Robert Ortenzio - Executive Chairman and Co-Founder Martin Jackson - EVP & CFO

Frank Morgan - RBC Capital Markets Whit Mayo - Robert Baird Chris Rigg - Deutsche Bank Bill Sutherland - Benchmark Company Kevin Fischbeck - Bank of America Whit Mayo - Robert Baird

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the third quarter 2017 results and the company's business outlook. Speaking today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; and the company's Executive Vice President and Chief Financial Officer, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as the circumstances change. At this time, I would like to turn the conference call over to Mr. Robert Ortenzio. Sir, you may begin.

Thank you, operator. Good morning, everyone. Thanks for joining us for Select Medical's Third Quarter Earnings Conference Call for 2017. Before I outline our operational metrics for the quarter, I want to provide you with some highlights for the quarter. First, we are pleased to have announced the signing last week of an agreement to combine Concentra and U.S. HealthWorks. Under the terms of the agreement, Select will remain the majority owner of the new combined company and Dignity Health Care, along with our existing minority partners, Welsh, Carson and Cressey & Co, will continue as minority partners in the new company. This partnership enables us to expand our platform and build upon our success in occupational health. U.S. HealthWorks operates approximately 217 occupational health centers and 33 on-site clinics in 21 states. As of the end of the third quarter, Concentra operated 312 occupational health centers, 102 on-site clinics and 31 community-based outpatient clinics in 43 states. With less than 10% overlap in our centers, this partnership significantly expands our national scope. We continue to be pleased with our progress that our LTAC operations are showing since the transition to patient criteria. For the quarter, we increased our total compliant patient days by more than 6.4% on a year-over-year basis. Our total patient days increased by 2.7% over the same period of time. Our occupancy rate in our LTACs was up year-over-year for the third quarter for the first time since our hospitals began their transition to patient criteria. LTAC occupancy was 65% in our seasonally weakest quarter, up from 61% in the same quarter last year and only slightly down sequentially from 66% in the second quarter. As we focus on criteria compliant patients only population, our Case Mix Index continues to run higher and was 1.27 in the quarter. Our rate also continues to increase and was $1,694 per patient day in our LTACs this quarter. Our improved occupancy and continued focus on managing our cost has resulted in a 170 basis point year-over-year improvement in adjusted EBITDA margin in our LTACs. Our LTACs adjusted EBITDA this quarter was $46.9 million, up over 21% compared to the same quarter last year. Our inpatient rehab business continues to grow rapidly. For the quarter, we increased our total patient days by 24.7% to 68,168 days on a year-over-year basis. Our occupancy rate increased to 73.4% from 66.6% as of Q3 2016. Our patient day rate increased by 10.6% to $1,609. Revenue growth on a year-over-year same-quarter basis was up 24.5%, and adjusted EBITDA growth was over 133%. We opened one additional rehab hospital in our Cleveland joint venture in October with additional Cleveland Clinic Hospital in Akron now scheduled to open later this month. As I mentioned last quarter, we also have 2 new rehab hospitals under construction. One in New Orleans that should open early next year and one in Las Vegas that should open in late 2018. Our outpatient legacy business continues to grow nicely with revenue up 4.4% and EBITDA up by 5.4% on a same quarter year-over-year basis. As we mentioned last quarter, we continue to experience some headwinds with several of the acquired Physio markets with corporate changes we have implemented. For the quarter, revenue for the Physio clinics was down by 10.3% to $68.4 million and EBITDA was down by 44% to $5 million. Overall for the quarter, revenue was flat and EBITDA was down by 8.4% to $29.3 million. It's important to note that we have very seasoned operators that have been with us for the past 19 years that are managing these assets and we are confident they will improve their performance over the next several quarters. Additionally, the temporary closure of many of our clinics due to hurricanes, Harvey and Irma, adversely impacted our operations in the quarter. Excluding the negative weather impacts, we would have