Britt Reynolds - President and Chief Executive Officer Tyler Murphy - Chief Financial Officer Jim Rolfe - Chief Development Officer

Lennox Gibbs - TD Securities Endri Leno - National Bank Neil Linsdell - Industrial Alliance Matt Bottomley - Canaccord Genuity Doug Miehm - RBC Capital Markets Ryan Lee - CIBC

Good morning, ladies and gentlemen. Welcome to the Medical Facilities Corporation’s 2016 Fourth 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 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 Tyler Murphy, our Chief Financial Officer and Jim Rolfe, our Chief Development Officer. Prior to the market opening today, we released our 2016 fourth quarter financial results. Our news release, financial statements and MD&A may be accessed through our corporate website at www.medicalfacilitiescorp.ca. These were also released to SEDAR today. I will start by discussing the progress we made in the last quarter and then discuss 2016. Tyler will review our financial results. Following Jim, we will then describe our strategy for growth. At the conclusion of our comments, we will then open the call for questions. 2016 was an instrumental year for Medical Facilities Corporation. In the year, we had a complete change in our senior management team. We added and expanded facilities and we put in place a detailed strategy for long-term growth. These changes began at the Board level, early in 2016 when they added me to join MFC. Along with that, they made the decision to leverage the progress of solid company that was founded 12 years earlier on a reputation of delivering stable distributions. Towards one of those deliveries, we have growth and accentuated distributions. I joined MFC late May with the objective of growing our organization. In 2016, we built the team, learned about our facilities and communities and identified potential acquisitions. Jim Rolfe joined us as the new – in the new role of Chief Development Officer in September. He added immediate value through his expertise in evaluating, acquiring and integrating healthcare assets of all types. These include physician, joint ventures and outpatient facilities. At the end of 2016, Michael Salter, our Chief Financial Officer, since the inception, retired. Michael was instrumental on the founding of MFC and underscoring our IPO. Under his direction, he established our reputation for focused financial management and consistent distributions. Tyler Murphy joined us in November of 2016 and succeeded Michael as CFO at the beginning of this year. I worked with Tyler previously. He has a strong financial acumen in all areas of operations, asset management and public markets. He is skilled at integrating acquisition assets is all so. In 2016, we made progress both in acquisitions and organic growth. As you are aware in September, we completed the acquisition of Unity Hospital in Mishawaka, Indiana. This is exactly the type of asset we are targeting. Unity is a 29-bed Medicare certified facility with four surgical and two special procedure suites. They are focused on providing neurosurgical, orthopedic surgery as well as ophthalmology, podiatry and pain management. We purchased a 62% interest in Unity for $27.8 million. This is an important acquisition. It added another physician owned surgical hospital to our roster. Unity delivers very high quality care, being five-star rated by Centers for Medicare & Medicaid Services. This is important in maximizing patient outcomes and in attracting physicians. Another important acquisition in 2016 was Prairie States Surgical Center. An ambulatory surgical center located in Sioux Falls, South Dakota. It was acquired by our hospital in Sioux Falls and immediately merged into the hospital as an outpatient department. This merger increased the day surgery capacity at Sioux Falls and provided overnight stay options for the procedures conducted at Prairie States. As well the Prairie States physicians became part of the Sioux Falls medical staff. This helped to expand capacity at the newly combined facility. In 2016, our center at Black Hills continued to increase its presence in the community and add incremental revenue. Specifically, with the addition of an urgent care center in Spearfish, South Dakota, located and adjacent – in an adjacent market. This is the third urgent care center that Black Hills has added. We believe building a strong regional preference like this will also help to drive case volume at Black Hills. The success we had in 2016 is an induction to the progress that we have targeted for going forward. To ensure that this growth culture is embedded in our organization, the management team has made this a priority focus. Tyler will provide a review of our financial results for the fourth quarter and also for 2016, followed by Jim, who will expand further on our growth strategies. Tyler?

