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Acadia Healthcare Company Inc
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Good morning, and welcome to Acadia’s Third Quarter 2019 Conference Call. To the extent, any non-GAAP financial measure is discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday’s news release under the Investors link.
This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding Acadia’s expected quarterly and annual financial performance for 2019 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia’s filings with the Securities and Exchange Commission and in the company’s third quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
At this time, for opening remarks, I would like to turn the conference call over to Chief Executive Officer, Debbie Osteen.
Good morning. Thank you for being with us today for our third quarter conference call. I’m here today with Chief Financial Officer, David Duckworth, and other members of our Executive Management Team. David and I are pleased to provide some remarks about the third quarter. We will then open the line for your questions.
For the third quarter, U.S. same facility revenue increased 4.9% with a 2.8% increase in patient days, and a 2% increase in revenue per patient day compared with the prior-year period. U.S. same facility EBITDA margin was 25.9% compared with 27.3% for the third quarter of 2018.
During the third quarter, we faced certain operating issues at a handful of our U.S. facilities. While we have historically had facilities that outperform and underperform against expectations in any given year, we believe the impact at these specific facilities has been unique due to the size of the facilities in terms of their revenue and earnings contribution to the company. There is not a systemic issue that is affected our business and we continue to be confident in the long-term outlook for our company.
Adjusting our same facility stats for these facilities, revenue growth is 7.1%, patient day growth is 4.4%. Revenue per patient day growth is 2.6%, and EBITDA margins would be flat as compared to the prior period. In the third quarter, we also had a few specialty facilities impacted by hurricane Dorian. Patient volumes were affected in the month of September and some specialty patients were reluctant to travel to North Carolina and Florida for treatment due to the adverse weather.
Combining the impact from the weather and the issues at the specific facilities, we estimate that the impact on EBITDA was approximately $9 million for the third quarter. We are very focused on executing our action plans to respond to these issues, and has started to see progress from our efforts. However, as the exact timing for improvement and expected ramp up of the census is uncertain, we have adjusted our full-year guidance accordingly.
In October, we had three facilities that were evacuated, because of the wildfires in California and several other facilities on impact to admissions and census. During the wildfires, we transferred our patients to other facilities. And as a result, our fourth quarter results will be impacted and we have adjusted our guidance accordingly. Our staffs have done an extraordinary job of keeping our patients safe in this very difficult time and we commend them for their efforts.
During the third quarter, we added 82 beds increasing our size and geographic scale and further enhancing our position as a leading provider of behavioral healthcare services. To the first nine months of the year, we have added 414 beds and we expect to reach approximately 650-bed additions for the year. Throughout the quarter, we have continued to make progress around achieving the savings generated to the operational initiatives outlined in this strategic review update in May.
We continue to expect the $20 million to $25 million of savings by year-end 2020. As detailed in the May update, most of the savings will be in procurement which will impact supplies and other operating expenses. We recently completed a rebid of our GPO and as a result, we’ll be making a change in the first part of 2020. We have also added resources at the corporate level to oversee our projects and ensure achievement of our goal. We believe these steps will facilitate the savings outlined in the review. We will continue to provide updates as we realize the benefits of these initiatives.
Before turning to the UK, I’d like to reemphasize our commitment to our partnership strategy. We have a strong track record of partnering with health systems and hospitals across the country. We have five joint ventures operating and three currently under development with a robust pipeline of over 20 projects in different stages of development. The market remains strong and the value proposition to our provider partners is very compelling. That’s part of our strategic plan. We are targeting two JVs and one wholly-owned de novo build per year. We are excited that we have broken ground on our new JV hospital was St. Thomas Health, a part of the Ascension Health System and the largest not-for-profit health system in the U.S. The partnership includes the establishment of a new 76-bed psychiatric inpatient hospital in Nashville encompassing 40 adult beds and 36 geriatric beds.