shown slight growth in revenue and adjusted EBITDA in our outpatient segment. Let me next take you through some of the operational highlights for the quarter. Net revenue for the third quarter increased $43 million to just under $1.1 billion compared to same quarter last year. Net revenue in our specialty hospitals for the third quarter increased 7.5% to $585 million compared to $544 million same quarter last year. Average net revenue per patient day increased to $1,676 in the third quarter compared to $1,642 in the same quarter last year. Overall patient days increased 6.7% to 316,000 days compared to 296,000 patient days same quarter last year. Net revenue in our Outpatient Rehabilitation segment of the third quarter decreased slightly to $250.5 million compared to $250.7 million the same quarter last year. The decrease in net revenue was primarily due to decline in visits within the areas affected by Hurricanes Harvey and Irma. We estimate the loss of net revenues to be approximately $2.9 million related to the impact of the hurricanes. Patient visits decreased 3.2% to 1.98 million visits of third quarter compared to 2.05 million visits in the same quarter last year. In addition to the impact of the hurricanes, we experienced decline in visits at Physiotherapy clinics within some of our markets. The decline in revenue related to the decrease in visits was partially offset by an increase in net revenue per visit. Our net revenue per visit was $104 in the third quarter compared to $102 per visit in the same quarter last year. Net revenue in our Concentra segment of the third quarter increased 1.1% to $261 million compared to $259 million in the same quarter last year. The increase is primarily from newly acquired and start-up centers which was partially offset by decline in visits in the areas affected by the hurricanes, which we estimate caused approximately $1.2 million decrease in our net revenue. For the third quarter, revenue from our centers was $229 million. And the balance of approximately $32 million was generated from the on-site clinics, community-based outpatient clinics and other services. For the centers, patient visits were 1.98 million and net revenue per visit was $116 in the third quarter compared to 1.90 million visits and $119 per visit in the same quarter last year. The decrease in net revenue per visit is related to an increased proportion of employer services which yield a lower per visit rate. Total adjusted EBITDA for the third quarter grew 18.1% to $115.8 million compared to $98.1 million in the same quarter last year with consolidated adjusted EBITDA margin at 10.6% for the quarter compared to a 9.3% margin for the same quarter last year. Specialty hospital adjusted EBITDA increased 43.9% in the third quarter to $69.5 million compared to $48.3 million in the same quarter last year. Adjusted EBITDA margin for the specialty hospital segment improved 300 basis points to 11.9% in the third quarter compared to 8.9% in the same quarter last year. The increase in adjusted EBITDA is primarily related to improved operating performance in both our LTACs and rehab hospitals and reduction in start-up losses at new specialty hospitals. Adjusted EBITDA start-up losses were $1.5 million in the third quarter compared to $9 million in the same quarter last year. Outpatient rehabilitation adjusted EBITDA for the third quarter was $29.3 million compared to $32 million in the same quarter last year. Adjusted EBITDA margin for the outpatient segment was 11.7% in the third quarter compared to 12.8% in the same quarter last year. The decline in adjusted EBITDA was primarily due to the decrease in visits related to Hurricanes Harvey and Irma. And this resulted in higher labor expense relative to our revenue in the markets impacted by the hurricanes, which had the effect of lowering our margins as compared to the same quarter last year. In addition, we continue to experience operational challenges in a few of our Physio clinic markets. Concentra adjusted EBITDA for the third quarter was $40 million compared to $40.9 million in the same quarter last year. Adjusted EBITDA margin was 15.3% compared to 15.8% in the same quarter last year. Decline in adjusted EBITDA and margin was primarily due to a decline in visits related to hurricanes, Harvey and Irma, as well as start-up losses in our telemedicine business. Earnings per fully diluted share were $0.14 in the third quarter this year compared to $0.05 in the same quarter last year. I'll now turn it over to Marty Jackson for additional financial details before opening the call up for questions.