Thanks Britt. As on our previous call, I would like to note that all of the dollar amounts expressed in today’s call are in U.S. dollars unless otherwise stated. In 2016, MFC had revenue of $339.5 million, a 10% increase over $308.8 million in 2015. Driving this growth is the increase in case volume at all of our centers along with additions from our acquisitions. We have had growth in cases every year since inception, which is a testament to the quality of our facilities and their teams. Strong momentum in case volume will continue to be a key feature of MFC that will help as we execute on our growth strategy both to serve as a model for a physician and facilities to join our network and to recruit physicians. On a quarterly basis, revenue was $108 million, up 20% from Q4 2015. Again, the increase was driven by case growth and contributions from acquired facilities. Of note was an 11.9% increase in the revenue at Black Hills, reflecting the addition of the new urgent care center and a new ear, nose and throat clinic. The fourth quarter also demonstrated the cyclicality we experienced when patients with private insurance elect to have their surgeries at the end of the year after the deductibles are extended. Q4 revenue was up 37% over Q3 and represented 32% of 2016 annual revenue. Payer mix continue to have an impact on annual revenue as we performed a higher proportion of cases paid for by Medicare. This was particularly the case at Oklahoma Spine Hospital and Sioux Falls Specialty Hospital. Government payers pay less for procedures than private payers. As a result, income from operations declined by 8.9% year-over-year. With fourth quarter case growth consisting of a higher proportion of private payers, we saw a less negative impact from payer mix in the quarter. When accounting for a non-cash reversal of an accrued rent liability in Q4 2015, income from operations was up slightly year-over-year at $25.3 million. Cash available for distribution in 2016 was $50.7 billion, a 10.5% increase from a year earlier. On a quarterly basis, cash available for distribution was $17.8 million in Q4 2016, a 41.8% increase over Q4 2015. For both annual and quarterly results, the reason for the difference is that no losses on foreign exchange forward contracts were realized in 2016. On a per share basis, our cash available for distribution was $1.63 in 2016 compared to $1.47 per share in 2015. For the fourth quarter, this was $0.57 compared to $0.40 in Q4 2015. The result in payout ratio was 69% for the year and 49% for the quarter, compared to a 76.7% and 69.7%, respectively for the previous year. At the end of 2016, with cash and cash equivalents of $67.6 million and about $32 million available on our credit facility, we believe we are well positioned to execute on our growth strategy. For additional details on the specific results for each center, please refer to our MD&A. Now, Jim will talk to you about our growth strategy. Jim?

