or 3.7%. Same-store managed care days increased by 15.7% over the prior-year quarter. Transition revenue grew by 9.7%, all of which resulted in GAAP diluted earnings per share of $0.18 and a diluted adjusted earnings per share of $0.34 for the quarter.

Other key metrics as of March 1, 2016 included cash and cash equivalents of $51.4 million, $118 million of availability on our $250 million revolving line of credit with an accordion of $150 million and 32 unlevered real estate assets.

As we discussed last quarter, after we acquire a skilled nursing facility, we experience a temporary delay in our ability to collect on our receivables. More specifically, following the transfer of ownership, we undergo a process with Medicare, Medicaid and managed care agencies to transfer the contracts and billing codes to an Ensign-affiliated account. This process results in delays in the receipt of payments for services provided at our recently acquired acquisition.

As a result, we experienced temporary spikes in our accounts receivable following acquisitions while we wait for the paperwork to be complete. This temporary delay in collections results in an increase in our accounts receivable can negatively impact free cash flow, which is consistent with what we would expect during periods of significant growth.

As Christopher mentioned, we are increasing our guidance for 2016. We are projecting $1.625 billion to $1.66 billion in revenue, and $1.45 to $1.52 per diluted share. The increased 2016 guidance is based on diluted weighted average common shares outstanding of approximately 52.6 million. The exclusion of acquisition-related costs and amortization costs related to patient-based intangibles.

The exclusion of losses associated with the development of new operations and start-up operations, which are not yet stabilized; the exclusion of costs related to system implementation; the exclusion of results at a single closed facility; the inclusion of anticipated Medicare and Medicaid reimbursement rates increases net of provider taxes; the tax rate of approximately 38.5% ; the exclusion of stock-based compensation and the inclusion of acquisitions closed to date.

Based upon the magnitude of acquisitions last year and so far into 2016, our expectation would be that much of this growth would be provided in the second half of 2016. Additionally, other factors contributing to our asymmetrical quarter include: variations in reimbursement systems; delays and changes in state budgets; the seasonality and occupancy in skilled mix; the influence of the general economy and our census and staffing; the short-term impact of our acquisition activities; variations in insurance accruals related to our self-insurance programs and other factors. With that, I'll turn it back over to Christopher. Christopher?

Thanks, Suzanne. We want to thank you again -- thank you for joining us today and express our appreciation to our shareholders for their confidence and support. I also need to express appreciation to our colleagues in the field and the service center.

Frankly, their tireless efforts and the sacrifices that they have made and the results from those sacrifices have been absolutely inspiring to watch it in a challenging time for the organization and I'm very grateful for all that have pushed and pulled along with us. I guess I'll now turn the Q&A portion of our call over to Sabrina. If you would instruct the audience, please.

(Operator Instructions)

Chad Vanacore, Stifel.

Good morning. This is Seth [Cohn] on for Chad. First question, just looking at, you reported higher skill mix and overall EPS in line with estimates, but your margins looked weaker than expected. Anything, in particular, pressuring margins. Is that from new operations that still have upside, or if you could provide more color there?

I would have to look at what you are looking at, seth, but I'm guessing that it's probably because of the influence of new acquisitions. It's -- we haven't -- they haven't had as big of an impact. Are you looking at same-store or overall?

Same-store.

So it's not to the new acquisitions. When we look at it, our margins have been pretty consistent. What are you looking at?

I don't think that you provided any same-store margins, so I'm just trying to get a sense of how much they've moved over the year?

That is good. I'm sure it's probably hard to see from what's provided just in the same-store.

But our margins have been pretty consistent over the last -- in many quarters. I think one of the -- I know that doesn't answer question, but it's probably hard to see the pressure that the new acquisitions are having on the margins.

If you look at the enormous revenue representation of the new acquisitions, and those margins are probably many, many points lower than the same-store. There is no probably about it. They are many, many points lower than same-store. But our margins have been very consistent over the last many, many quarters.

Even overall, if you look at the non-GAAP revenue to non-GAAP EBITDAR, it actually -- we did improve over on a consolidated basis even over what we did in 2015. So I think just looking at overall, the margins are actually going up, if you look at non-GAAP revenue to non-GAAP EBITDAR.

