Ensign Group Inc (ENSG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ensign Group's First Quarter Fiscal Year 2018 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Chad Keetch, Executive Vice President. Please begin, sir.

Thank you, Norma. Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and this announcement is available on the Investor Relations section of our website at www.ensigngroup.net.

A replay of this call will also be available on our website until 5:00 p.m. Pacific, on Friday, May 25, 2018.

We want to remind any listeners that may be listening to a replay of this call that all statements are made as of today, May 3, 2018, and these statements have not been, nor will be updated subsequent to today's call.

Also, 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, The Ensign Group is a holding company with no direct operating assets, employees or revenues. Certain of our wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries.

In addition, our wholly-owned captive insurance subsidiary, which we refer to as captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as workers' compensation insurance liabilities. The words Ensign, company, we, our and us refer to The Ensign Group and its consolidated subsidiaries.

All of our operating subsidiaries, the Service Center and our wholly-owned captive insurance subsidiary, are operated by separate, wholly-owned, independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the terms we, us, our and similar terms used today are not meant to imply nor should it be construed as meaning that The Ensign Group has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group.

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'll turn the call over to Christopher Christensen, our President and CEO.

Thanks, Chad. Good morning, everyone. We're pleased to report that we achieved a record quarter as the improvements we experienced in the fourth quarter continued into the first quarter. We're excited about the progress we've made as the ramp in many of our transitioning operations is now materializing, including significant growth in occupancy in Utah and Texas. We've experienced positive momentum in skilled revenue, driven by strong growth in managed care revenues in both same-store and transitioning facilities as these operations continue to gain the trust of the healthcare communities they serve. These results are only possible because of outstanding local leaders that work tirelessly to tailor their care and services to the needs of the unique healthcare markets they serve. We also are encouraged by the progress we're making in our more mature operations and we're especially excited about the enormous potential we have in our newer operations, most of which haven't begun to contribute what we expect they will in the future.

During the quarter, we experienced a dramatic improvement in our transitional and skilled services segment income of 45% over the prior year quarter and 16% over the fourth quarter of 2017. We also experienced positive trends in occupancy, with an increase of 415 basis points in our transitioning operations and 82 basis points in our same-store operations, both over the prior year quarter. We're excited to announce that our GAAP earnings per share for the quarter was $0.43 per diluted share, and adjusted earnings per share was up 32% over the prior year quarter to a record $0.45 per diluted share. In addition, our consolidated GAAP net income for the quarter was $23.1 million, and consolidated adjusted net income was $24.1 million, an increase of 35% over the prior year quarter.

Since January of 2015, our talented local leaders have been tirelessly integrating 100 skilled nursing in assisted living operations into the organization. Some of these transitions made positive contributions to our results right out of the gate, while others have taken much longer. In fact, it's not unusual for an operation to take several years to truly become healthy, clinically and financially.

With that said, over the period of 18 years and 234 acquisitions, we've proven this pathway to progress over and over again. We're very encouraged to see this multiyear process in nearly all of these transitioning operations beginning to bear fruit.

With the focus on strengthening outcomes, lowering readmission rates and extending our capabilities to care for more complex patients across the post-acute continuum, we continue to invest in the best leaders and clinical programs in post-acute care. As a result, we're seeing significant improvements in outcomes and patient satisfaction, both of which will continue to drive occupancy and skilled mix.

As some of you may know, CMS implemented a new methodology in the star ratings. As we expected, this led to a temporary reduction in some of our 4- and 5-star ratings, but we expect this drop to be temporary and we're continuing to adjust to those new standards and expect to return to our previous upward trends. But rest assured that the quality of care we deliver is the reason we are seeing improvements in occupancy and skilled mix and the improving financial performance.

As Chad will discuss in a minute, we continue to methodically add value to our real estate portfolio by improving the operating results in our owned operations and by acquiring additional real estate assets. As a reminder, since we announced the spinoff of all but one of our real estate assets to CareTrust REIT in 2014, we've added 154 operations, which included 66 real estate assets. We believe that our shareholders have received little to no credit in the past for the incredible amounts of underlying value in our real estate and that its value is again being overlooked. We'll always be an operationally driven organization first, but we also believe it's important to recognize the growing underlying value in our own real estate and the flexibility that ownership gives us in the future.