Thanks, Bob. Good morning, everyone. For the third quarter, our operating expenses which include our cost of services, general and administrative expense and bad debt expense were $986 million. This compares to $960 million in the same quarter last year. As a percentage of our net revenue, operating expenses for the third quarter were 90% as compared to 91.1% in the same quarter last year. Cost of services were $939 million for the third quarter compared to $916 million in the same quarter last year. As a percent of net revenue, cost of services decreased 130 basis points to 85.6% in the third quarter compared to 86.9% in the same quarter last year. The decrease in cost of services as a percent of revenue is primarily due to improved operating performance in our acquired start-up specialty hospitals. G&A expense was $27.1 million in both third quarter for this year and last. G&A as a percent of net revenue was 2.5% in the third quarter compared to 2.6% of net revenue for the same quarter last year. Bad debt as a percent of net revenue was 1.9% in the third quarter compared to 1.7% in the same quarter last year. The increase in bad debt as a percent of net revenue was driven by an increase in our specialty hospital segment. As Bob mentioned, total adjusted EBITDA was $115.8 million and the adjusted EBITDA margin was 10.6% for the third quarter which compares to adjusted EBITDA of $98.1 million and adjusted EBITDA margins of 9.3% in the same quarter last year. Depreciation and amortization expense was $38.8 million in the third quarter. This compares to $37.2 million in the same quarter last year. We generated $4.4 million in equity and earnings of unconsolidated subsidiaries during the third quarter. This compares with $5.3 million in the same quarter last year. Interest expense was $37.7 million in the third quarter compared to $44.5 million in the same quarter last year. The decrease in interest expense is primarily related to the reduced rates we were able to achieve and the refinancings that we completed during the first quarter of 2017 as well as the refinancing of the Concentra term loans we completed in the third quarter of 2016. Company recorded income tax expense of $14 million in the third quarter. The effective tax rate for the third quarter is 36.1%. Net income attributable to Select Medical Holdings was $18.5 million in the third quarter, and fully diluted earnings per share was $0.14. At the end of the quarter, we had $2.8 billion of debt outstanding and $107.3 million of cash on the balance sheet. Our debt balance at the end of the quarter included $1.14 billion in Select term loans, $320 million in Select revolving loans, $710 million in the Select 6 3/8% senior notes, $619.2 million in Concentra term loans, $45.8 million in unamortized discounts, premiums and debt issuance cost that reduced the overall balance sheet debt liability. And we had $42.7 million consisting of other miscellaneous borrowings and notes payable. Operating activities provided $89.6 million of cash flow in the third quarter. Our days sales outstanding, or DSO, was 60 days at September 30, 2017. This compares to 58 days at June 30, 2017 and 51 days as of December 31, 2016. The increase in our DSO was primarily related to underpayments we received through the Medicare Periodic Interim Payment Program in our LTACs. During the third quarter, we recouped over $23 million in underpayments, but we're still currently underpaid by approximately $45 million. During October, we recouped over $10 million and we expect to recoup a total of approximately $30 million of underpayments for the balance of the fourth quarter. And then the balance of the amounts owed will come in the first quarter of next year. Investing activities used $70.9 million of cash in the third quarter. The use of cash was related to $68.5 million in purchases of PP&E and $2.4 million in acquisitions and investments during the quarter. Financing activities provided $14.7 million of cash in the third quarter. The provision of cash primarily relates to $20 million in net borrowings on our revolving facility and $13.5 million in other debt net borrowings which was partially offset by $15.2 million in repayments of overdrafts and term loan payments of $2.9 million. Additionally, in our earnings press release, we provided updated financial guidance for calendar year 2017. We now expect net revenue to be in the range of $4.4 billion to $4.5 billion. Adjusted EBITDA is expected to be in the range of $530 million to $550 million. Fully diluted earnings per share is expected to be in the range of $0.72 to $0.82 on an adjusted earnings per share which excludes the loss on retirement of debt and the related tax effect to be in the range of $0.81 to $0.91. This concludes our prepared remarks. And at this time, we'd like to turn it back over to the operator to open up the call for questions.

[Operator Instructions] And our first question comes from the line of Frank Morgan from RBC Capital Markets. You may begin.

Now that the LTAC transition is complete, I'm wondering if you can give us a view on kind of how you think admission growth should go from here now that we've got this transition underway. That would be my first question.

Frank, I mean, we really see the LTAC growth, really, the first focus we have is to get it back to our historical occupancy rate, in that 70%, 71%. We think we can achieve that probably over the next 9 to 12 months. And then we think that there is some real opportunities to grow it even higher than that. So that's really the - we've got a short-term focus to get back to historical levels. And then we anticipate that we can take it higher than that.