Alright. Thanks Tyler. As Britt mentioned earlier, the MFC [indiscernible] focus to the end of 2016 and early 2017 was on creating a detailed strategy for growth that would guide the company for the next few years. It was brought to the Board, revised with their input and ratified this past February. Our strategy for growth has two parts; making accretive acquisitions and expanding revenue and improving efficiencies at our existing facilities. In terms of growth acquisitions, we currently have a robust pipeline. As you know, MFC was very active in 2016. We looked at several opportunities close onto and passed on several more. Local reimbursement pressure continues to provide opportunities in the U.S. M&A healthcare market. There were 940 transactions, totaling $175 billion in 2015, more than double the average rate of the previous decade. This increase in 2016 and the trend is expected to continue in 2017. Britt, Tyler and I have considerable experience in identifying, evaluating, acquiring and integrating medical facilities and we have been active in our networks to look for new opportunities. When we consider facilities for acquisitions, we look at the following attributes that are adjacent to our current portfolio. First, the facility must have high quality with optimum clinical outcomes. Next, they must have physician alignment and affiliation. Our focus is to acquire majority control and to only acquire facilities where practicing physicians are our partners. Lastly, it must be accretive, with strong earnings and growth available from a local strong physician base, demographics and operating enhancements. We expect early opportunities will be with the ambulatory surgical centers like our Newport Beach and our Prairie States facilities. There are around 5,000 ASCs in the U.S. and they have grown into a key healthcare delivery platform and are offering more varied and complex services. We will continue to consider physician owned specialty surgical hospitals when they become available and act as we did with Unity Hospital in 2016. These however, are currently restricted under the Affordable Care Act, which limits their numbers and will remain fewer will be available to acquire. The next component of our growth strategy is organic growth. Organic growth drivers in our care facilities will be achieved through physician development, expanding service offerings, in-market acquisitions, capacity, utilization and operational efficiencies. Since joining MFC, I have been closely involved with our local leadership teams to develop individual strategies for physician development, as the recruitment and retention of highly qualified physician is important to the continued success of our hospitals. We are looking at opportunities for them to join MFC as accredited physicians or a physician investor. In either case, the new physicians benefit from working in a highly rated facility with high quality service, improved time management and optimum patient outcomes. Expanding service offerings is also important to organic growth initiatives as we address the decreasing reimbursement and the increase in consumerism such as quality, price and access. We are focused on expansion of our local footprint and service offerings. Examples of these services are surgical diversity, hospital services, cardiac care, oncology and urgent care. These will deliver immediate results in terms of growth and case volumes and utilization. The new urgent care center established by Black Hills and Spearfish that Britt mentioned earlier and their addition of an ENT clinic illustrates the recent success we have had with this initiative. Consistent with our expansion of service lines mentioned earlier, we are also focused on in-market complementary acquisitions such as ASCs and imaging centers. Adding these will expand our local market area and services offered and access, enabling continued higher patient and provider satisfaction and importantly, expanding our patient base. In addition to physician development, expansion of services and in-market acquisitions, MFC will continue to focus to improve efficiencies and margins, given that a large portion of the MFC facility procedures provide orthopedic services, there are opportunities to realize cost improvements through streamlined procurement of implants and related supplies. We have also initiated communication across our organization to facilitate sharing of best practices in management and patient care. This multi-faceted approach to growth is one that we feel will deliver both near-term results and build long-term shareholder value. On behalf of the whole executive team, I would like to say we are dedicated to the strategy and we are looking forward to reporting our progress throughout the rest of 2017. We will now open the call up to questions.

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

Good morning. Thank you. Just with respect to the margins, what were the relative contributions of payer mix and case mix to the year-on-year margin trend?

Hey Lennox, this is Britt. As reported earlier, the case mix volume, we are really excited about the year strong volume growth pretty much across the board. And so that was a positive for us. From a payer mix standpoint and especially in markets when you acquire new facilities, it takes a little while to really reach to the physicians in that marketplace as they are joining, as well as refining the processes, which takes a little time out of the gate. And we consume [ph] a lot of time focusing on learning about those centers, not only due diligence, but afterwards, so a little bit of margin downside on some of the acquisitions. But not to be unexpected in a situation like that in a very short-term, so that’s pretty consistent with what we would expected and not consistent with what we would expect to see long-term.

Okay. And then if you look at the base business so to speak, what is some of the case mix issues in the base business, which facilities, which procedures, where do you think you have the greatest opportunities to improve case mix in the base business?

Well, I would tell you from a case mix standpoint and I think I should tell you, we see the opportunity to improve that pretty much across the board. Now, it’s going to be extremely variable, so I don’t want to be coy about that. There is obviously opportunity, which is the second part of your questions. But clearly, in both of the newly acquired facilities, there is a case mix opportunity. As Jim mentioned both from recruiting new service lines in and bringing them on the fold as well as implementing strategies that we have seen in some of our other markets. And then on our existing portfolio, from an opportunity to improve, I think there are couple of selected facilities and probably don’t really want to call them out necessarily individually, but that have some opportunity or had have good opportunities to improve it. Again, based on the same rationale, we really haven’t been on a large physician recruitment initiative historically or at least in the most recent history. And as we do that, that gives us good opportunity to focus on case mix.

Thank you. And then if you don’t want to call out facilities, can you speak more specifically to procedures, to the kind of procedures that you would like to boost volumes on?

