Britt Reynolds - President and CEO Michael Salter - CFO Jim Rolfe - Chief Development Officer

Neil Maruoka - Canaccord Genuity Lennox Gibbs - TD Newcrest

Good morning, ladies and gentlemen. Welcome to the Medical Facilities Corporation’s 2016 Third Quarter Results Conference Call. Before the call is turned over to management, listeners are cautioned that today’s presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities Law. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form, and Medical Facilities, other filings with Canadian Securities Regulators. Medical Facilities does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today’s call is being recorded for the benefit of individual shareholders, the media and other interested parties, who may want to review the call at a later time. I would now like to turn the meeting over to Mr. Britt Reynolds, President and CEO of Medical Facilities. Please go ahead, Mr. Reynolds.

Thank you, operator, and good morning, everyone. Joining me today is Michael Salter, our Chief Financial Officer and Jim Rolfe, our Chief Development Officer. Prior to the market opening today, we released our 2016 third quarter financial results. Our new release, financial statements, and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca, and these were also released to CEDAR today. For today’s call, I’ll start by discussing the results of our third quarter, and then Michael will review further detailed financial results. Jim will provide some insight on our growth plans and future. Then we will call to questions. The third quarter of 2016 was a solid quarter for us, anchored by the acquisition of new centers, the strengthening of our management team resources, and solid increases in volume and revenue. A big part of our mandate when I was appointed CEO last spring was to systematically and methodically grow the company and enhance consolidation opportunities in the global markets. In the previous quarter, we made solid progress on these fronts. We closed on the acquisition of a specialty surgical hospital in Mishawaka, Indiana, and an ambulatory surgery center near our Sioux Falls Surgical Hospital in South Dakota. Unity Medical and Surgical Hospital in Mishawaka, Indiana is a physician owned hospital institution with our current portfolio. It is a Medicare certified provider with 29 beds and six surgical and special procedure suites. It is focused primarily on orthopedic surgery, ophthalmology, podiatry, neurosurgical and pain management procedures. We acquired a 62% interest in the entity for $27.8 million. We also have the right to purchase an additional 21% over the next three years. This is an important acquisition for us. It adds another high quality physician owned surgical hospital to our group, and it expands our geographic diversification. It’s also important to note that five of our six centers are now five stars rated by the centers for Medicare and Medicaid services. In a related transaction, we also purchased the land and buildings near Unity’s operations for $27.4 million. Similar to our ownership of real estate at some of our other facilities, this could serve as a future financial diversification opportunity. We’ve already made progress in integrating Unity in to our operations, and we are optimistic on our ability to generate long term value in this new market. Just after the end of the quarter, our Sioux Falls Surgical Hospital purchased a nearby ambulatory surgical center for $20 million. This surgery center, Prairie States Surgical Center is an outpatient surgery facility that offers services for orthopedic procedures. Upon acquisition, it was integrated in to a department of the Sioux Falls Surgical Hospital. Prairie State Surgical Center is located two miles away from Sioux Falls Surgical Hospital and brings additional orthopedic surgeons to these facilities. We are excited about the operational synergies that can be gained between the two operations. With the addition of this new surgery component, we experienced increased service demand, and we have identified operating efficiencies for both facilities. These transactions demonstrate two different approaches we have for generating growth. One, by adding facilities in our new geographies and markets; and two, by making tuck-in acquisitions that complement our current market presence. To enhance our ability to evaluate and accelerate these growth initiatives, we have added a Chief Development Officer, Jim Rolfe to our team this quarter. Jim brings significant experience to MFC in the healthcare industry and more specifically on acquisitions and development. I’ve worked closely with Jim for over a decade, and I’m pleased to have him and his skillset to identify, evaluated, acquire, integrate assets of all types, including physician joint ventures in hospitals and outpatient facilities. We also bring established, extensive industry network with help to build a pipeline for accretive opportunities. Jim is familiar with MFC prior to joining us, in fact as a consultant; he drove the recent acquisition of Unity from the identification, the assessment, the evaluation and is now spearheading the integration. Turning to our performance in the third quarter of 2016, we experienced some volume and revenue. We had 4.6% increases in cases in the quarter, resulting in a very solid 7.8% increase in revenue to $78.8 million compared to $73.1 million in Q3 of 2015. This problem was due to an increase in volume across our facilities, and particularly strong growth in our Arkansas Black Hill Surgical Hospitals. We also had contributions for a partial period from Unity previously described. Operating expenses increased 10.6% year-over-year to $64.6 million from $58.4 million in Q3 of 2015. As a proportionate revenue, operating expenses were 82% compared to 80% in the prior year. This increase in operating expenses and a modest decrease in margin was primarily affected by payer mix. Government payers namely Medicare and Medicaid increased approximately 16% overall in the third quarter of 2015. Quarter-to-quarter variability and payer mix is a normal part of our business. While we were primarily pleased with the growing volumes in our facilities, delivering care efficiently if something remained keenly focused on enhancing. Within our centers, our physician partners, their teams have been working on initiatives to improve operating efficiency. Given that a large portion of our procedures provide orthopedic services, there are opportunities to realize cost improvements through streamlined procurement of implants and related supplies. For the third quarter, consolidated income from operations was $14.2 million compared to $14.7 million in the third quarter of 2015. On a trailing 12 basis, our consolidated income from operations grew and was $70.6 million, a 2.3% increase over the $69 million realized 12 months ended September 30 of 2015. I will now ask Michael to provide more detail and insight on our financial performance for the third quarter, and then Jim will provide some insight from on our growth plans. Thereafter, I would like to forward all questions. Michael?

