Earnings Call Transcript - SEM Q4 2023

Operator, Operator

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the Fourth Quarter 2023 Results and the Company's Business Outlook. Speaking today are the company's Executive Chairman and Co-founder, Robert Ortenzio; and the company's Senior Executive Vice President of Strategic Finance and Operations, 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 circumstances change. At this time, I will turn the conference call over to Mr. Robert Ortenzio.

Robert Ortenzio, Executive Chairman

Thanks, operator. Good morning, everyone. Welcome to Select Medical's earnings call for the fourth quarter of 2023. Before providing details on each of our four operating divisions, I will provide some updates and commentary on the business. As most of you know, on January 3, 2024, we announced that our Board of Directors has approved a plan to pursue the separation of Select Medical's wholly-owned occupational health services business, Concentra. As I have previously stated, we are pursuing the separation of Concentra with the objective of enhancing shareholder value and the success of each business by creating two companies that will be leaders in their respective markets. The potential separation is intended to be affected in a tax-free manner to Select Medical and its stockholders and to be completed in 2024. We expect in the very near future to receive a private letter ruling from the U.S. Internal Revenue Service with an opinion confirming the tax-free status of the potential separation of the Concentra business. The completion of the separation is still subject to customary conditions, including favorable market conditions, completion of necessary financing transactions and final approval by the Select Medical Board of Directors. I will now provide commentary on our four business lines. Overall, we had a very successful fourth quarter and year. We experienced double-digit adjusted EBITDA growth over prior year in every quarter of this year. In the fourth quarter of 2023, adjusted EBITDA grew 21% and revenue grew by 5% with all four of our operating divisions again exceeding prior year revenue and EBITDA. For the quarter, total company adjusted EBITDA was $180.1 million compared to $148.9 million in the prior year. Our consolidated adjusted EBITDA margin was 10.9% for Q4, compared to 9.4% in the prior year. Our critical illness recovery hospital division continued to see margin improvement in Q4 with a 28% increase in adjusted EBITDA margin along with a 4% reduction in their salary, wages and benefits to revenue ratio compared to the prior year. Consistent with prior quarters, Marty Jackson will provide additional detail regarding critical illness continued progress with labor. Critical illness incurred $3.6 million of startup losses related to new hospitals in this quarter compared to $3.1 million in the same quarter of the prior year. The opening of the critical illness recovery hospital with a distinct part rehabilitation unit in Chicago with Rush University System for Health remains on target for Q2 of this year. As we mentioned last quarter, we also have hospital expansions underway which are expected to be completed in 2025, including in our Orlando market which will also include a 48-bed rehab distinct part unit. On the inpatient rehab development front, we're excited to announce that we signed an agreement with CoxHealth System to construct a new freestanding 63-bed inpatient rehab hospital in Ozark, Missouri in which we will have majority interest. This hospital is projected to open early-2026. As previously noted, we have agreements with the University of Florida Health Shands to open a 48-bed hospital in Jacksonville, Florida, in Q3 of 2024 and with the Cleveland Clinic to open a fourth inpatient rehab hospital, which is a 32-bed hospital scheduled to open in the first half of 2025. In the latter half of 2024, we plan to begin construction on a new inpatient rehab hospital in Southern New Jersey, the Bacharach Institute for Rehab in partnership with AtlantiCare. We anticipate that our inpatient rehab division will continue their strong performance and have a successful 2024. Overall, I am pleased with the development results and pipeline for our Specialty Hospital divisions. In 2023, we developed or acquired and put in operation 128 inpatient rehab beds and 227 critical illness recovery hospital beds. In 2024, we plan to be under construction or complete construction of 533 inpatient rehab facility beds and 70 critical illness recovery hospital beds that will begin operations in the current year or 2025. Concentra continued their strong performance exceeding prior year revenue, EBITDA and patient volumes. As we mentioned on the last call, Concentra had significant development activity in October with the acquisition of three occupational medicine centers in Delaware and Maryland and the opening of three de novos in Norfolk, Virginia; Columbus, Ohio and Fort Myers, Florida. We have five signed leases for de novo slated to open in 2024 and two signed leases for de novo expected to be open in Q1 2025. There is a strong pipeline of acquisitions, including one currently under a letter of intent and other de novos that we continue to evaluate. This quarter, our outpatient rehab division generated a 41% increase in adjusted EBITDA and an 11% increase in visits per day. The division added seven clinics this quarter via de novos, which offset the closure of 12 underperforming clinics and the fold-in of eight clinics into existing operations as their leases expired. The pipeline for future growth remains strong with 19 executed leases for de novo clinics, of which 10 are scheduled to open in the first half of 2024. There are also many additional opportunities for acquisitions and de novo development that are under consideration. At this point, I'll provide some further data points on each of our operating divisions. Our critical illness recovery hospital division experienced increases of 1% in net revenue and 29% in adjusted EBITDA. While our occupancy was down from the same quarter last year, an increase in our case mix index and favorable payer contract negotiations contributed to an increase in our revenue per patient day. We've experienced very nice volume increases thus far in the first quarter of 2024 and are now at levels that exceed prior year. Our adjusted EBITDA margin was 10.1% for the quarter compared to 7.9% in the prior year Q4. The reduction in labor costs contributed to the improvement of our EBITDA margin with a 4% reduction in our salary, wages and benefit to revenue ratio. Both nursing agency rates and utilization decreased 24% when compared to prior year Q4. Orientation hours decreased 