We're also pleased to report that we continue to build significant value in our other lines of business, including home health and hospice, assisted living, nonemergency medical transportation and other post-acute care services. Under the direction of key leaders and their dedicated Service Center resources, these operations have achieved consistent clinical and financial results while simultaneously bolstering our core skilled nursing operations.

During the quarter, Cornerstone Healthcare, our home health and hospice portfolio subsidiary, grew its segment revenue and income by 24% and 41%, respectively, over the prior year quarter. Also during the quarter, Bridgestone Living LLC, our assisted living and independent living portfolio company, which consists of 51 stand-alone operations and 22 campuses in 12 states, grew its segment revenue and income by 12% and 5%, respectively, over the prior year quarter.

While these 2 business segments and our skilled nursing operations both benefit from certain synergies that come from their affiliation with Ensign, each of these independent leadership teams drive their respective operations with little to no dependence on Ensign. We expect to see each of these segments grow by acquiring underperforming operations and driving organic growth. As they do so, we continue to evaluate ways in which our shareholders will receive credit for the value that these new businesses have created, all with minimal disruption to their momentum.

Collectively, these 2 business segments, along with our other new healthcare ventures within the portfolio, are quickly approaching the size of Ensign when it completed its initial public offering in 2007.

I also wanted to say a few words about the recent announcement made by CMS. We're very pleased with the proposed net market basket increase of 2.4%, starting in October of 2018. We're also encouraged by CMS' newest payment reform proposal called Patient Driven Payment Model, or PDPM. While there's much to learn about this new proposed payment system, we're very pleased that CMS is working so closely with operators across the country to develop a predictable and sustainable reimbursement system. But regardless of how the changes ultimately play out, we're confident that our relentless focus on quality and efficient outcomes will serve us well in any number of new reimbursement systems, including this latest iteration.

We're reaffirming our 2018 annual earnings per share guidance to between $1.80 and $1.87 per diluted share. Overall, this guidance represents a 31.1% increase from the midpoint over our annual earnings for 2017. Even with the recent tax reform and related expenses, that reduced the company -- that reduced the company's effective income tax rate from 35.5% to an estimated 25% for 2018. The midpoint of our guidance represents a 15.7% increase over 2017 results. We're excited about the coming year and look forward to continuing to drive quality health care outcomes in corresponding financial results.

And with that, I'll ask Chad to give us an update on our recent investment and growth activities. Chad?

Thank you, Christopher. During the quarter, we paid a quarterly cash dividend of $0.045 per share. This is the 16th consecutive year we have increased our dividend, which we hope shows our continued confidence in our operating model and our ability to return long-term value to shareholders. We have been a dividend-paying company since 2002, and have increased that dividend every year since.

During the quarter, Bridgestone Living, our assisted living portfolio subsidiary, acquired the real estate and operations of Cedar Hills Senior Living, a 37-unit assisted living facility in Cedar Hill, Texas; and Deer Creek Senior Living, a 37-unit assisted living facility in DeSoto, Texas. With these acquisitions, Bridgestone now operates 51 stand-alone assisted living and independent living operations, and portions of 22 healthcare campuses that include both assisted and independent living units.

Bandera Healthcare, Inc., our Arizona-based portfolio company, acquired the real estate and operations of Peoria Post Acute and Rehabilitation, a 128-bed skilled nursing facility located in Peoria, Arizona. The acquisition was effective on April 1, 2018 and included an adjacent 50-bed long-term acute care hospital that is currently operated by a third-party under a lease arrangement. This new operation is in good hands as the team in Peoria joins one of the strongest concentrations of our outstanding local leaders that are truly the post-acute operators of choice in Arizona.

Yesterday, we announced that Keystone Care, LLC, our Texas-based portfolio subsidiary, acquired the real estate and operations of Grace Presbyterian Village, a 26-acre post-acute care and retirement campus located in Dallas, Texas. Grace Presbyterian Village, which will be known as The Villages of Dallas, is a full-service senior care campus with 125 skilled nursing beds, 81 independent living units, 36 assisted living units and 26 memory care units. This acquisition adds to our expanding footprint in the Dallas area and adds to our ability to accelerate the quality of care we can provide to our patients and their loved ones.

We're being very selective with each potential acquisition opportunity and we have carefully chosen each of these operations because of the potential we see to enhance the clinical and financial outcomes. These additions bring Ensign's growing portfolio to 183 skilled nursing operations, 22 of which include assisted living operations, 51 assisted living and independent living operations, 22 hospice agencies, 20 home health agencies and 4 home care businesses across 15 states. And as Christopher mentioned, we now own the real estate at 67 of our 234 healthcare facilities.

