Chad Keetch - Executive Vice President Christopher Christensen - President, Chief Executive Officer Suzanne Snapper - Chief Financial Officer

Chad Vanacore - Stifel Frank Morgan - RBC Capital Markets Dana Hambly - Stephens

Good day, ladies and gentlemen, and welcome to the Ensign Group’s First Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [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. 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 made are 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, change in 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 the captive, provides certain claims-made coverage to our operating subsidiaries for general and professional liability as well as for workers’ compensation insurance liabilities. The words Ensign, company, we, our and us refer to the Ensign Group and its consolidated subsidiaries. All 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 the record quarter as the improvements we experienced in the fourth quarter continued into the first quarter. We're excited about the progress we made as the ramp in many of our transition in 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 transition in facilities, as these operations continue to gain the trusts of the healthcare community they serve. These results are only possible because of outstanding local leaders that worked tirelessly to tailor their caring services to the needs of the unique healthcare markets they serve. We are also 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 dramatic improvement in our transitional and skilled services segment income of 45% over the prior year quarter and 16% over the fourth quarter 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 a 100 skilled nursing and assisting 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 multi-year process in nearly all of the 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 in 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 four and five star ratings, but we expect this draw 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, the quality of care we delivered is the reasons 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 spin-off of all but one of our real estate assets to CareTrust REIT in 2014, we’ve added a 154 operations, which included 56 real estate assets. We believe that our shareholders have received little or no credit in the past for the incredible amounts of underlying value in our real estate and then start as been 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, non-emergency 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 consist of 51 standalone operations in 22 campuses in 12 states, grew its segment revenue and income by 12% and 5% respectively over the prior year quarter. While these two business segments in our skilled nursing operations both benefit from certain synergies that come from their affiliation within Ensign, each of these independent leadership teams tried 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 two 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’s newest payment reform proposal called Patient-Driven Payment Model or PDPM. While there is 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 our well in any number of new reimbursement systems, including this latest generation. We’re reaffirming our 2018 annual earnings per share guidance to be between $1.80 and a $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’s effective income tax rate from 35.5% to an estimated 25% for 2018. The midpoint of our guidance represented a 15.7% increase over 2017 results. We are excited about the coming year and look forward to continuing to drive quality healthcare outcomes and the 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 a 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 standalone assisted living and independent livings operations and portions of 2 healthcare campuses that include both the 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 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. Great Presbyterian Village, which will be known as the Villages of Dallas has a full-serviced 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 are 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 four 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 non-profits that are exiting the business to large regional, operators that are selling non-core or turnaround assets. We continue to attract and consummate transactions with non-profits and believe that our value-based approach to post-acute care will make us an attractive solution for non-profits and big B sellers in the future. Almost all of the transactions we completed in 2017 and the first part of 2018 fit one of these two categories, and were completed one, two and three at a time. We also continue to see opportunities evolving 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 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 help their community and the team of caregivers very personally, and will 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 as 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 operation-driven strategy, even if it means we have to path on the majority of the transactions that we see or only participate in portions of these larger portfolios. The pipeline for our typical turnaround opportunity remained strong, and we remain confident that there are and will be many opportunities that we had at the right prices. And we are currently working on 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 quarterly 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 remember, at the time of the Legend acquisition, we explained that the historical performance with the operation, the geographic locations and the relative newness to 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 at -- 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 locally driven cluster model. Over time, as we replaced almost all the leadership in these operations with the combination of experienced and signed leaders and new highly talented operators, the portfolio is now performing like we expect that 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 it’s 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 shape portfolio and in Arizona the 10 building -- 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 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 done. Let me just share couple of examples of individuals operations, we’ve begun to see the effect of our efforts this quarter. Shea Post-Acute, a 120-bed transitioning operation located in -- led by CEO Clay Wagner and COO Barb Duncan has overcome a low star rating, low census and trouble reputation of become a 4-star operation. At the time of acquisition, this operation was in the midst of the multi-year decline and was experiencing devastating operating losses. When Clay 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 Star by opening the doors to both Medicare advantage plans and Managed Medicare. But they steadily become 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, has EBIT has grown by over five times in the first quarter of 2018 compared the same quarter last year. River View village senior living and assisted living campus located in the - falls with constant has undergone some tremendous operational transformation. Led rector, Executive Director Michael Stern and Wellness Director Vicky Hornhost, the River View team has worked diligently to offer the highest quality care with superior customer service and true service, improve offerings and amenities and have integrated into their community as a valued partner. In 2017, they achieved an impressive perfect survey from the state health department for the first time. They’ve transformed the operation from a secure and largely unknown assisted living facility to the premier senior living option in our 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 of Clinical Services [Cynda]. 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 stays by 28% over the prior year quarter. This growth has been deepening key referral relationships and developing new relationships with positions, 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 in 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 Susan 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 at 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 were 76%, an increase of 415 basis points. Transitioning skilled managed care revenue was at 60% and same store skilled managed care revenue was up 5.9%. Total home health and hospice segment revenue was up 23.7% in que $39.8 million and segment income was up 41.1% to 6.1 million Other key metrics that first 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 on our revolving line of credit. We expect our least adjusted net debt-to-EBITDA ratio to -- we expect our lease-adjusted net debt-to-EBITDA ratio, which was 4.1 times at quarter end to decrease in 2018 as the EBITDA from transitioning and newly acquired operations continue 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 impact the first 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 a $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 base intangibles; the exclusion of losses associated with startup operations, which are not yet stabilized; the increase 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 and occupancy and skilled mix, the influence of the general economy and our center re-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 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. Your line is open.