Yes, Frank, this is Bob. I would say that we are really pretty bullish at this point on the LTACs. I mean, the really tough work has been done. I think we have some great momentum. And I couldn't be more pleased with the way our operators have responded to the challenge of the new criteria. They've done a great job. And we and they think that there is good upside.

And I know that a lot of our providers have spoken on just the weak macro utilization environment. But when you look across your businesses, I'm just curious, could you point to some of that, perhaps maybe on the outpatient side? Would you say any of the softness could be there? And it didn't sound like it was in any of your prepared remarks, but I just wanted to confirm that. And then secondly, in the areas of outpatient and Physiotherapy, maybe just a little more color on sort of the timing and recovery there.

Sure, Frank. We don't think there's anything to point to as far as fine on the outpatient side. I mean, the outpatient side is really a function of some of the lost therapists in specific Physiotherapy marketplaces. And what we're going to have to do is make sure that we put some additional PTs in those clinics. And when they're in the clinics, we'll see those visits come back. So from a timing perspective, probably over the 6 - the next 6 to 9 months is, I think, a reasonable time frame to see Physio come back to where it was historically.

Just one more and I'll hop off. On the rehab side, the JV development obviously, you have several of those coming online. When we start thinking about these coming online, from a start-up loss perspective, how should we thinking - be thinking about how that impacts the geography of the quarters going into next year? I know you're not going to give guidance. But just at a high level, where will the biggest start-up hits come? And I'll hop off.

As far as start-up losses, we anticipate we'll probably see about $1.5 million to $2 million per hospital. I think we provided the time frame that we expect to open those. So next year, we've gotten a number of hospitals that are just opening up their doors. So for the first 2 quarters, you'll see some start-up losses. But we anticipate that we'll see - we'll go into the black in the third and fourth quarters and so on. On an overall year basis, there really shouldn't be that many start-up losses.

And our next question comes from the line of Whit Mayo from Robert Baird. You may begin.

I think we're all trying to get a feel for the new seasonality of the LTAC business now that you're fully transitioning through the site-neutral conversion. And the third quarter is seasonally a weak quarter for most providers and presumably pretty weak for pulmonology and upper respiratory cases. But just kind of curious to get how you guys look at the quarter? And maybe put into perspective just how you think about the seasonality of this business going forward?

Sure, Frank - I'm sorry, Whit.

That's okay.

When we take a look at seasonality, it really is different for our different businesses. If you take a look at the LTAC, the LTAC is typically very strong in the first and second quarter. Third quarter is, out of all the quarters, the lowest quarter and then it starts to come back in the third quarter as far as census is concerned. When you take a look at the inpatient rehab, inpatient rehab really isn't all that impacted from a seasonality standpoint. Our outpatient rehab business, first and second quarters were very strong. Third quarter is the lowest that we have. And then fourth quarter is the third lowest. And then on Concentra basis, typically, you see the second and third quarters being your strongest quarters. The first quarter would be the third quarter as far as performance is concerned. And then the fourth quarter is typically the weakest.

Yes, looking - I mean, when I'm back into the hospital operating expenses per patient day, it looks like they declined 2.6% year-over-year. And I know some of the start-up losses may be influencing that. Just any clean way to look at the controllable costs in the quarter, how they're trending? And just maybe just any anecdotes you can share on initiatives or strategies or just progress you're making?

As far as costs are concerned, as you - I'm sure you'll probably recall, one of the things we talked about in 2016 was to keep a number of the nurses that we had on board, kept them employed and made sure that we weren't flexing staffing at the time. And with the growth in volume, obviously, on a per patient day basis, you saw a nice benefit from doing something like that. I think our operators have also done a very good job in reducing overall expenses, in particular, on a per patient day basis. So if you take a look at supplies, pharmaceutical on a per patient day basis, all of those costs, as I said on a PPT basis, are down. So again, they've really done a very good job managing costs.

And maybe just one last one, just high level, looking at Concentra and maybe doing a compare and contrast with the U.S. HealthWorks. Just maybe how you guys look at the similarities or dissimilarities of the transactions? Where the opportunity is, presumably more on the staffing model versus the top line? But just looking for any high-level color on how you guys look at the opportunity going forward?