We continue to see a steady flow of acquisition opportunities across all our business segments. These potential transactions come from a variety of sources and different types of sellers, ranging in size from small operators and nonprofits that are exiting the business, to large regional operators that are selling noncore or turnaround assets.

We continue to attract and consummate transactions with nonprofits and believe that our values-based approach to post-acute care will make us an attractive solution for nonprofits and faith-based sellers in the future.

Almost all of the transactions we completed in 2017 and the first part of 2018 fit one of these 2 categories and were completed 1, 2, and 3 at a time. We also continue to see opportunities involving several larger, well-known portfolios of skilled nursing assets and we expect to participate in the marketing process with some of these larger sellers. With that said, our primary constraint to growth is the availability of locally driven clinical and operational leaders.

In preparation for future growth, we continue to recruit and train outstanding leaders. As long-term investors, we take our commitment to each health care community and the team of caregivers very personally and we'll only do a deal if we can see a pathway to continued and sustained health over the long run.

One of the keys to our success has been, with very few exceptions, to ensure that the prices we pay and the lease rates we negotiate will ensure the long-term health of the operation. We continue to remind each other to remain disciplined and true to our operations-driven strategy, even if it means we have to pass on the majority of the transactions that we see, or only participate in portions of these larger portfolios.

The pipeline for our typical turnaround opportunities remains strong and we remain confident that there will -- there are and will be many opportunities to be had at the right prices. And we are currently working on a handful of transactions that we expect to close throughout the year.

And with that, I'll turn the call back over to Christopher.

Thanks, Chad. Before I turn the call over to Suzanne, I want to provide more information on the quarter results. And I want to give you an update on our often discussed Legend acquisition, which consisted of 21 operations in Texas. As most of you will remember, at the time of the Legend acquisition, we explained that the historical performance of the operations, the geographic locations and the relative newness of the facilities, combined with our perceived cultural similarities, made Legend the perfect portfolio for a strategic transition of that size.

As has been discussed almost ad nauseam, the declining trend in performance that began before we took over, and the cultural differences as well as the combination of other factors, led to a much slower transition than we anticipated. However, our local teams in Texas never lost faith in our proven locally driven cluster model. Over time, as we've replaced almost all the leadership in these operations with a combination of experienced Ensign leaders and new, highly talented operators, the Legend portfolio is now performing like we expected they would. We still have small pockets of weakness in some of these operations but we have made great progress in the vast majority of them. We're happy to report that the Legend portfolio saw an increase in its total revenue by $3.7 million or 11%, and its EBIT by $2.3 million or 222%, both over prior year quarter. We're very confident that the Legend buildings will be solid contributors for many years to come.

Throughout this process, as well as in some other larger deals we've done in California, specifically the 9-building Shea portfolio; and in Arizona, the 10-building Life Care transaction, we've learned many lessons. One of those lessons is that larger acquisitions will take longer to turn. But in each of the Legend, Shea and Life Care transitions, we've proven that the same principles that have led to our successes in smaller transactions apply in larger ones. As frequent acquirers, we always take a long-term view. In the future, should another opportunity arise that is larger in scope, we'll apply the lessons we learned in each of these transactions to make solid, long-term decisions about what acquisitions to pursue and how to best transition them?

Let me just share a couple of examples of individual operations who've begun to see the effect of our efforts this quarter. Shea Post Acute, a 120-bed transitioning operation located in Scottsdale, led by CEO, Clayton Wagner, and COO, [Barb Duncan], has overcome a low star rating, low census and troubled reputation to become a 4-star operation. At the time of acquisition, this operation was in the midst of a multiyear decline and was experiencing devastating operating losses. When Clayton and [Barb] assumed control, they quickly partnered with hospitals and physician groups to determine what was missing in the community and how they would be able to fill those needs with specialized services.

They also embraced an untapped niche in North Scottsdale by opening their doors to both Medicare Advantage plans and Managed Medicaid. As they've steadily become the facility of choice, their occupancy has grown from 50% at the time of acquisition to over 92%.

Just as impressively, they've improved their skilled mix Medicare days by 52% and skilled mix managed care days by 93% compared to the same quarter in 2017. Not surprisingly, EBIT has grown over by 5x in the first quarter of 2018 compared to the same quarter last year.