With respect to the UK operations, we were pleased to see continued stabilization in our operating metrics. Same facility revenue was up 4% consisting of a 5.1% increase in revenue per day, driven by a 2.7% rate increase from the NHS and local payers and higher reimbursement related to an increase in the acuity of our patients. The increase in revenue per patient day was partially offset by a 1.1% decrease in patient days, which is related to our retooling efforts outlined on our second quarter call. If these beds were online and when they do come back online, we believe this will contribute approximately 2% to our patient day growth, which would imply approximately 6% revenue growth in the UK.
Same facility EBITDA margin was 16.7% consistent with our expectations. Total facility EBITDA margin increased over the prior year by 20 basis points to 15.2%. We were pleased to see an improvement in the third quarter labor cost as compared to the same period in the prior year. Agency labor as a percentage of total labor cost improved 60 basis points year-over-year to 13.4% for the third quarter of 2019 from 14% in the third quarter of 2018.
Total labor costs as a percentage of total revenue improved 70 basis points year-over-year to 67.9% for the third quarter of 2019 from almost 69% in the third quarter of 2018.
operationally, the UK business continues to demonstrate stability. The team in the UK remains focused on operating the business as our sales process continues. We continue to work on reopening the beds offline for retooling, which involves identifying a facility, where the patient can be transferred to, retooling the unit to the new service line and reopening the ward with qualified staff for the new service. We believe that there is a real long-term benefit from retooling that will add value to our operations and this has been demonstrated from our analysis of past retoolings across the portfolio.
The demand for our services in the UK has been consistent. Priory continues to receive referrals for the highest levels of acuity across all divisions and continuously reviewed our services to ensure this market need is safely met. We believe we are well positioned to take advantage of future demands across our service lines. with the beds that we’ve retooled, we believe this will help with future growth. We will continue to work with the NHS and other referral sources to identify areas, in which we can help meet their demand.
Finally, before we discuss our financial results in greater detail, I’d like to address our ongoing exploration of a potential sale of our UK business. As previously announced, the board has engaged a financial advisor to run a process to explore the sale of the entirety of the UK business. We have engaged in preliminary conversations with a number of interested parties and have completed the necessary front-end preparatory steps consistent with market practice for UK transactions of this nature.
We are continuing discussions with prospective parties and after consulting with our advisors and in light of the upcoming December elections in the UK. We expect to solicit initial beds for the UK business early next year. We believe this timeline provides the best path forward for optimizing the certainty of the sale process and maximizing value for our shareholders in a thoughtful and deliberate manner.
Now, I will turn the call over to David Duckworth to discuss our financial results and guidance in more detail.
Thanks, Debbie and good morning. revenue for the third quarter was $777.3 million compared with $760.9 million for the third quarter of 2018. our consolidated revenue growth of 2.1% was affected by the foreign currency exchange rate and revenue generated by close facilities in the prior year. The exchange rate had a $15 million or a 2% impact on revenue and revenue growth and the close facilities had a $13 million or a 1.7% impact on revenue and revenue growth.
Consolidated revenue growth adjusted for these two factors was 5.8%. the company’s consolidated adjusted EBITDA for the third quarter of 2019 was $146.6 million or 18.9% of revenue. As it relates to third quarter adjusted EBITDA as Debbie mentioned, our results were impacted by $9 million related to the specific U.S. facilities and the hurricane. Additionally, the EBITDA impact of the lower exchange rate, which has rebounded to approximately 1.29 today with average 1.233 for the third quarter, was approximately $2.2 million.
Net income attributable to Acadia stockholders was $42.6 million or $0.48 per diluted share for the third quarter of 2019, compared with net income of $46.2 million or $0.53 per diluted share for the third quarter of 2018. adjusted income attributable to Acadia stockholders for the third quarter of 2019 was $46 million or $0.52 per diluted share, excluding transaction related expenses of $5.8 million and an income tax effective adjustments to income of $2.4 million based on a tax rate of 16.7%.