Good morning. This is [indiscernible] for Chad. 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, it’s 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 is the patient, here is the condition of the patient and here is what we are 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 is the person. You've got the get them back to where they need to be. And whatever cost you to get them back to that is up to you. And there will be one of the nice things is there will be less -- it 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 have or documented that you through the minimum dataset or through other things. And so obviously there will 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 path. And there generally are 2, 3, 4, 5 passes before the final pass occurs. But we're just hopeful because of the way that going through the process and the fact that they're consulting with -- 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 operations, it didn't seem to have much of the financial impact, but can you just elaborate a little further on those changes and how you think the star rating impacts you fundamentally?

I mean, star ratings are more impactful when it comes to managed care at this stage. But remember, this is -- some of the new things that we 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 and the track that we've been at forever and ever and ever, which is increasing number of 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 prepared for that. But that's why you didn't see. When you say there wasn’t financial impact, there was a financial impact. It's just through the Managed care sector that is not as visible to you.

All right. Thanks. 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?

Candidly it's probably because we've had some weakness due to the 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 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 they 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 scare people away from managed care, I think that that’s helped us too. I think that I can’t speak to everybody, but I feel like we started to do that earlier than others did and I think that that’s benefitted us a lot.

All right, great. Thanks for taking my questions.

Thank you. Our next question comes from Frank Morgan of RBC Capital Markets. Your line is open.

Good afternoon. Hey I wanted to start first. You mentioned in your comments about M&A activities from larger skilled assets portfolio is 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 there is flurry of deals coming into the market place actually occurs.

Well, I’ll let Chad clean up whatever I’ve said, 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 that 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 see even in the past. And then I think in terms of what contributed to the -- we’ve kind of talked about this, Frank, but I mean I think one of the things is there has been a lot of money chasing these debts and there have 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 payments 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 two.

Do you think you’ll have the opportunity to own these assets? Or will these be transaction working more likely you just have to step in and negotiate a lease rate?

I think it will be both.

Got you. Switching gears. You were mentioning the managed care is really the only area where your stars are having impacts your potentially impact your reimbursement. How much of a lag is there between the time of say a stars writing 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 select there or will they still have to go through this process of making some temporary adjustment.