Okay, great. (multiple speakers)

But Seth, I do want to make sure you -- we are hearing you and we're going to look at something and see what we can do to make it more obvious without doing something that we're not supposed to do.

All right. Yes, that's fine. And then my next question, circling back to the conversation last quarter on the California Medicaid impact. I know you had mentioned that your year-end bonus that you got, and I was just curious to see if there was any trickle into 1Q 2016 from last year? I think it was up 1.3% year over year.

Yes, we had a small trickle into the current quarter of about $1.5 million coming into Q1.

Okay. All right. Great.

And then as we get closer to the implementation of the CJR and BPCI, does it get more difficult to manage the newly acquired operations in the sense that you have less time to prepare them for the reimbursement changes?

That's a good comment.

I think in certain markets, it could take a little bit more time to turn them around to become a trusted partner, because you are being excluded from certain relationships that maybe you weren't excluded from in the old days, in quotation marks.

But I think that -- I still think that the effort is worth it. And while it might take an extra few quarters, when you earn that reputation, and you build those relationships, and your quality is what it ought to be, I think that it could -- it would be more long-lasting even though it might take a little longer.

I will just add to that. Certainly, as we re-evaluate acquisition opportunities, we look at that and underwrite their inclusion or exclusion from those relationships as part of the evaluation.

Great. Thanks very much for the answers.

Thanks for your questions.

(Operator Instructions)

Ryan Halsted, Wells Fargo.

Thanks, good morning.

Wanted to go back to your comments at the opening where you talked about the shift you're seeing into more managed care. I was hoping maybe you could dive a little deeper into that and call out some trends that maybe you're seeing that are contributing to that.

Are you seeing a very direct shift from fee-for-service into managed care, or are you also taking market share within the payer networks that you're in. Or are you expanding it to new networks. Any more color around that trend, I think would be very helpful.

I think surprisingly it is more the latter than the former. I was actually a little surprised to see in the quarter that our Medicare percentages dropped off very slightly. So I think it is more of a shift in taking market share.

Our length of stay is starting to level off on the managed care front more than we've seen in the past. And I think that that's partially a result of the relationships and understanding one another between managed care hospitals, doctors, and us. But yes, our -- as I think I said somewhere in the script, there was -- our volume increased by a fairly steady amount. I don't think we --

(multiple speakers) --[15.7%]

I think in one of the charts that we give, we show what has happened with our Medicare and I think it only dropped off by, like, 20 basis points or something like that. So I think it is more a shift of market share than is shifting from -- we're not seeing as big a shift from Medicare to managed care as we have seen in the past, surprisingly. And I say that loudly. That is surprising.

Okay. That is very helpful. You did -- you mentioned length of stay leveling which is, certainly, very encouraging directionally when you look across the industry and some of the comments that some of your competitors are making. Can you talk about what your length of stay is on your managed care business relative to the Medicare book?

I'm going to let Suzanne give those numbers but I do want to -- I think one of the reasons is because we have been active participants in managed care relationships for a long time. It has represented a large percentage of our business for many, many years.

So I think everyone will see it level off as they get more and more experienced in it. I don't think it is just unique to Ensign. I just think it is where we are in our -- the length of history we have. But Suzanne can give you more data.

Yes, so we've seen it drop from 17.7% last year to 17.5% this year. It is a small drop quarter over quarter on the managed care skilled business.

Okay. Thank you for that. Maybe one last one on this topic. You also called out some of the exceptions you're trying to get in place to control costs to potentially offset any reduction in length of stay or any managing of the care. Can you give a sense of the percent of costs you think -- your percent of per diem cost you think you could potentially strip out with some of these exceptions?

There's -- there are a number of them. It's -- there's -- you've got specialty medications. You've got excess therapy. You've got certain DME. You've got specialty beds. There are all kinds of things, that when you come -- and it is not a matter of removing them from the equation. The resident still gets some and hopefully gets them because every -- more parties are involved in the decision-making.

But there is more of a shared costs. So unfortunately, too many of us pay attention to the revenue reduction and we don't look at the reduction in underlying costs, because with a highly skilled resident, that is a huge portion of your overall cost.