Riverview Village Senior Living and assisted living campus located in Menomonee Falls, Wisconsin, has undergone some tremendous operational transformation. Led by Executive Director [Michael Stern] and Wellness Director [Vicki Hornhost], the Riverview team has worked diligently to offer the highest quality care with superior customer service, improved service offerings and amenities and have integrated into their community as a valued partner.

In 2017, they achieved an impressive perfect survey from their state health department for the first time. They've transformed the operation from an obscure and largely unknown assisted living facility to the premier senior living option in that marketplace, which has translated to an impressive 16% improvement in overall occupancy and 35% growth in revenues compared to the same quarter in 2017.

Emblem Hospice Tucson in Tucson, Arizona was a standout performer for our home health and hospice segment, led by Executive Director [Michael Johnson] and Director Clinical Services, [Cindy Eustace]. Emblem has grown almost entirely organically to become the hospice provider of choice in the competitive Tucson market.

In the first quarter, Emblem increased revenue by 32% and hospice days by 28% over the prior year quarter. This growth has been driven by deepening key referral relationships and developing new relationships with physicians, hospitals and post-acute providers. Emblem has grown its reputation for clinical excellence and has continuously received high marks for patient satisfaction.

As a result of the agency's clinical success and responsible cost management, Emblem increased its first quarter 2018 EBIT by 75% over the prior year quarter.

We appreciate you allowing us to share these important examples today. Our hope is that this will give you some insight into the quality of the extraordinary leaders that are found in every corner of the organization and why we are so optimistic about our near and long-term organic growth potential.

With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our updated guidance and then we'll open it up for questions. Suzanne?

Thank you, Christopher, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Highlights for the quarter included: GAAP earnings was $0.43 per diluted share and adjusted earnings per share was up 32.4% to a record $0.45; consolidated GAAP net income was $23.1 million and adjusted net income was $24.1 million, an increase of 34.7%.; total transitional and skilled segment income was $46.2 million, an increase of 45.3% over the prior year quarter and an increase of 15.7% sequentially.

Same-store occupancy was 79.2%, an increase of 82 basis points. Transitioning skilled occupancy was 76%, an increase of 415 basis points. Transitioning skilled managed care revenue was up 16% and same-store skilled managed care revenue was up 5.9%.

Total home health and hospice segment and revenue was up 23.7% and -- to $39.8 million, and segment income was up 41.1% to $6.1 million. Other key metrics for the quarter included cash and cash equivalents of $35.1 million at March 31, and cash generated from operations was $40.4 million. We also had approximately $195 million of availability in our revolving line of credit. We expect our lease adjusted net debt-to-EBITDA ratio to -- we suggest that net debt-to-EBITDA ratio, which was 4.1x at quarter end, to decrease in 2018, as the EBITDAR from transitioning and newly acquired operations continues to grow. But as a reminder, this number could be impacted by the pace and magnitude of future acquisitions.

We also wanted to note that many of our items that are impacting our GAAP results in 2017, including the impact of the natural disasters and the adoption of the tax law, did not impact us this quarter. Accordingly, we anticipate that there will be fewer non-GAAP adjustments in 2018 as compared to 2017.

As Christopher mentioned, we are reaffirming our guidance in 2018. We are projecting revenues of $2 billion to $2.06 billion, and adjusted earnings of $1.80 to $1.87 per diluted share. The 2018 guidance is based on: Diluted weighted average common shares outstanding of $54.3 million; exclusion of transaction related costs and amortization associated with patient-based intangibles; the exclusion of losses associated with startup operations, which are not yet stabilized; the inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax; a tax rate of 25%; the exclusion of stock-based compensation; and the inclusion of acquisitions closed and anticipated to be closed in the first half of 2018.

Additionally, other factors contributing to our asymmetrical quarters include: variation in reimbursement systems; delays and changes in state budgets; seasonality in occupancy and skilled mix; the influence of the general economy and our census and staffing; the short-term impact of our acquisition activities; variation in insurance accruals and other factors. And with that, I'll turn the call back over to Christopher. Christopher?

Thanks, Suzanne. We want to again thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We also appreciate our colleagues in the field and the Service Center for making us better every day. I guess, we'll turn the call over to Norma if you wouldn't mind taking over for the Q&A.

(Operator Instructions) Our first question comes from Chad Vanacore of Stifel.

This is Seth Canetto on for Chad. So first question, you guys mentioned the new CMS proposed move to value-based model. Can you just talk a little bit more about that? It sounds like it's going to add some predictability and sustainability to the system?