Thanks Britt and good everyone. Before I begin, please note that all of the dollar amounts expressed in today’s call is in US dollars unless otherwise stated. As Britt mentioned, in Q3 2016, we experienced very respectable revenue growth from $73.1 million a year ago to $78.8 million this year, a 7.8% increase. Let’s now take a look at the centers specifically; Arkansas Surgical Hospital continued its strong growth trends in the quarter with a 10.8% growth in revenue, as a result of an improved case mix and increased capacity. At Black Hills Surgical Hospital, increased surgical volume and improved case mix resulted in a very solid 8.9% growth in revenue. At the end of the third quarter, Black Hills opened a new urgent care facility in its secondary markets in Spearfish, South Dakota. Initial startup volumes exceeded our expectations and as capacity grows, we expect that this new facility will be a solid source of incremental revenue generating positive operating margins and providing options for services at Black Hills Surgical Hospital. At Oklahoma Spine Hospital revenue increased by 4.2% in the quarter, due to a higher case volume; however OSH also experienced a less favorable payer mix. Sioux Falls Surgical Hospital has experienced an increased case volume and favorable case mix including increases in its MRI and pain clinic services. However, they did experience a 1% drop in revenue compared to Q3 2015 primarily as a result of a higher government patient base. In the past quarter, our ambulatory surgery center in Newport, California had a decrease in case load related to complex orthopedic cases. This resulted in revenue being 4.6% lower than Q3 2015. We are pleased that several of our initiatives to expand services and physicians are coming to closure and should be seen in the start of 2017. The center did experience an improved payer mix with increased cases from Blue Cross and Blue Shield. Cash available for distribution increased by 7.3% to $10.5 million compared to 9.8 million in the third quarter of 2015. This increase was due to lower cash flows from our respective centers which were more than offset by lower realized losses on foreign exchange forward contracts. On a per share basis, our cash available for distribution was Canadian $0.34 per common share or 9.7% higher than $0.31 recorded in Q3 2015. This resulted in an 83.1% payout ratio in the third quarter of 2016 comparing very favorably to the 89.8% in Q3 2015. On a trailing 12 months basis, our payout ratio was 76.9% for the 12 months ended September 30, 2016 as compared to 77.4% for the same period ended September 30, 2015. As of September 30, 2016, cash, cash equivalents and short term investments were even with the previous share at $70.9 million. Despite some of the fluctuations we just discussed, we are confident that resources are in place to execute on our growth initiatives and we anticipate further positive contributions from our existing operations. I would now like to call on Jim to discuss our revolving growth focus. Jim?

Thanks Michael. In the past quarter, we have seen MFC take the first steps on our path to growth. Since joining MFC I am really excited about the attractive opportunities for acquisitions. We currently have multiple targets on consideration that could be a right fit for us. In our relationships, Britt and I have worked and continue to work together to identify accretive opportunities in attractive markets. Our primary focus is on identifying appropriately priced, strategically positioned, high quality opportunities. We are tracking those that add value and that are near term accretive. A core criteria will also be those that provide an attractive payer mix. As Michael has noted, we have the resources dedicated to pursue these opportunities. Continuing to increase revenue and improve margins at the facility level is a very important part of our growth strategy. As Britt mentioned, the leadership teams at our centers already initiatives in place to improve operating efficiencies. Just coming aboard, I have been focused on adding resources and value to our existing portfolios. Another part of our concentration on organic growth is by adding to and enhancing the services provided at our current centers. This will include identifying and collaborating with our current and also new potential position partners. Our focus remains on providing an environment where these physicians can dedicate their patient care efforts with efficient facilities. Thus enabling high quality services and outcomes, which is MFC’s trademark. Starting at the end of last quarter and continuing for the rest of the year, we have been refining and transforming the long term strategy for Medical Facilities Corporation. For the balance of 2016, we will be moralizing that strategy in concert with our Board of Directors, our local leaders and our physician partners. With that we would now like to open up the lines for questions.