Anything related to ancillary services is enormous. And if there is shared, sharing of that, the reduction in revenue actually can result. I think I said this a few quarters ago. But your margins can actually be a little bit better even if your revenues are less.

That's really helpful. Final question from me. Just any update on your deal pipeline? The broader M&A environment? Are you seeing any changes in the environment. Is it becoming any more competitive? Especially as you're seeing some new REIT players enter the market.

This is Chad. It is interesting. I think that the deal flow continues to be strong. We have not noticed an increase in competition. The deal we did in Texas was an off-market transaction. We continue to get a lot of deal flow that way.

And then on the onesies, twosies, again, we just haven't seen a lot of competition, but the opportunities are definitely there. I think it's, given all of our recent growth, we will continue to be selective and have the ability to do that. But yes, it is actually not that different from last quarter.

All right. That's great. Thanks for all the color.

Thank you.

Dana Hambly, Stephens.

Thanks. Just a follow-up on that last one Christopher or Chad. We've seen cap rates for the industry start to -- have been trickling down for several years now. You've seen some pretty big numbers on a per-unit basis paid for beds, that includes the Legends acquisition in there.

So just trying to figure out, is it a buyers or sellers market? And there seems to be plenty of activity on the private side. Yet public equity seems to be fleeing from the skilled nursing space. So wondering if you could kind of piece any of that together?

I'm going to let Chad clean up what I say, but I have to clarify something that you said, Dana. I'm sure that you knew that I would do this. So Legend, if you look at the performance of it I wouldn't say that was a higher-priced or lower cap rate at all.

But it is higher than we normally pay, for sure, and that's fair to say. I think that -- I will admit that I am a little surprised at the inconsistency of cap rates assigned to these deals. I'm a little surprised at how much some people are paying for deals relative to performance.

But on, quote-unquote, normal deals, I don't think that we're seeing prices rise. But I -- as always, on highly performing deals that are widely marketed, I think you're right. I think cap rates probably are continuing to fall. It appears that it is a tougher environment for those that are -- that everybody is chasing.

I just -- I agree with that. I'd just sort of add. I mean, I think there tends to be more of these kind of performing assets coming to market. I don't know that you would pay more today for a performing asset than you would have last year.

But there are just more of those deals that make it look like the overall cap rates are coming down. That is my view. But with respect to the distressed properties and the ones that are struggling, I think it is similar as to how it has been in the past.

Okay. That is helpful. And then when we look at the growth in patient days on the same-store bucket, you address Medicare and managed care. The other skilled have been growing over 20% for a few quarters now, it looks like.

I think Christopher, you talked last quarter about getting some of the ER admits and the respiratory and wound care. Is that what's driving the growth there? And is there anything changed in the market where we would expect to see a pretty exceptional growth in that bucket?

It is a little more complicated than this but to simplify it, it is really Medicaid. It is subacute Medicaid that is growing. We are seeing the need and as we build our capabilities, we are filling that need and we've seen it grow quite substantially in California, Arizona, a little bit in Utah, but primarily in those two states.

Okay. And then just a few for Suzanne. The construction costs in the quarter. Is that -- that's related to the project's opening second and third quarter this year?

On the non-GAAP, when you look at the non-GAAP adjustment of the newly --

I think it's 2.7.

That is exactly what that is. So that's for the -- it is not just the construction cost per se, but it's just the cost of having everything set up and ready to go for those operations, so that when they go through their certification class, or time, they have to actually incur some cost and we're paying rents and everything on them.

Okay. All right. And then what is the non-GAAP revenue for the quarter?

The non-GAAP revenue for the quarter is $371.8 million.

$371.8 million. Okay. You talk about your leverage comfort level in the past on -- it's debt to EBITDAR. Is that correct?

Correct.

That you target. And what multiplier or cap rate do you use on the leases?

Great question. It is 8%.

8%. Okay. Great. Thanks very much.

Thanks, Dana.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Christopher Christensen, President and CEO, for closing remarks.

Thank you, Sabrina, and thanks everyone for joining us today. We appreciate your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.