Well, U.S. HealthWorks and Concentra are very similar businesses. They do have some geographic differences. U.S. HealthWorks has historically been a company that's grown in the Western part of the United States whereas Concentra has been more in the Southeast, South, Northeast. So these businesses are not different. So we're looking forward to putting them together and kind of expanding the overall national geographic footprint. But there's always subtle differences in companies like these, but I would say nothing dramatic.

And our next question comes from the line of Chris Rigg from Deutsche Bank. You may begin.

Just wanted to make sure I got the numbers right on the Physio EBITDA pressure. I think you said down about 44% year-over-year to $5 million. So does that imply about a $4 million year-over-year absolute decline in Physio EBITDA?

Yes. That's right, Chris. The prior year - the quarter, I think was $8.9 million.

And has it been trending that way all year? So roughly $16 million-ish for the - for the full year 2017, you're going to be about $16 million below where you were last year?

It trended that way in the first quarter. And then in the second quarter, we saw it come back nicely. And then over the third quarter, it - we saw it trending - it was - trending event that was going on.

And then so I guess where I'm really going with is, when I think about the guide down of $20 million at the midpoint, could you just help break that down a little bit? You got about $4 million to $5 million from the hurricane. How much is specific to Physio? And is there any other areas that are trending a little bit below your expectations coming into the year?

Yes, it's a very good question, Chris. There's really 3 components to the guide down. Number one is when you take a look at the weather, there was about a $5 million impact on the weather. If you take a look at our outpatient business and it's really, again, it's solely focused on Physio, it's about $9.5 million that we're - we see the impact on the Physio side. And then if you take a look at our inpatient rehab, there was a slower ramp-up of the new hospitals and that was about $12 million, little bit north of $12 million. So that will get you - that will provide you with a bridge to get to that $20 million.

And then I guess just to finalize this train of thought here. So I would think that the weather in the - at least the inpatient should come back at least - we get that all back next year? And then Physio will take a little bit more time to recoup as you had noted earlier?

The weather is a onetime event. As a matter of fact, I mean, all of the clinics, all of our outpatient rehab clinics and with the exception of one center at Concentra, all of those are opened for business. So from that perspective, we see it as onetime. There will probably be a little bit of an impact, but I think it will be less than $1 million in the fourth quarter associated with the weather. But yes, I mean, it really is a onetime type of event.

And then just one final one here, changing gears. On the JV side, obviously, inpatient rehab has been a strength for you guys. Has there been any change to note on the LTAC JV side? I know you've talked about some. But are you seeing any more broad-based interest? And I'll leave it there.

Yes, there is some interest and we will do those on a one-off. It is not kind of the focus that we have on the rehab side, those de novo operations. I mean, our preoccupation, as you know, has been the transition to the new criteria. So new LTACs at this moment is not a primary focus, although we will do some. It's really primarily the growth will continue to be on the rehab side. And we look forward to announcing some more JVs in the future. And that's going to become more of a definite part, as you've seen the last couple years, a part of our broad business plan going forward. So I wouldn't expect to see the JVs on the LTAC side to be as frequent or as large as what you're going to see on the rehab side and that's the focus.

And our next question comes from the line of Bill Sutherland from Benchmark Company. You may begin.

Most of mine have been asked. But Marty, since you went through the EBITDA variance, I'm just trying to get a little tighter handle on the IRF adjustment and the slower ramp. So as far as where we stand today, to what degree are you kind of on track with those - I assume you're referring to the 3 significant ones last year?

Yes, Bill, that's a great question. If you take a look at where we are today, we are on target. So the slower ramp was really in the first 2 quarters. We've seen some nice improvements in the third quarter. And we expect the fourth quarter to be pretty strong.

And was it mostly just related to the challenges of doing such a large facility as you did in Southern Cal?

Yes, I think you hit the nail right on the head. I mean, CRI was a very, very large hospital, and it took us some additional time to get the ADC, the Average Daily Census up, but it is up nicely now. And we're all very excited about the opportunity at California Rehab.