Turning to our financial guidance. As noted in our press release, we have revised our guidance for the full-year 2019 as follows: revenue in a range of $3.1 billion to $3.125 billion, adjusted EBITDA in a range of $584 million to $589 million and adjusted earnings per diluted share in a range of $2 to $2.05. our revised EBITDA guidance reflects the third quarter results as well as the following assumptions related to the fourth quarter. A continued impact from the issues related to this specifically identified U.S. facilities and temporary facility closures related to the wildfires in California.
Secondly, an exchange rate assumption of approximately 1.28 based on actual exchange rates for the month of October plus an estimate of 1.29 for the last two months of the year and a tax rate of approximately 17%.
We would like to briefly discuss the overall trends of the business and expectations for 2020. As Debbie mentioned earlier, we believe the issues at these facilities are temporary and we are working to address the challenges with action plans. We do not believe there’s a systemic issue or challenge that had an impact across all of our facilities or within one service line or geographic region.
We continue to believe that the demand for mental health and substance use services is strong. We firmly believe that by executing on our action plans and our operational improvement initiatives, we will see high single-digit revenue growth and EBITDA margin improvement in 2020.
We look forward to discussing our targets for next year when we provide our 2020 guidance on the fourth quarter call, but wanted to provide this additional context today around our expectations. We remain very excited about the potential of our platform and confident about the future.
This concludes our prepared remarks this morning. I’ll now ask Paul to open the floor for your questions.
Thank you. [Operator Instructions] We’ll now take our first question from A.J. Rice from Crédit Suisse. Please go ahead. Your line is now open.
Thanks. So, just first of all, to drill down a little bit more on the trouble facilities and how long it might take to get those back on track. So, $9 million in Q3, obviously with the revised guidance, you’re looking at more in the fourth quarter. So, some of that must have happened toward the end of the quarters, you sort of alluded to, you’ve also got the wildfires and the hurricane. Any way to parse out how much of the fourth quarter adjustment relates specifically to those five facilities? And then when you describe whether it’s the natural disasters or these facilities – are you going to – do you think it this early points you’ll probably have some spillover into the first half of 2020 or will you have it. do you think back on track by then?
Yes, A.J. We did mention the third quarter impact that these specific facilities of around $8 million, $9 million if you include the hurricane. And we do believe since the timing of those issues, many of which occurred in the middle or later part of the third quarter, that there is an ongoing impact in the fourth quarter. Additionally, we have had bed additions at several of these facilities that we previously expected with contribute to our earnings in the fourth quarter. We now see a delay of that, continue to be optimistic about those bed additions ramping, but see a delay in that into 2020. So, the fourth quarter does reflect a revision that not only reflects just the timing of these issues, but also the bed addition contribution that we expected that we now think will be delayed to next year.
In terms of just the size of it, it is around $15 million and again, that just reflects the timing of it. We do believe that many of the issues can be addressed very quickly and are very positive about the action plans that we have in place and believe that the issues can be addressed in the near-term. And I do think there will be some – a ramp back up to the normal level of operations from these facilities and we expect that to occur early in 2020 following the issues being addressed over the next several months.
I guess just one other way to think about it. It seems a little long that you’d have these five different facilities all have, significant facilities have issues at a roughly, the same time. Was there an initiative that the company had undertaken? Was there something happening on the policy front? Any – if we step back and think about the fact that you had all this happen in one time period. Is there any rhyme or reason to it from your perspective?
A.J., there really isn’t these issues are very unique to the facilities that have had the impact. There’s not really even a common service line here. It’s not a common state. We had – our initiative has been to focus on our growth and our performance improvement. But nothing that we had done here or frankly throughout the company has caused these issues. I think they’re very unique. They’re very individualized and we believe that they don’t reflect the majority of our business, which is why we’ve really called them out to focus on. But they are not reflective of the strength of the company and there’s no trend from a macro perspective that we see causing these issues. They’re very individualized and unique.