Yes. I wish we had more detail on it. But what we can -- from what we can see, it looks like it's something that is more sustainable because it is something that is based on -- diagnosis codes is based on the actual condition of the patient and not based on how much work you provide or how much therapy you give or how much -- so it's something that is, here's the patient, here's the condition of the patient and here's what we're going to reimburse you for that patient. And I guess, one of the reasons we think it will be more sustainable is because it's, again, you -- here's the person, you've got to get them back to where they need to be, and whatever it cost you to get them back to that is up to you. And they'll be -- one of the nice things is, they'll be less -- should be less expense on tracking all of this stuff because it's more about taking care of the patient, taking care of the resident and not making sure that you documented how many minutes you gave or documented that you -- through the minimum data set or through other things. And so, obviously, there'll be adjustments from year-to-year, but I have to reiterate, we don't know what's going to come out. This is the first pass, and there generally are 2, 3, 4, 5 passes before the final pass occurs. But we're just hopeful because of the way they're going through the process. And the fact that they're consulting with ACA and other parts of the industry and operators and trying to come up with something that is good, I guess, for taxpayers and also good for the patient and something that the good operators will be able to continue to be self-sustaining on.

All right. Great. That's very helpful. And then, the new methodology and the temporary reduction in the star ratings for your operation, it didn't seem to have much of a financial impact. But can you just elaborate a little further on those changes and how you think the star rating impacts you fundamentally?

Yes. I mean, star ratings are more impactful when it comes to managed care at this stage. But remember, this is a -- some of the new things that were introduced required timely submission of certain information that is a little different than it's been in the past. I don't want to get into too much detail. It also included a few other points that changed some of the star ratings for some of our facilities. And we think that as we get better at communicating that documentation, that we'll get back on the track that we've been at for ever and ever and ever, which is increasing the number 4 and 5-star operations we see. But to answer your first question, the star ratings are not used currently by Medicare to determine your reimbursement, but we know that they will be or should be in the future. And that's why it's important that we all prepare for that. But that's why you didn't see -- when you say there wasn't a financial impact, there was a financial impact, it's just through the managed care sector that is not as visible to you.

All right. And then, just thinking about occupancy in the quarter, it was relatively strong, and we've seen industry have some pressures and struggle there. So what drove that occupancy improvement, and particularly, what are you guys doing to improve the occupancy in your mature markets?

Well, candidly, it's probably because we've had some weakness due to some self-induced things and we were able to fix some of those things. And so as we fix those things, obviously, occupancy is going to increase. On the overall occupancy, or the transitioning, which saw the biggest improvement, a lot of that had to do with what we talked about, which is fixing some of the things relative to the Legend transaction, fixing some of the things in Utah, some of the narrowing of networks and the improved managed care relationships that we've had. I know we've talked about this a lot, but it really does have a bigger impact than I think people realize. Just embracing the whole managed care direction of the industry and partnering with them in a way that allows us to help the patient, first and foremost, but to help each other in the management of the patient and making sure we do it in a cost-effective way together instead of trying to steer people away from managed care, I think that, that's helped us too. I think that we -- I can't speak to everybody, but I feel like we started to do that earlier than others did. And I think that, that benefited us a lot.

Our next question comes from Frank Morgan of RBC Capital Markets.

Hey, I want to start first, in your comments about M&A activities, some larger scaled asset, portfolios coming back on to the market. I'm curious if -- what do you think is driving that right now? And how do you think the valuation backdrop is going to look with -- if this flurry of deals coming into the marketplace actually occurs?

Well, I'll let Chad clean up whatever I say. This is Christopher again. But I think you know the answer to the second part of that. I mean, our hope is that the prices are going to drop amongst the facilities that aren't doing very well. We think that they should. We don't think there are as many buyers out there as there have been in the past. So I think that, that will be -- that will result in some, I guess, more solid deals than we've seen even in the past. And then I think in terms of what's contributed to the -- I mean, we've kind of talked about this, Frank, but -- I mean, one of the things is there has been a lot of money chasing these beds, and there've been prices that have been paid on these deals that I don't think were sustainable. When you pay a rate per bed that results in a rent or mortgage payment, and then, often, escalators tack on top of those, at some point, the operator can't run fast enough to run away from those real estate related cost. And I think that has a lot to do with what you're seeing and what you will see in the next year or 2.