Absolutely, I would be glad to do that for you. In the neurosurgical arena, clearly that’s our bread and butter. And we are going to continue to grow that. We have a lot of interest not only in existing markets for new additions. We had an obvious one in the acquisition of Prairie States, which was a group of neurosurgeons, orthopedists. And orthopedics will be the second area that we see good margin growth in and continued services. And then as Jim alluded to, we are exploring very heavily and have some active interest in areas that are not typically you would hear us talk about like cardiology and some other areas. And those services have nice margins. So to really get back to your main question Lennox, it’s that kind of margin opportunity that maybe we haven’t historically had that’s the real focus of what drives Jim’s opportunities as we are seeking them out. So your questions fall on with where our directive is on opportunity.

Thanks very much.

Your next question comes from Endri Leno from National Bank. Your line is open.

Hi, good morning and thank you for taking my question. First one is just a bit specific on Arkansas Hospital. I was wondering, even after adjusting for a non-cash charge for last year, there was – seems a bit of margin contraction, I was wondering if you can expand on what drove the higher expense and how transient to where this factory?

Yes. This is Tyler. Good morning. Yes, they – Arkansas had, they did have lower case volumes. So they were down a bit. They also had higher Medicare volumes than in the past, which obviously as we have discussed or lower – much lower reimbursement on the private pay side. Jim has been doing some work down there to help them recruit some new physicians. But I think will help bring back in some of these managed-care cases and some of the higher margin business. It’s something that we are definitely concentrated on.

Yes. This is Britt. I would tell you, I am not sure that I have had this commentary in my shorter tenure here with you, but that marketplace is one that is probably the most competitive on a higher number of patients on a lower reimbursement to – compared to some of her other facilities. So they actually, when you dig down to the details and look at some of the comparables across our organization, they are one of the more efficient utilizers of the cost side equation. And that’s and a must to be kind of situation in order to yield stronger results that they have historically. So we are going to continue to have some challenges there. But those challenges have not translated into something where we are not bullish on the market. In fact, this is one of the markets where Jim as Tyler alluded they have spent a lot of time. There is a lot of opportunity again like I said earlier of adding services and provisions that have not been historically there that would have a natural up-tick on margin. So margin selection is sense what you are asking and that is core to us going forward.

Great. Thank you very much. And one other question that I have Britt, you mentioned in your opening comments about a possible joint venture, I was wondering, I mean as part of the growth strategy and I was wondering if you could please expand on what could this entail, please?

Well, I think the obvious piece of the joint venture is the continuation of the model with our medical staff partners. And that would include and [indiscernible] acquire a specialty surgical facility much like UMASH or an ambulatory surgery setting. We would have physician partnership in that as well and other sources. But we are also open to partnerships with other entities if that makes sense in a given market. Clearly, we will maintain our majority position, so it’s not going to dilute that in any way, but sometimes, partnerships with even local providers where we could provide the service either better or differently, that’s not something we are adverse to.

Great. Thank you very much. That’s all for me.

Your next question comes from Neil Linsdell from Industrial Alliance. Your line is open.

First of all, obviously you are getting some great revenue growth, a lot of traffic coming through your hospitals, on the expense side, I know the margins are going to vary quarter-to-quarter quite significantly based on case and payer mix, but you have got these ongoing programs to try and take costs and work efficiencies and synergies, can you give us any idea of dollar value you would might be able to expect from the current operations that you can save?

I don’t believe we – we haven’t really put out any kind of forecast on a dollar savings. Obviously, two of the three main categories we are looking at is SWB, I mean we do have some competitive markets on the wage side. And then obviously, drugs and supplies. And that’s a big project we are undertaking right now as we are trying to aggregate all of our facilities data so we can go to a GPO or go to a distributor and show what we are buying across the board as a company as opposed to being a one by one facility basis and hope to help drive savings to these facilities. You are not going to be able to stop increases in SWB, you are not going to be able to stop increases in drugs and supplies. But we hope to be able to keep that going at a not increase at a level. And so that’s a lot of what we are working on right now.