Okay. All right. Thanks a lot.
Thank you.
We will now take our next question from Brian Tanquilut from Jefferies.
Hey, good morning guys. I guess my first question, Debbie, to follow-up on that point that you’ve just made. So, if we isolate and take out the five facilities, what was the business have looked like in the U.S.? Number one. And then I guess the second part of that is what are the steps that you’ve taken to address the issues in terms of timeline? Is it a one-quarter issue you think, or is it something that would take six months, nine months before we see an improvement?
Well, I think if we back out those facilities, the third quarter, the revenue growth for the third quarter would be 7.1%. If you look at patient day growth, it’s 4.4% versus the 2.8%. And then revenue per patient day, we would see an increase at 2.6%. Our EBITDA margin would be flat. And I think that that reflects really the majority of the facilities across all of our service lines. I do think that there are action plans that are in place. The team is very focused on getting these specific unique issues resolved and I believe they feel that these issues will be resolved over the next quarter. They have very good plans. They are working very hard to make sure they’re implemented properly and that we end up starting 2020 with this behind us.
So, I guess Debbie, to follow-up on that, where do you sit today? Has your view on the 2020 earnings power of the company changed versus where you were, say at the end of the second quarter?
my view has not changed. I see the strength of the company. I see the opportunity for Acadia. I’m disappointed for this temporary disruption, because it doesn’t reflect the overall strength of Acadia. I think we have enormous potential across all of our service lines. And I think that we do have an opportunity to improve, which we’re doing to this performance initiative and we want to strengthen our balance sheet, but I have not changed my view at all. And I believe that 2020 can be a very strong year for the company and I think that we will get these issues resolved. We’re working very hard to do so, but I feel very positive about our future.
I appreciate that. Thank you, Debbie.
Thank you.
Our next question comes from Kevin Fischbeck from Bank of America.
Good morning. This is Joanna Gajuk filling in for Kevin today. Thanks for picking the questions. So, just to follow-up on this on this comment and I have another one. in terms of the U.S. business, because I know one of your peers experienced some pressures in the – specifically in the substance abuse business in the U.S. So, is any of these facilities somewhat impacted by that and also if not, then are you seeing any increased competition in that area?
No. We really have not experienced any of the industry trends that have been mentioned by our peer. We have very solid performance in our specialty service line. It’s actually a very – it’s one of our leading platforms. and I think that with the opioid epidemic and the ongoing demand, I think we have been very pleased with the performance. It’s not impacting the facilities that we’ve mentioned. We also have a very unique sales and marketing platform, which works very well. And so I think that as we look across the – that service line in particular, we don’t see the issues that I think had been mentioned are at a network is less than 5% of our revenue and patient days in the substance use service line. So, we’ve already transitioned many of our contracts in our payer relationships to that. So that puts us in a very good place, because I think as consumers do start to want to be more in network with their coverage. We are going to be able to service them throughout the portfolio.
Great. That’s very helpful. And if I can switch the topics to the UK business, which seems like it's continuing to stabilize there, so any change in your outlook I guess for next year in terms of labor costs, I appreciate the commentary around these retooling efforts and the benefits are coming with it. So, I guess on that front also, do you expect an incremental pricing increases when you have more of these or it just comes with the higher acuity mix?
Yes, Joanna, this is David. I think our outlook for the UK continues to be positive. We expect that the labor costs that we have seen a lot of stability around in the last several quarters, that that will continue. The revenue per patient day growth as Debbie mentioned earlier, reflects 2.7% pricing increases as well as the higher level of acuity that we’re seeing in many of our patients. And the margin, we – the margin continues to be solid 15.2% for the quarter is within our range and we think we’re positioned well for volume growth and bringing beds back online next year, which will get us into a revenue growth in the mid single-digit range. So, we do see not only stability and improved performance this quarter, but have a positive outlook for 2020 in the UK.