Just one more on this topic. In the Physio challenge, is the issue now, which apparently is some churn in therapists, similar to what the issue was in the first quarter that you thought was somewhat corrected in the second quarter? Or did things change in that respect?

No, it's the same thing.

What do you - as you guys analyze it, what do you think that churn is about?

Well, I think, with 1,600 clinics, what we always do as we standardize all of our procedures, operational procedures. And consequently, when you do that, I think you've got - when you all - whenever you have change, Bill, there's certain people that don't like that change.

And then last, you mentioned start-up losses regarding the telemed business you're developing. Just be interested in any color in terms of kind of what that type of business would be on your platform?

Sure. As far as the telemedicine initiative we have in place over at Concentra, it really is focused on providing remotely located physicians. And I would anticipate it's going to be for some on-site services in addition to after-hour services. I think in the third quarter, the dollars spent there was about $600,000. So there was a negative variance of about $600,000 for the third quarter.

And our next question comes from the line of Kevin Fischbeck from Bank of America. You may begin.

Go back to Physiotherapy. The - so I guess, the staffing issues you're saying are not really related to - I guess, we hear a lot of providers talk about labor cost pressures and some certain specialties difficulties finding workers. That's not the issue, it's related kind of specifically to the transaction and just the disruption of change in leadership?

Yes, that is true, Kevin. Although I would say that we certainly - the question hasn't been asked specifically. But we do find challenges in recruiting in some areas and subsegments of our business, particularly on nursing. But that's not the commentary we're getting on the Physio. The Physio is a different issue that's related to the transaction and the acquisition.

And then why exactly do you think that it started to get better in Q2 and then got worse again in Q3?

We think that what ended up happening was the additional - some of the additional volume that was there kind of masked it. But we've been - and then all of a sudden just - and we always experience a lot less volume, Kevin, in the third quarter for outpatient rehab. So I think that's why it's shown itself again.

So I guess - but if you didn't have the volume then I would think your staffing levels would be better, right, with Q3? Was it that you hired temporary therapists expecting a volume rebound or that didn't happen or...

Yes, that commentary was really relative to the LTACs not to the outpatient business. I don't think we can call out staffing problems unique to the outpatient business that we haven't seen historically. Kind of the staffing issues that we referred to earlier really had to do with the LTACs through the criteria transition.

And then you mentioned that specialty hospital bad debt was up in the quarter. What was driving that?

Yes, and as is what we've seen is we've seen some increased aging in some of our accounts in the specialty on the LTAC side.

Okay, it's on the LTAC side?

Yes.

And then you talked about getting back to a target occupancy on the LTAC side in a pretty short period of time. What's driving that view? Is it just - are you on pace now, if you continue what you did in Q3, you should be able to get there? Or how do you think about that ramp into normal occupancy? And then I guess, once you get to that normal occupancy rate, what is the right growth rate from there?

Yes. What makes us feel comfortable, Kevin, is as us going into criteria, as that continues to mature, the educational process that takes place, we think that's very helpful. And that's - if you take a look at what occurred between Q3 of '16 versus Q3 of '17 with the 4 point increase in occupancy rate, I mean, we think that that will continue. I mean, it's really spending a lot of time in each of the hospitals, specific geographical locations and the impact that our clinical liaisons are making on the ground.

Obviously, our historical concern was that these are patients that were out there that could have been treated in LTAC before. So I was wondering how exactly you were going to be able to get people to come in who could have always come in? You guys have done a great job, better than we expected, to fill that. I guess, the concern now might be, will the first few percent is going to be the easiest few percent to get and then it's going to be harder to get that next couple of percent occupancy? You've obviously said - apparently, you haven't seen any slowdown in that referral progress.

No, we have not, Kevin. As a matter of fact, the exact opposite. I think we have talked to a number investors and to you and your peers, that when you take a look at the med part data, it really gives us comfort that there is a substantial number of potential compliant LTAC patients sitting in the acute care hospitals. And as I said, what we've done is we've done a lot of education with our short-term acute care hospital referral sources. And just educating them both from a clinical perspective, saying, it's really appropriate that once the patient is stabilized, you really want to move them out quickly into a setting that has a clinical program that address their specific needs. I mean, we're finding some real success with that.