Yes. This is Britt, Neil. One of the opportunities that Tyler was speaking to, I think is on the SWB side of the equation, part of the strength we talk about almost every time we are on the call or a discussion with you is the quality that we deliver there. And I am never going to say we are going to do quality at the expense of operating prudently. But on our SWB, we are competitive in our marketplaces. It’s an attractive place for people to work. And we staff those typically a little bit richer than you might have in a general acute care hospital. I don’t see us switching wildly away from that because five star rating is both impressive from a continued reimbursement opportunity for pick-ups but also from a place where physicians want to go. So it’s a ginger balance on that, but there is opportunity. I am not going to sidestep that. There is opportunity to address that and we are working with our facilities to do it. As Tyler mentioned on the supply side of the equation, it’s a little bit longer of a run. I am not trying to stall it all. But the real solution is what he said, which is being part of a large consortium where we can purchase not only from our own book of business, but also with other partners in the healthcare space and have – all of us having part of that in the past. But that’s going to be the solution and it just takes time to get into some of those big provider networks. And but it is, as he said, a clear focus. We know we have to control the costs. I am extremely pleased with this volume growth compared to most in the industry, in our industry and AFC industry and hospital industry as well. I think our opportunity, as you aptly put is in the cost side equation.

Yes, okay. And let me ask the question that I don’t think you thought you were going to be able to avoid on this conference call, but with the changes in the government regulations that seem to be proposed right now, did you see any impact to the way you have been operating the business or any new opportunities perhaps if the ACA is repealed and it gives you a chance to expand with your current surgical hospitals, is there any positives or negatives that you are seeing so far with the proposals coming out?

Yes. One, we did anticipate the call as you said. But actually, I welcome the call because I have had the statement again with many of you. And I want to continue to make sure that we are having this center forefront. In our area of the business and oftentimes we get lumped with other providers in the healthcare space. And again, I am speaking more specifically to the general acute care hospital provider space. Where we are distinctly different is our cases, being among the surgery center side or on the hospital side of the equation, our scheduled elective procedures that the physician is controlling into our facility, meaning, making the selection to come to our hospital. We are not operating the full service 24/7 emergency departments, critical intensive care units. Areas where the cost is exorbitant and you have no control whatsoever on who comes through the door. You don’t have it as an operator. The doctor really doesn’t have it as a provider. So regardless of really what direction the ACA goes in, that’s not going to change. So it’s not something that we are really focused a lot on because it really doesn’t look to be something that’s going to focus our attention or nor should it, really. We have a low percentage of those patients who really fall into any kind of low subsidy kind of paying or no pay – kind of pay. So we view it, frankly, as neutral at worse and quite candidly, and you alluded to this in the second part of your question, we have been a part of PJ and others saying we welcome the opportunity to get back full force in the business of being able to continue doing this. So from Jim’s job standpoint, I think you make it accurate and the opportunity to be able to get back up to do business again if it shouldn’t be repealed and puts us into a much more robust opportunity in markets. Not to even walk away from de novo opportunities if it makes sense. So we see it neutral on the day-to-day operations. And we see it opportunistic on the ability to affect our acquisition pipeline.

Okay, great. And then just as a follow-up to that, I mean you have been doing this a long time as far as looking for acquisition opportunities, has the current administrative changes changed the attitude of the potential sellers out there?

I am going to – I will take one stab and then I am going to Jim to really delve in. I would tell you on a sort of top aerial view, yes I think it made some folks a little skittish and they are looking for partnerships and looking for economies of being part of something bigger. And I would gush that as being an opinion, not an absolute statement by someone. But I feel comfortable enough to share it. And that I think it offers opportunity for the reasons I shared a few minutes ago Neil, for partnership with us. But Jim, do you want to share some insight?

Yes. Good morning Neil. I think Britt is exactly right. I think that – and we are seeing this as well with the continued decrease in reimbursement, competition has gotten pretty robust in a lot of areas. And so not – I mean the same with acute care hospitals. So I think a lot of these specialty hospitals, there is 245 out there. So there is not a lot of them. But I think they are starting to feel the pressures of what the acute care, to some degree, not near as lowers as the acute care. But I think they are seeing some financial pressure. And like Britt alluded to, scalability and being with the size that actually has capital to help them grow their local footprint like we mentioned earlier today. I think they are looking for that. So and in the same on the ASC side. I think that they are seeing the same pressure and abilities to grow it and expand their footprint as well.