Yeah, I mean with healthy relationships they do, and they have. They recognize there has 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. So 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 and in terms of reimbursement and other things and where there is similarity between what the state consider and the star ratings that can impact our medicated rates as well in some of the rewards or penalties that we received 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 are 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 the networks to the Legend getting better -- Legend portfolio getting better, some improved in Utah. Was there any one of those things that stood out that would be the primary driver of 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 have 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. So I don’t dare guess a percentage but both of things, the narrow 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 -- 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’s diluting that margin that’s causing that 30 basis point drop in the consolidated margin. And so any 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 that -- I think you are probably right. I think the labor market has -- what you are 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 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 transition 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 doors 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 will see better performance in our same store, and that has played out and you will see it continue to play out. Doesn’t mean we will start 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 alright. Hey two more and I'll hop back in the queue. Just maybe as we're getting closer to summer in the store -- fiscal years. Just what you're seeing out there in terms of what the rate environment for Medicaid and that 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 from last year. Is that is 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 of CapEx should we expect there when we think about free cash flow? Thanks.

Thank you. So three questions. The first one, no, Frank, we don't see anything incredibly positive or incredibly negative in our Medicaid rates in the future. So we're happy with that. And yeah, that's all I’ll say about that. I guess on the second question, cash flow, it was a strong flow for the quarter. We expect that to be assigned for the future although the first quarter was strong. So you may see a little bit of a step backwards 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've actually were under in the first quarter. So you'll see a little bit of more spend throughout the year than you did in the first quarter. But again, I want to reiterate. The newbuilds 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 in our ratio.

Thank you. And our next question comes from Dana Hambly. Your line is open. Of Stephens.

Hey, thank you. 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 in the asset. My question is would you be willing to do something to do a larger deal that would be dilutive in the near term?

That's certainly is not our plan. We don't expect to do a deal that 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 two of the three large transactions that we did. And frankly, two years later we feel like we've done really 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 is no plan to do any dilutive transaction at this stage.

Okay, good to hear. And you mentioned that one of the gaining 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 get larger, but certainly there is not frantic search for new jobs or new careers in today's labor market. 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 is 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. It’s early days. How would you initially compare that to the previously proposed RCS payment model?

So I mean I think on plan, like April may be out there for a couple of days as you know, but on first plan 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 to its actually total residents is significantly less helps on the labor side obviously. There are some - the changes that they’ve recognized and feedback that they’ve heard from industry with regard to the types -- different types of classification of patients where they within. So the results are definitely better and they actually did incorporate some of the feedback that was submitted during the open period. And obviously there are some additional things and feedback that people are working on, and we’re excited to set their partnering with us at this point. So we can get better than it is today.

Okay, that’s helpful. And then last one from me, Suzanne. You mentioned that you’d expect fewer adjustments to GAAP this year, which I appreciate. But I did want to ask, there is one of on just reminds 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 back to me again. So some of those are just buildings that we barely open 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 one or two that we just barely opened that are not a full capacity. There is a facility or two that we had to empty out and renovate for structural issues, engineering issues, and that’s what include in that. We’re not including in facilities that are having a little occupancy in that. These are completely empty buildings that we’re having to totally show it off, so that its safe for the residents and once we reopen them and have a few months under our belt, we’ll include those again.

Yeah, in this quarter, like you see -- if it’s helpful look at on the press release table and reconciliation of GAAP to non-GAAP, it gives you a breakout of those two different classifications, ones are the ones that Christopher just talked about at the facilities that are currently being constructed and then in the current quarter we had no adjustments on the results in closed operations. That is for the prior quarter, but if you look at that detailed press release table, that could help you out.

Okay, appreciate it. Thanks.

Thank you, Dana.

Thank you. 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.

I’ll thank you, Norma, for your help and thanks everyone for joining us and giving us your time. We appreciate it.

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