Great. It’s helpful. And if I may just squeeze the last one since I have you here in terms of the refinancing that you mentioned that took place in August and you pay down some debt. So, I guess, you’ve seen some of the benefits in third quarter. Am I right in estimating that the annual sort of benefit of these actions about $8 million, $9 million reduction to interest expense is there in the ballpark?
We did complete that transaction in mid-August. So, we saw about a half a quarter of an impact from that. There is interest savings related to that transaction, but it is more like $4 million to $5 million annually. So, we saw one and a half months worth of that savings during the quarter, but the annual benefit from that as $4 million to $5 million.
Great. Because there’s also some debt you paid down. Wasn’t it? So that it’s all inclusive of $4 million to $5 million annually. That’s the refinancing and also the lower debt.
Yes, that’s correct. That we did pay down the $60 million that was outstanding on our revolver. We now have full availability of that revolver. And we paid the $60 million down on the revolver, Joanna and then we have about $40 million of cash that we put on our balance sheet following that transaction.
Great, that’s all from me. thank you so much.
Thank you.
Our next question comes from Matthew Gillmor from Baird.
Hey, thanks for the question. I was hoping to get a little more detail on the nature of the operational issues that you called out. It sounds like they’re unique to each facility. So, I appreciate if you don’t want to go through each one. But if you could maybe just provide, one or two examples that impacted some of the larger facilities just to help us understand.
Sure. I’d be happy to, Matt. I mean one of our large specialty facilities made a change in their services in August and early into September. They had been treating a specialty patient, but also mental health patients, and we looked at and heard feedback from our referral sources that mixing those two patient types of more acute mental health with specialty, with the layout of the facility was actually I think causing our referral sources to be hesitant to send the specialty patients to us. They don’t really mix well when you take the layout of this campus. I think we’ve done this successfully in other locations around the country, where we do co-occurring and we do treat both. But in this situation, because of the layout, it just did not work well. We made the change and I think that we brought in some outside resources to actually help us with the marketing, because as we changed and focus back solely on this specialty and substance use business, it is a ramp.
While we were changing this service and we stopped taking the mental health patients, we were reluctant to address the cost structure, because we wanted to make sure we were ready to make this change and to start accepting patients. I think that that impacted the cost, again, back to our margin impact. But I do believe the action plans that are in place are working. We are starting to ramp back up and we see that continuing. I think we’ve had a lot of positive feedback from referrals that are very pleased that we’ve made this change and it’s a long-term core competency for this facility in this specialty area. So, we feel that we can recover very quickly from deciding to stop taking these acute mental health patients, so that – that’s one example. I’ll give another one we have a state, where we have operated a campus as one license. And so we staffed in that way.
We had a licensure interpretation that has directed us to staff by our buildings, which requires five licenses. There is a waiver for the license, which we’ve applied for. But as we had patients at our facility there, it had a pretty big impact on cost, because as we have had to staff up per building, which is a big increase in our end. We actually had to bring in agency to actually meet those needs, but we’re hoping to hear very soon about our new integrated license and we don’t see any reason at this point that we would not get that. But that’s another example of really a unique situation that happened in one of the facilities that had a pretty substantial impact on their cost.
Got it. That’s helpful and understanding. And then one clarification on your 2020 comments. So, you talked about the high single-digit revenue growth and the EBITDA margin improvement. I just wanted to confirm that that’s against the current guide you’ve provided that’s not adding back the headwinds you’re calling out. And then I think David did, but I just wanted to confirm that this also includes both the UK and the U.S.
Well, Matt, I think we’ll go into more detail obviously, around our 2020 guidance in February as we report our fourth quarter results and – but we do believe just with the turnaround at these specific facilities combined with the operational improvement initiatives we have in place in the U.S. as well as just the bed addition contribution and the benefit that we expect from facility expansions. That’s the commentary we’ve provided is that we have a positive outlook for 2020. We will provide more detail as we report our fourth quarter results.