Do you think you'll have the opportunity to own these assets or will these be transactions where you're more likely to just have to step in and negotiate a lease rate?

I think it'll be both. It'll be both.

Got you. Switching gears, you were mentioning that managed care is really the only area where your stars ratings impacts your -- could potentially impact your reimbursement. How much of a lag is there between the time of, say, a stars rating changes and where you actually see that show up in your numbers? And if there is some kind of temporary anomaly because of some nuance to the rating system, where you're confident you'll get that back, would managed care cut you slack there, or would they still have to go through this process of making some type of rate adjustment?

Yes, I mean, with healthy relationships, they do and they have. They recognize that there's been a little bit of an adjustment in how this is reflected. And as long as the key pieces that they're looking at look good, they absolutely will cut us some slack. I want to correct something that I said. While the star ratings don't impact us directly, obviously, quality does. And we are impacted in a lot of our states in terms of reimbursement and other things. And where there is similarity between what the states consider and the star ratings, it can impact our Medicaid rates as well and some of the rewards or penalties that we receive throughout the year. But we do expect, we do feel like we're on the same track that we've been on and there were some things that we didn't do that we should have done relative to timely submission of documentation that was already there that impacted our star ratings. And as we correct those things that are -- these are new to us and we haven't been accustomed to submitting them as quickly. We think that our star ratings will continue to increase and improve. And they're very important to us, not just for reimbursement reasons, but because they often are a reflection of the reputation that we enjoy over a long period of time.

Got you. And then, on the transitioning portfolio where you saw a lot of improvement, I was just curious, could you just conceptually sort of provide some attribution of how much of the improvement. I mean, you mentioned a couple of different things from those, the narrowing of networks to the Legend getting better, Legend portfolio getting better, some improvement in Utah, was there any one of those things that stood out, that would be the primary driver to the improvement that you saw there?

I think they were both significant contributors, they weren't the only contributors, but they probably represented a meaningful portion of that improvement. You know that we've been talking about that, Frank, for I don't know how many quarters, and finally, things are starting to come to fruition. But we -- there are other things too, though. I mean, there were improvements in other transitioning facilities in Arizona and in Idaho and in Colorado. And so I don't dare guess a percentage, but both of those things, the narrowing networks in Utah and the Legend improvement, made up a significant portion of our climb in the transitioning bucket.

Got you. And then, with this occupancy growth and revenue growth, in terms of -- it's not necessarily translating that much into, at least on a consolidated basis, to margin expansion yet. So could you give us some color, like if you were to extract out -- I mean, are you -- is there a certain amount of these more recent acquisitions that is diluting that margin that's causing that 30 basis point drop in the consolidated margin? And so just any color there and maybe just some commentary about labor because we continue to have lots of questions from investors about the outlook for labor in a higher, tighter wage market?

Yes. I think you're probably right. I think the labor market has -- what you're implying is right. I think the labor market has probably tightened that margin a little bit. But I still think, when you look at all of our -- from our same-store, our transitioning bucket and our new acquisition bucket, we still have significant improvement to be made in each of those areas. And as we make them, we still feel like the margins can be better than they've ever been. Remember, Frank, that we still have the largest representation we've ever had in the transitioning and new acquisition arena in terms of our overall portfolio. And at some point, that will be diluted. And as that is diluted, you will see those margins increase. And I realize that the same store does get broken out and you can see that. But again, as I expressed probably -- as we expressed a year ago, as more and more of these work into the same-store arena, the strain on the rest of the organization is lessened and lessened, and you'll see better performance in our same-store. And that has played out and you'll see it continue to play out. Doesn't mean we'll stop making acquisitions, but we probably won't have the same -- we won't have 40% of our overall portfolio in the transitioning and new acquisition buckets. Sorry, I'm stumbling over my words.

That's all right. Two more and I'll hop back in the queue. Just maybe as we're getting close to the summer and the start of a lot of state fiscal years, just what you're seeing out there in terms of what the rate environment for Medicaid might look back -- look like on a state-by-state basis. Anything that jumps out as an opportunity or one that you're worried about? And then, finally, good growth in cash flow from ops in the quarter, almost doubled it from last year, is that a sort of a good, sustainable run rate that we should be thinking about for the year? And then, how much CapEx should be going with that? Whatever that run rate is, how much CapEx should we expect there when we think about free cash flow?