Okay, great color. And then just in parting, Tyler, maybe you talked about the dry powder with $68 million in cash, $32 million available in credit facilities, I think you said, so that will give you $100 million, but you are still like pretty low on the leverage side compared to some of your competitors, I mean what’s your comfort level as far as leveraging that up when you are looking at acquisitions?

Yes. We haven’t set a target leverage, I think the comfort level is going to come as we start to look at these opportunities, we get closer to things that we can actually close and kind of the size of those. I mean we do have a couple of opportunities to monetize some real estate that would give us some additional dry powder. And other ways, I mean obviously, we are not going to jump from where we are as a low leverage company to all the way up to where our peers are. And that would just be – it would have to be a step approach, but it’s obviously going to be based on opportunity. And I think we will talk more about actual leverage targets and levels as we start to realize are we getting more surgical hospitals in the loop or are we going to get more ASCs and just kind of what capital is going to be required to take care of those things [ph].

If I could add slightly to that, I think acquisitions, like we have demonstrated by the ones clearly embedded or within that wheelhouse that we described and comfort zone. If you saw us want to ever contemplate a leverage piece, it would be in an opportunity where Jim is able to find a pretty significant size multi-facility acquisition. And at that point in time, we would be very clear about our diligence and what any other opportunity might be, but even so, as Tyler mentioned, it’s still not going to be some radical departure.

Okay, great. Thanks a lot guys.

Sure.

Your next question comes from Matt Bottomley from Canaccord Genuity. Your line is open.

Good morning.

Good morning.

Good morning.

Just a couple of quick questions on Unity, just going back to the margins there, so first of all, quarter end, it’s one of the lower contributors compared to some of your other facilities, so I am just wondering if there is any integration costs or non-recurring items that hit OpEx that we should consider going forward or what some initiatives might be in terms of how we look at the margins in that facility over the next few quarters?

Yes. This is Britt. Yes, sure there are always going to be integration opportunities. And my experience has been you are going to see those in the first three months to six months typically as the most intensive as you both sort of weed out what you kind of learned through the diligence process and as you learn a facility even greater. But also and Jim alluded to this in his earlier comments. We are actually looking for opportunities where there are some differences and abilities to move that margin up. I mean obviously, that’s the role of an acquisition. And so it’s not surprising to us either in level or in the fact that it existed in the relatively short period that we have owned them. So clearly, some start-up costs. Clearly, some integration costs. And just the sheer process of doing the diligence from legal fees to folks that have to make sure we put all the appropriate pieces and documentation together. So again, far shot from saying hang on for a long period of time. But this was somewhat anticipated. I think in particular, because you are asking about Unity, I might ask Jim to give some color on this. One of the things that made it attractive to us is we knew this would happen, but we also knew the opportunity for expansion was about as rapid as you could see in terms of what was open on the market, so our ability to sort of flip to the growth side of the equation as we are normalizing and stabilizing is real. Jim, just a few color on that?

Yes, Matt. UMASH has a chassis to be substantially larger, that is another quality is definitely off the charts, it’s a five star hospital. So with that it has a fixed expense from their nursing side and from their patient care side. So they do have a chassis. So yes, it’s my – not my job, it’s our job to work with little management to bring in new physicians to grow service line. And so it’s a little bit of a component that they have a nice, well-run hot quality chassis. let’s add to that chassis and grow that margin. And from our diligence – from our diligence, as well as our foots on the ground, there is solid, solid interest in physician and other services joining and becoming part of this new direction at Unity, both in terms of same type procedural case as well as a whole host of incremental cases that they have never done before that we find extremely exciting. So it really rolls back into the – we are working to get our house in order in the short-term, short, short-term. But our upside potential is not just theoretical. I mean these are real doctors having real conversations with us about becoming a part of this organization.