Got it. Fair enough. Thank you.
Thank you.
We’ll now take our next question from Pito Chickering from Deutsche Bank.
Good morning guys. Thanks for taking my questions. Just to follow-up on Matt’s, you guys did offer sort of this high single-digit EBITDA growth and you guys are in the process of – you’ve commented you’re soliciting the sale of the UK in beginning of next year. So, just to be super clear, because you gave that number is that for the corporate average, so that would be implied 6.33 EBITDA or is that solely against the U.S., which couldn’t for something in the range of 5.70 even in the U.S. for next year?
Yes. Pito, we will be more precise about that next year. I do think that when we talk about our expected growth, it is based on a normal year. And so we do expect that with the recovery from these items, we could see stronger growth in 2020. But again, we’ll provide more detail about that in February.
Okay, fair enough. Can you give us an update of how the beds of ramping in the UK that you took offline? I think you mentioned in the last quarter, additional 150 beds are taken offline for further retooling. Any updates on those and also on the U.S. de novos that were slow to ramp in the first half of the year?
Pito, we have seen in the UK, some of those beds come back online, but we really didn’t expect to see much in the third quarter. We do expect to see some additional beds come back on in the fourth quarter. Most of the retool beds will be coming on in 2020. And I think that, it’s a process, which I talked about earlier. We have patients that we have to move out and they have to go to a secure setting and then there is the retooling. So, some of this can take up to six months, some can be done much faster, but as we retool these beds, we then ramp back up with staff.
So, we expect that these beds will be back online by 2020, and it’s my hope that they’re in the earlier part of the year. I think management is trying to accelerate as much as possible. They work with the referral sources on placing these patients. So, some of that depends on collaboration of where these patients are going. But I think that we feel good that when these beds do come back online, they have a very positive impact on the results for the UK.
And with respect to the U.S., our de novos are coming along. I think that we’re pleased to see after we were able to clear some of the license and certification issues that the market demand is there, they’re coming along very nicely. They’re well within what we projected and both markets, I think, are going to be very strong for the company.
Okay. And then last question from a process perspective, Debbie, you mentioned earlier that you were investing within more in the corporate side. There’s been a couple of hiccups, sort of 2Q and 3Q, and sort of facilities having issues here and there, could you sort of walk us through from a process perspective, how you’ve changed sort of the corporate oversight team and kind of how does it improve over the next 12 months? Thank you.
Sure. Well, we’ve done several things. We have an outside group working with us to identify savings throughout the company. We have used some of their expertise with the GPO, but we need our own procurement person and we have identified and hired that person, who will oversee the process. We’ve also brought on an individual that will make sure that all of the parts of this work well. We’re a big company, but we have a lot of opportunities. So, we want to make sure we’re keeping track of that and staying on schedule.
We have centralized our contracts for managed care. We have a database now. We have better visibility around contract timing, rates. We have a team in place to make sure that that progress continues. We also have made some changes to our financial structure and reporting, so that we can have greater visibility around our day-to-day cost management. And I think that the group and the team here is very strong. I think that it’s been a group that had been here for several years, they’re working well. But what we’ve tried to do is enhance what’s already the strength here and to get visibility around what we can do to accelerate growth, but also to manage the day-to-day cost and performance improvement initiatives.
Great. Thanks so much.
Thank you.
Our next question comes from Ryan Daniels from William Blair.
Hey, guys. This is Nick Spiekhout in for Ryan. First, just to clarify, was that walked down from the 700-bed addition target to the 650 – is that 50-bed just on those places that are struggling operationally?
No, Nick. We actually have open beds at many of those facilities already or we’ll continue with the bed additions that we have at those identified facilities in the fourth quarter. The slight adjustment to our bed additions target for 2019 from 700 to 650 is just one project being delayed to next year. So, we will have that project and our numbers next year, but there was a delay from when we expect it to happen.