[Operator Instructions] Your first question comes from the line of Neil Maruoka from Canaccord Genuity. Your line is open.

First one just on Sioux Falls, I think if we look back over the past few quarters, you can see a year-over-year deterioration in the operating margins there. Are there any structural reasons for that, whether it be macroeconomic or operational, and how do you expect that you can turn that around?

Yeah, Neil I’ll take this is Britt. Obviously you noticed and you’re correct, we’ve seen some deterioration there. We don’t see that as being something that’s systemic or long term, and I’ll explain. The opportunities to continue to refine on our purchasing initiatives, on our cost saving initiatives are well underway. We have an active engagement with our physicians on co-management there at the facility, so they are actively engaged in not only delivering the care but also managing the cost. And part of what you’re seeing is really the beginning since I got here of amping up some of the development efforts that we have there. And embedded in here and we wanted to brief in our notes but use this time to explain. We experienced some one-time hits actually literally within a couple of months of the quarter, and not even in the full quarter of this period, where we made some investments in the longer term as we mentioned on the ambulatory surgery acquisition. That took a lot of cost in to integrating, educating the operations of a surgery center ambulatory, largely outpatient is very different than an inpatient. And so there was a lot of effort to make sure we came out of the gates strong. We could have delayed that a little bit in terms of being more systematic and methodical, but because these were in close proximity and because we felt like that we can get out of the gates strong and really have a clear path starting 2017, we decided to go ahead and take those. I think absent that, you would have seen a better performance out of Sioux Falls than you’ve seen in the prior two quarters when we’ve talked on these earnings call.

Okay, great. Thank you for the detail there. And may be that leads in to my second question Britt, you’ve been CEO for a few months now. What’s your view on the urgent care and how that fits in with the surgical hospitals that you operate?

We see obviously our core business is the surgical component at our centers, a secondary core business; both enter the same market on the ambulatory surgical side. It gives us a little different platform on growth of the types of services we can provide. So it gives us a real nice diversification play in our organic markets. Then the second time order really on urgent care and other areas of ambulatory diagnostics really starts to roundup to continuum. So those services are not going to be nearly as high margin as the surgical side of the component. But they are the relationship builders for the patients and the physicians in the markets that really start to tether them to our facilities and often times the urgent care arena caters to an orthopedic population, neurosurgical population and job injury kind of population and we see those as being natural connection points to the core business we operate. And then obviously, if you have an efficient model in place, we are able to expand other services that might not absolutely require immediate services, but part of what we’re really focused on doing this is to continue to build a relationship with our community. And Jim mentioned that earlier and I want to make sure that that’s not lost on us. In the most recent reporting of our satisfaction measures and the reporting on our outcomes, the vast majority of our facilities were five stars out of five stars. So part of our goal is continuing to develop that high quality reputation. They may not need services immediately, but we believe they’ll need services ultimately and that’s a corollary function to have these services developed for us.

And finally my last question, I think a few years ago I probably had noted a lot of synergy between the hospitals. You come from much larger organization, and you’ve been here for a few months now and you step back, where do you see the opportunity for cross synergies, cost synergies between the hospitals.

I think it’s appropriately described for you I think that we functioned for a fair amount of time as efficient, focused individual operations that have had a large measure of success over MFC’s 12 plus years. One of the things that I was challenged with and one of the thing that is clearly present is the ability to network these hospitals stronger together sharing best practices and sharing demonstrated results. And without getting in to the details and being succinctive for others to ask questions, each one of our centers actually has different dimensions that they perform rather well on. And so part of the entire management team is today like the successful initiatives that are being accomplished and really using that as much more of a templated approached and best practice sharing. What I’m really encouraged about our - maybe for the first time but surely in a much more robust manner, these facility executives are literally visiting each other, sharing the information and then working with us as management together to look at how do we identify those opportunities and are showing tangible results, probably and I’ll call it out, one of our most efficient operators is our ASH facility in Arkansas. And I’m just really pleased that how the other Chief Executive Officers have looked to that organization to emulate some of the successes that they have there.