Then last question on this dynamic. Because obviously, some of the LTAC competitors were much worse, of course, than you were as far as relying more on noncompliant patients. Are you seeing them struggle now? And do you see potential closures as a potential opportunity? Or is there a better understanding in the marketplace helping them too and therefore making it less likely that you're going to see capacity come out?

I don't think there's any question you're going to see capacity come out. And we are seeing that. And I think it's consistent with the commentary that Marty and I have given over the last couple years on this is that because the large segment of the industry was treating lower acuity patients that we know by looking at Case Mix Index, there are many, including the smaller ones who are having trouble adjusting and having the kind of programs that they need to attract the compliant patient and create a good clinical environment for those patients. So I think we will see the industry continue to struggle, and I think the transition from the blended rate will accelerate that here in the next 12 months. The extent, I don't think we can call it out with great accuracy. But directionally, we are confident that we are right on that. So I think what you're seeing is - and as was anticipated, a broader commentary is that this industry is changing and you're going to see, I think, the LTACs viewed differently over time in the markets as being higher acuity, high acuity on a post ICU venue for patients. And that's - not all providers are going to be able to adapt and meet that need. And so we'll see this industry gradually transition. And you're seeing it because CMS and the legislature, the criteria, gave a very long glide path for this. So you are going to see it gradually. But we are confident that you will see it.

Actually, I'll go back. Just one more question. I don't know if you answered the second part of one of the earlier questions which was, I guess, once you get that normal occupancy, what is the right growth rate for the LTAC business?

Yes. I mean, I think you'll be in a position to ultimately see that grow to potentially 74%, 75% over probably another 18 months.

And our next question comes from the line of Whit Mayo from Robert Baird. You may begin.

Can you hear me? Sorry. Marty, can we go back to U.S. HealthWorks? Just wanted to hear a little bit more about the financing, the structure of the transaction. Maybe talk a little bit about the put, the call, the time frame? I just wanted to get a sense of the commitments going forward for both Dignity and Welsh, Carson.

Yes. With regards to the financing for U.S. HealthWorks, it is a committed deal that we have with JPMorgan, it's a first and second lien. And so the focus right now is we've got to get through FTC. Once that's done, we'll be out marketing that. And we think after FTC approval, financing should be completed pretty soon thereafter. Your second question was the put-call. The put-call, you ought to take comfort that the put-call structure really remains the same as you saw in the original Concentra deal. The only difference is that instead of the put being the third, fourth and fifth year anniversary and the call also being the fifth year anniversary, it will be the second, third and fourth year. So let's assume that U.S. HealthWorks closes the first quarter of 2018, the first put could be made in the first quarter of 2020. And then 2021, 2022. And then in 2022, Select would have the ability to call any outstanding ownership. The other thing to really stress here, Whit, is it is at Select sole discretion as to how we pay for that, whether it's cash or the use of Select stock.

So that - is this for both Dignity and Welsh, Carson? They have the same put-call structure? Or are they different?

No, they're the same.

They're the same?

So it's identical.

And is there an established multiple on the - I guess, I'm trying to - is there a fair market value on the put-call? How are you establishing the amount…

It'll be fair market value, but it'll basically be on precedent transactions and the multiples paid for them. So if you want to make an assumption, that's probably not a bad assumption to state that - or to use what was paid for the first Concentra deal and then the U.S. HealthWorks deal which was about 11.3x.

Got it. And how much debt would be on the joint venture?

The total expected debt level would be at about $1.350 billion.

And last one I have is just thinking about the noncontrolling interest going forward. Will there be a cash distribution to Dignity and Welsh or will they just be rolling this into the growth of the joint venture going forward?

Yes, the liquidity events of the put-call structure, Whit, really - that was really the focus to say, okay, your liquidity event is going to come from the puts that you're able to ask us put to Select. We do not anticipate that there is going to be any distributions or dividends that will occur during the 2-year period of time.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Robert Ortenzio for closing remarks.

Yes. No closing remarks. Thank you all for joining us, and we'll look forward to updating you again on the company's performance next quarter.

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