Got you. Great. And then can you provide a little bit more color and the downtick and same facility UK margins, is that mostly a Forex issue or can you just provide a bit more color there?
No, there’s – the FX is adjusted in our reporting of our same facility stats. So that’s not the case. I think as you compare the third quarter to the second quarter, we talk about seasonality that we expect to see in the third quarter each year related to mainly the holiday season that occurs in August in the UK. So sequentially, that’s what we saw on the UK results, but we’re very pleased with the margin the comparison to the prior year and stability there in the UK. But sequentially in the third quarter of each year, we do expect a slightly lower number than the second quarter.
Got you. Thanks. And then I guess a quick clarification, I don’t know if you’ve said this before, but the $20 million to $25 million in procurement savings, is there a breakdown of U.S. versus UK there? Is that mostly going to be in the U.S. business?
Nick, it’s all in the U.S. We do have performance initiatives in the UK, but that’s not included in that number.
Got you. Thanks. All right, that’s it for me. Happy doing.
Thank you.
Thank you.
Our next question comes from which Whit Mayo from UBS.
Hi, this is Brian Owusu on for Whit. In the UK same-store EBITDA growth in the quarter look like it was a 2% and that’s inclusive of the rate increase, is there any way that you can size the revenue dollar impact that that had in the quarter or maybe, look at it another way. How did the same-store cost per patient day trend in the UK?
Yes, Brian. We did see an increase in our cost per patient day, but we talk about the acuity of the patients that we’re seeing, following some of the retooling that that has happened and more growth that we have within the higher acuity services. And so what we are focused on is the revenue per day reflecting that higher acuity and we talked about the revenue per day growth being strong, because of the rate increases as well as that higher acuity. And so yes, we did see a cost per patient day increase, but it was in line with this service mix benefit that is reflected in our revenue per day growth.
Got it. And then quickly U.S., I know, you talked about the de novo before. but on the losses there, any update on the performance for those in the quarter, I think you had mentioned $1.2 million expected, just if there’s any change there in the actual performance?
Yes. Sure, Brian. We had an expectation for the third quarter of losses between $1 million and $2 million, and we were right in the middle at $1.5 million. That is essentially taking half of the losses that we had in the second quarter. So, we’re seeing great progress there. And we continue to have a goal at those two facilities to be at breakeven by the end of the year. So, it was close to $3 million for the second quarter, $1.5 million in the third and we still think those facilities can be break-even by the end of the year.
Great. Thank you.
Thank you.
We will now take a follow-up question from Pito Chickering from Deutsche bank.
Hey, guys. Thanks for taking the follow-up. Quick questions for you on the UK sale comments. Thank you so much for providing more clarity today. Can you talk a little bit more about the process? Can you give us some, like early reads on what type of buyers you’re talking to when the first bids are due and then when anything final bids will be due? Thanks so much.
Well, I can say, and I’ve said before, we have a lot of interested parties that have reached out to us and we’ve obviously contacted with our advisors. And I think, they vary from infrastructure to private equity and also strategic. And I think that – I think what has given us optimism here is that the number of interested parties is very strong. And we don’t have a view on valuation at this point, but we do see that there’s interest. And we’ve done a number of things with our interested parties around informal conversations, which they call fireside chats in the UK. But it’s really trying to educate our potential interested parties about the market and priory’s specifically. And I think that those I think have moved along. And so as we look at the first part of the year, we have said, and I said in my prepared remarks that we expect that to start the first part of the year.
I think we will have the elections and there is a holiday period that will occur there as well as here. And so I think that we feel like once we initiate that process, we’ll see where we are with respect to how valuation comes in and we’ll move from there. So, we’re not really trying to state a prediction around how long the process goes, but we want to make sure we take time to get everyone that has an interest in bidding, to bid and then we’ll evaluate those bids and the next step will be hopefully to refine that number and to continue to move forward.