Okay, great. Thanks. So then maybe just on and I think you have answered this within a question, but maybe just on the revenue side then for Unity, if you normalize for the fact that your Q4 is about 30% of your revenues, do you think Unity’s run rate for the quarter after that normalization is appropriate looking into the current fiscal year?

Yes. As you alluded to, I mean obviously, the fourth quarter is going to be a little bit higher on a percentage basis. I have not broken that on how quarter-by-quarter from last year is obviously I just came onboard, right before the fourth quarter. But I think it is safe to say, obviously that first quarter is not going to be [indiscernible] like the fourth quarter. And then as you build through the year, you have the second quarter that’s usually better than the first. And the third quarter just it really depends a lot on vacations and other things as you kind of move through it. So I think once we get another quarter or two quarters under our belt on Unity as part of our consolidated financials, we will have a much better picture and be able to articulate it a lot better as far as how it’s going to breakdown comparative to the rest of our facilities.

Okay, great. Thanks. And just last question on my end, just your payout ratio at 69% came down nicely this year, we have seen a full fiscal year now where your FX isn’t impacted from the hedges from 2015, so do you think sub-70% is a good way to look at it going forward?

Yes, I think that’s right.

Okay, great. Thank you.

Your next question comes from Doug Miehm from RBC Capital Markets. Your line is open.

Good morning. A couple of questions with respect to operations at the individual hospitals and those sort of things, perhaps you can tell us about referral mix of owners versus non-owners at the moment. And then if you could just talk to us about layoffs and turnovers – or turnover at the facilities, anything unusual or say business as anticipated?

Sure. Let me address maybe in a reverse order. So layoffs and turnover, we really haven’t seen – allow me to address on a couple of different levels. From a physician standpoint, we have not seen any kind of loss of significant physician group or significant physician individual that’s been historically with our existing core business and quite the contrary on our two acquisitions, which we have added physicians frankly, even in the short-term we have been. Not only that are currently practicing, but that are in line to practice in the very, very near-term. So from a turnover standpoint, we are not really experiencing that specifically in one of our markets in the Midwest. We had some, I would call it a run on trying to take away some of our core nursing staff have been long-term folks. And we were able to actually avoid that and maintain our folks. And there were some costs associated with that, obviously. But we thought it was the right thing to do from the five-star rating that facilities enjoyed for a long time as well as just the consistency and it’s a top operator for us in Black Hills. So that is going to – again, in the short-term increase our costs. But again it’s our job to make sure that we are driving more revenue there to offset that increase. That’s really the only market where we have seen that kind of competitive force either on the physician or in the staff side of the equation that we contribute to that. And then the first part of your question, again, if you don’t mind Doug?

Just referral mix, owners, physician owners versus non-owners?

Again, a large part of our markets are pretty much right at that exact threshold of 49% ownership stake in partnership with our 51%. So the vast majority of our caseload from our historical organic standpoint is coming from that existing pool. As Jim alluded to earlier, our view on opportunity and we are really bullish on this, is the attractiveness of physicians that aren’t currently on our medical staff or have historically not used this and the interest level for a variety of reasons, be that either quality efficiency, more fluidness for their own personal practices. We are getting a lot of interest individually from physicians both through our local leadership as well as to us individually. So I think there is a lot of upside potential in attracting a greater percentage of folks that currently don’t use this now and particularly in our organic markets.

Perfect. And then maybe one for Jim and then maybe another one, acquisition multiples you are seeing and if you were to go after like a cardiac care, would it be in an existing market or would this be something new, so just multiples and give us an example of what the strategy would be around the cardiac care facility?

Yes. The cardiac care, we are not going to get into the cardiac care as a platform. So location by location, from our organic center that we currently have if we want to add that service line, we will definitely look at that. But we are not going to get into the cardiac business for sure as a platform.