[Operator Instructions] Your next question comes from the line of Lennox Gibbs from TD Securities. Your line is open.

The strategic planning process, what have the key points of focus been in that process? That’s the first question, and then secondly, how and when do you see sharing that plan with the market?

The process as Jim mentioned in his opening comments it’s no secret. I tapped Jim to work with me. We worked both together and we’ve worked in separate organizations but collaboratively, and so I know where his focus is and where we’re directed. We are concluding as he alluded in his opening comments. The Board’s strategic planning process that will consummate in the very earliest weeks of the New Year. And we’ve memorialized a lot of the thoughts that I brought to the organization that Jim brought, that Michael has had over the years and I feel really good about where that is. It would be premature to absolutely get into the details, but we absolutely will get into the details going forward in January next year. So, our criteria is really looking on facilities that don’t really meet an absolute turnaround process, because the time framing on that is a little bit protractive, and sometimes the effort is a little bit harder to sustain without more immediate results. And on the top side, we would have been looking for opportunities that are at the top of their game because we want obviously some accretion opportunities. So there’s a middle bandwidth that makes absolute sense to us that is very, very open. And I’d like to turn to Jim and both his experiences since working with me again over the last month and a half and the more recently in the last six or seven years that we’ve worked closely together on what he sees as opportunity. Jim?

Yeah Britt thanks. The two large components that we are looking in and we are getting on paper for January’s meeting is organic growth, and as Britt mentioned acquisitive growth. The organic growth is a big piece of our growth initiatives something from position development, continuing our efforts on making each hospital operate very efficiently. And as Britt alluded to our acquisitions that we’re going to target and look at are going to be adjacent to our core business model currently. So we’re not going to realize a fair way on what our core business is. And also as Britt mentioned, what we’d like to look for in assets that we do pursue are good target hospitals or ASC or others that have strong quality, a strong management team, consistent revenue and earnings, but also the capacity to grow. So, again, we are not going to deviate tremendously from what our core business is now.

And then a second sort of line of question that’s perhaps a little bit off the beaten track. But there’s obviously a surge in interest in appealing the Patient Protection and Affordable Care Act, and that act obviously included several restrictive provisions with respect to specialty hospitals. Can you comment on those developments as best as you can just in terms of risk and opportunity to medical facilities?

Sure. Lennox you didn’t think we thought or think that we’d get that question today did you? No, we are actually glad to answer it, because I think unless we did take this opportunity to answer it might be misinterpreted particularly with our current portfolio. And then more to your question on what does the future look like irrespective of whatever direction it can take which no one knows at this point obviously. Our current portfolio and so I’ll speak to that first, has not been in states that have been particularly affected the expansion from the ACA. So we have not had historical uptick necessarily for the last several years by the advent of that. So we haven’t benefited therefore I don’t think we are vulnerable if there is a repeal or a significant modification. That being said, if the repeal were to allow for an expansion or a re-visitation of the ability to expand this business model, one might view that as we’ve lost some competitive advantage by a scarce commodity. I’m not choosing to view it that way, Lennox. I’m choosing to view it as we would have always welcomed the opportunity to continue to deliver this mode, because it’s much more efficient, it’s much more predictable. The bad debt associated with this type of business are marginally lower than at general acute care hospital. For example, we do not offer 24 hours a day, seven days a week, year around emergency service coverage’s which are typically not reimbursed like a surgical hospital. So on the core book of business if there isn’t a change materially, we keep executing our clients. If there isn’t a change materially, I view that as opportunity.

There are no further questions at this time. Mr. Reynolds, I turn the call back over to you.

All right. Well thank you guys for participating on our call today. As we discussed, we are extremely excited as a leadership team to be making progress. I couldn’t be prouder of our local hospital leaders and the quick assembly that they have of coming together and focused on delivering on our execution going forward. And as I mentioned before, I appreciate the patients and tolerance of those that have asked questions on previous calls as well as individual interactions with us about share the vision, share the future. We are literally a month away from being able to do that, and we look forward to doing that on our next interaction and as we visit with you in the ensuing months. We thank you for your time on the call today and we appreciate your interest in Medical Facilities.

This concludes today’s conference call. You may now disconnect.