Great. Thanks so much.
Thank you.
We will now take our next question from John Ransom from Raymond James.
Hey, good morning. Back when you released your strategic plan, you had a view on the UK real estate value of $1.7 billion. Do you still have that view and if so, can you provide any of the detail around what supports had assumptions? Thanks.
Yes. John, the $1.7 billion that we discussed in May is the real estate value that is on our balance sheet. At that point in time, we do not have to share an updated view around the real estate value. It is part of the work that we’re doing with our advisors is to evaluate the real estate. We have 80% ownership and significant value in that real estate in the UK, but we don’t have an updated valuation at this point in the process.
Well, maybe, I could ask it this way. Is there a comparable cap rate we should think about for specialty medical real estate that you’ve seen and other transactions over there?
We don’t have a view that we’re going to provide on any valuation metrics within how you might assign a value to the real estate.
So, your evaluation was just based on your carrying value on your balance sheet, not what you thought the market would give you for it?
That’s right, John. That $1.7 billion was based on the appraisal work that we did at the time of acquisition of those various properties, starting in 2014 through the Priory acquisition in 2016.
So, is it possible though that one of the outcomes would be kind of an opco/propco type transaction? Or do you think it’s more likely you’re just going to sell this thing for a multiple of EBITDA and the buyer would then extract the value down the road from the real estate?
I think our goal is to look at a sale of the entirety of the UK operations. If there is a structure like that makes sense, it could be something that we could help a buyer execute, but our goal is to sell the entirety of the operations.
Okay. And then I guess my other question is this is the third year in a row as you know that you’ve missed on 3Q. So, when you think about your guidance next year, is it possible to maybe, factor in a little more cushion for Murphy’s law? It seems like it’s – I don’t remember the last time you didn’t miss 3Q by a pretty wide margin. So, is there a thought to maybe adjusting your guidance would be a bit more – it provides you a little more cushion for that to happen?
Well, obviously, we shared more about our guidance in February. I think as we reflect back, there’s obviously very unique items that that have happened in each of the last several years. So, we don’t think there’s any rhyme or reason to it. It’s just unfortunate timing on the various issues, but of course, we look forward to providing our 2020 outlook in February.
I’ll just add John that we are going through a budget process right now, and we have asked the operators to give us a view of what they believe next year will look like. We feel like, it’s – they’re optimistic about what they can do with bed additions and other metrics. I will say that all, but one of the five facilities that we’ve had to mention, because of issues that were unique to them were add budget to the second to the first half of the year. So, we’ll be doing a very thorough view of budgets, looking at it by facility, by region, trying to anticipate opportunity, but also any challenges that they might face and incorporating both of those views in a budget and then guidance that will give on our first quarter call.
Great. Thanks. That’s all for me. Thanks.
Thanks.
Our next question comes from Michael Hall from JPMorgan.
Hey guys, I’m on for Gary Taylor. Just a quick follow-up on the UK sale. Wanted to ask about if you have more clarity about why you guys are waiting till after the election in the UK holiday period? Any rationale there?
Well, we’re taking advice from our advisors, who are in the UK, and I think they have a view that having certainty around those elections is important. And we believe that having certainty there with respect to parliament will be something that we can move off the table from the buyer perspective. I think that we’re going to continue through the end of the year with our discussions with interested parties, so we’re not stopping our process. We’re just moving the formal initial bed to the first part of the year.
Got it. Thanks.
Thank you.
It appears there are no further questions at this time. So, I’d like to turn the conference back to Debra Osteen for any additional or closing remarks.
Thanks again, for being with us today and for your interest in Acadia Healthcare. I would like to conclude by thanking all of our employees and clinicians for their dedication, their focus on providing the highest quality care to our patients and their families. If you have additional questions today, please do not hesitate to contact us directly. and have a good day.
This concludes today’s call. Thank you for your participation. You may now disconnect.