And I may have confused you Doug, in the opening discussion or in the part of Q&A. This, as Jim mentioned is a very local situational dynamic where this is a large group, with a large cardiac platform. And that’s an opportunistic situation that Jim alluded – we are going to go [indiscernible] get cardiac services at every one of our hospitals. So it’s much a case-by-case. And you can substitute any other specialties you want to do other than cardiac in that same vein. So what we are trying to reflect openly to you guys is we are at additional service lines. But they very likely could differ from facility to facility and circumstance to circumstance, not necessarily that we are going to move from something to something else at every one of our facilities. It’s going to be very situationally crafted.

Okay. And then just finally, on these related party transactions, when we talk about orthopedic surgeons and orthopedic groups say at Sioux Falls, I am just trying to figure out how much are they earning of that $7.5 million that was paid out this year and why don’t you have these types of agreements at some of the other facilities?

Again, it’s okay, I will take it in sort of a reverse order. From a – why would we not have it at other facilities, again – not again, excuse me. Sort of potentially in contrast to what I just said that we don’t have an absolute on cardiology in a marketplace, orthopedics would be a stalwart for us in pretty much every one of our centers and everyone of an AFC that we either currently operate or might acquire. And so orthopedics too, I think the question you are absolutely delving at, orthopedics is a service line that does well for us. And let me quantify that for you, it does well for us in terms of its margin versus other types of service. It does well for us in terms of the complexity. It does well for us in terms of we have had good outcomes in our locations. So it would be one along with neurosurgical, various aspects of general surgery and the like that we already offer or that in new markets if it’s not offered, we would look to do. So that’s a little bit of a contrast to what I was discussing on cardiology and Jim was discussing on cardiology, orthopedics would be right in our wheelhouse.

Yes. Just keep in mind, that’s not just professional fees. That includes up and down the board and the fee to services, physical therapy, medical product employee, but just it’s all listed under related party. But it’s not just a professional fee that’s being paid to the doctors.

Yes. I am just trying to figure out why it’s even necessary like even this billing one with Unity, why do you need to pay for billing?

It’s just that they have outsourced their billing services much like many people do. Much like we have IMD doing one of our hospitals, one of our competitor hospitals. And it was just – it was something that was already in place when the acquisition was taken over. Those are the types of things that are opportunities for us to look at going forward as we want to internalize that if want to do it through IMD or something else that we already own. That again is future opportunity for us to look at margin savings.

Perfect, okay. Thanks very much.

[Operator Instructions] Your next question comes from Ryan Lee from CIBC. Your line is open.

Good morning guys. I am calling in for Prakash Gowd. A couple of questions here, my first question here is relating to the private payer mix as in relation – as a percentage of facility services, we see that 2016 is about 28% and the year before that is around 27.5%, where do you see this trend going in 2017 and beyond?

We had a little bit of trouble hearing you on the very beginning and f it’s not too much of an inconvenience, could we hear that question again, please?

I am just asking about the payer mix, looking back in 2015 is around 27.5% for the public payers and 28.7% for 2016, we would just like to know where this is going to go in 2017 and beyond?

Well, I mean we haven’t put out any kind of target [ph] percentages. As we said I think if you listen back to all of Jim’s comments and kind of the whole management team’s comments. We are trying to help facilities where they need to recruit new physicians, obviously these bring in more managed care, Blue Cross types reimbursement, in a lot of cases these are younger physicians. They have a little bit younger patient base that you are not worried about the Medicare mix. I mean that’s kind of one of our jobs is to trying to help these facilities bring in these cases to keep the highest percentage of managed care Blue Cross, that type of things coming in the door.

Okay. And in terms of the acquisitions now, you mentioned you have a robust pipeline, when do we see like the fruits of your labor coming in, would it be in the second half of the year or would you see something sooner?

No. It’s evidently going to be in the second half of the year. We spend a lot of time with our current centers. I have been visiting all of our current centers to talk about our organic growth, which is the second component of what I do. But yes, we have been – several conversations right now. And as you will know, these things take time to bear fruit, so yes, definitely the second half.

Okay, thanks.

At this time, I will turn the call over to Mr. Reynolds.

Yes. Thank you, operator. We thank you all for your time today, your questions and the opportunity to share our direction with you. And we appreciate your interest in Medical Facilities and we wish you a great day.

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