Thank you. So 3 questions. The first one, no, Frank, we don't see anything incredibly positive or incredibly negative in our Medicaid rates on the -- in the future. So we're happy with that. And yes, that's all I'll say about that. I guess, on the second question, cash flow, it was a strong cash flow quarter. We expect that to be a sign for the future, although the first quarter was strong, so you may see a little bit of a step backward in the second and third quarter. But we do expect that to improve dramatically over 2017. And in terms of CapEx, I think our budget is $60 million for the year. And I think we were about right on track. We actually were under in the first quarter. So you'll see a little bit more spend throughout the year than you did in the first quarter. But again, I want to reiterate, as the new builds get better and better, and as we hopefully don't have the same kind of natural disasters we had last year, this year, that cash flow is going to get better and better, which will also reduce our debt load as well and our ratio.

And our next question comes from Dana Hambly of Stephens.

You talked a lot about some of the larger deals you've done in the past, and certainly, it sounds like you're looking at some larger deals now. So my question is, would you be willing to do something to do a larger deal that would be dilutive in the near term?

That certainly is not our plan. We don't expect to do a deal the way that we did it with Legend. That's not -- we're not trying to create the impression -- I mean, I can say with confidence right now, we have no big deal in the works right now. But we do see a lot of opportunities out there, Dana, and we do think that some of them might make sense, and we think that we've learned some good lessons. We did really well with 2 of the 3 large transactions that we did. And frankly, 2 years later, we feel like we've done really well with the third one too. But no, it's not -- we would let you know if that was a plan at some point, but there's no plan to do any dilutive transaction at this stage.

Okay. Good to hear. And you mentioned that one of the gating factors of growth is making sure you have the right people in place. Is that becoming more difficult as you get larger? And is it more difficult in a tight labor market?

The second point is a good point. It's not becoming more difficult as we became larger, but certainly, there is not the frantic search for new jobs or new careers in today's labor markets. So we do find that we have to work a little bit harder to get folks in the pipeline. But once they're in the pipeline, it's fairly easy for us to -- I guess, what I'm saying is, we have to do a little bit more recruiting on the front end than we used to have to do. But there's no shortage of extraordinary leaders that want to join us.

Okay. And then, you talked a little bit about the patient-driven payment model, and I appreciate it's early days, how would you initially compare that to the previously proposed RCS payment model?

So I mean, I think, on first glance, like it's only been out there for a couple of days, as you know. But on first glance, kind of looking through some of the stuff that's been published by CMS, I think, overall, it's actually more positive. And I think, on a couple of different fronts, the number of codes that you have to go through to actually code a resident is significantly less, so it helps on the labor side, obviously. There are some of the changes that they recognized and feedback that they've heard from the industry with regard to the types of -- different types of patients and types of classifications of patients where they've listened. So we feel it's definitely better. And they actually did incorporate some of the feedback that was submitted during the open period. Obviously, there's some additional things that -- and feedback that people are working on. And we're excited that they're partnering with us at this point. So we think it could even get better than it is today.

Okay. That's helpful. And then, last one for me, Suzanne. You mentioned that you'd expect fewer adjustments to GAAP this year, which I appreciate, but I did want to ask, there's one of them on -- just remind me on closed operations, operations not at full capacity, what are the adjustments you're making now? What is in that and when do you expect that, that will roll off?

I'm going to start and then Suzanne can clean up after me again. So some of those are just buildings that we barely opened. And we've been adding them into the GAAP earnings over time and they'll continue to get -- almost all of them will be added by the end of this year. There might be 1 or 2 that we just barely opened that are not at full capacity. There's a facility or 2 that we had to empty out and renovate for structural issues, engineering issues. And that's what's included in that. We're not including facilities that have low occupancy in that. These are completely empty buildings that we're having to totally shore up so that they're safe for the residents. And once we reopen them and have a few months under our belt, we'll include those again. There's actually -- there's one of those now.

Yes. And this quarter, like if you look, if it's helpful, look at the -- on the press release table, the reconciliation of GAAP to non-GAAP, it gives you a breakout of those 2 different classifications, ones there -- or the ones that Christopher just talked about, net of facilities that are currently being constructed. And then, in the current quarter, we had no adjustments on the results from closed operations. So it's just a prior quarter disclosure, but if you look at that detailed press release table, that could help you out.

And at this time, there are no other callers in the queue for questions. I'd like to turn the call over to Christopher Christensen for final comments.

Thank you, Norma, for your help. And thanks, everyone, for joining us and giving us your time today. We appreciate it.

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.