10% compared to prior year Q4 and decreased 26% compared to Q3 of 2023. Nursing sign-on incentive bonus dollars decreased 36% from prior year Q4 and 5% from the prior sequential quarter. Our inpatient rehab hospital division experienced a 9% increase in net revenue and a 19% increase in adjusted EBITDA. Patient volumes increased 7% and our rate per patient day increased 3%. Our occupancy of 85% was consistent with the prior year. The adjusted EBITDA margin for inpatient rehab was 25.5% for Q4, higher than the prior year's 23.6%. Concentra experienced an increase of 6% in net revenue, driven primarily by rate. Our workers' comp volume increased 6% but was offset primarily by a decrease in employer-based visits which are reimbursed at lower rates that resulted in an overall visit increase of 1%. Concentra's adjusted EBITDA margin increased to 15.5% for the quarter compared to 15% for the same quarter of the prior year. The outpatient rehab division experienced an increase of 6% in net revenue, with patient volumes increasing by 11%, offset by a decrease in rate from $102 net revenue per visit to $100. Organizational activities focusing on improving clinical productivity via patient access contributed to additional volume where the decline in rate was due to a decline in the outpatient Medicare fee schedule, payer mix, and variable discounts. The outpatient division adjusted EBITDA increased by 40.9% compared to the prior year with a 33% increase in EBITDA margin to 7.5% from 5.7%. Earnings per fully diluted share were $0.36 in the fourth quarter compared to $0.22 per share in the same quarter of the prior year. For the full year, earnings per fully diluted share were $1.91 compared to $1.23 per share in the prior year. Adjusted earnings per fully diluted share were $1.99 this year, which excludes the loss from early retirement of debt and its related costs and tax effects. In regards to our capital allocation, our Board of Directors declared a cash dividend of $0.125 payable on March 13, 2024, to stockholders of record as of the close of business on March 1, 2024. This past quarter, we did not repurchase shares under our Board authorized share repurchase program and we will continue to evaluate stock repurchases, reduction of debt, and development opportunities. This concludes my remarks and I'll turn the call over to Marty Jackson for some additional financial details and commentary before we open the call for questions.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Thanks, Bob. Good morning, everyone. I would like to first provide additional details with the progress we continue to make regarding labor costs within the critical illness recovery hospital division. Overall, our salaries, wages, and benefits as a percentage of revenue decreased from 59.8% in Q4 of the prior year, down to 57.6% this past quarter. Our SW&B as a percentage of revenue improved as the quarter progressed. Our year-to-date basis with regards to SW&B as a percentage of revenue decreased from 63.4% in '22 down to 57.2% in '23. Thus far in 2024, our SW&B as a percentage of revenue has continued to trend favorably and we expect to finish at or below 55% in Q1. This past quarter we had a sequential reduction from Q3 to Q4 in our RN agency costs with a decrease in both utilization and agency rates. The reductions realized were 17% in RN agency costs, a drop in RN utilization from 15% to 14%, and a decrease in agency rate from $78 to $70. RN agency utilization decreased throughout the quarter from 14.4% in October, 13.8% in November and 13% in December. Nursing sign-on and incentive bonuses dollars also decreased by 5% and we had a 26% decrease in orientation hours. Moving on to our financials. In Q4, equity and earnings of unconsolidated subsidiaries was $10.2 million compared to $6.8 million in the same quarter of the prior year. Net income attributable to non-controlling interest was $15.5 million compared to $10.2 million in the same quarter of the prior year. Interest expense was $50.8 million in the fourth quarter. This compares to $47.3 million in the same quarter of the prior year. The increase in interest expense was attributable to an increase in interest rates. This was offset by a decrease in our revolving credit facility when compared to Q4 of '22. At the end of the quarter, we had $3.7 billion of debt outstanding and $84 million of cash on the balance sheet. Our debt balance at the end of the quarter included $2.1 billion in term loans, $280 million in revolving loans, $1.2 billion in our 6.25 senior notes, and $68.2 million of other miscellaneous debt. We ended the quarter with net leverage for our senior secured credit agreement of 4.54 times. As of December 31, we had $434 million of availability on our revolver. The interest rate on $2 billion of our term loans is capped at 1% SOFR plus 300 basis points through September 30, 2024. For the fourth quarter, operating activities provided us with $179.4 million in cash flows. Our day sales outstanding, or DSO, was 52 days as of December 31, 2023, this compared to 55 days at December 31, 2022, and 52 days at September 30, 2023. Investing activities used $69.6 million of cash in the fourth quarter. This includes $60.6 million in purchases of property, equipment and other assets and $9 million in acquisition and investment activity. Financing activities used $103.3 million of cash in the fourth quarter. This was primarily due to $60 million in net payments on a revolving line of credit, $16 million in dividends on our common stock, $13.4 million in net payments on other debt, which included $5.3 million of term loan payments and $12.5 million in net payments and distributions to non-controlling interests. As stated previously, we did not purchase any shares under our Board-authorized repurchase program this quarter. Last quarter, the Board approved a two-year extension of the share repurchase program, which now remains in effect until December 31, 2025, unless further extended or earlier terminated by the Board. We are issuing our business outlook for 2024 and expect revenue to be in the range of $6.9 billion to $7.1 billion. Adjusted EBITDA is expected to be in the range of $830 million to $880 million. And finally, our expected range for earnings per fully diluted common share is $1.88 to $2.18. We expect capital expenditures to be in the range of $225 million to $275 million for 2024. 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, Operator

Thank you. Our first question comes from Justin Bowers from Deutsche Bank.

Justin Bowers, Analyst

Hi. Good morning, everyone. Could you talk about some of the moving parts in the guide and then any additional color you can give us by segment would be appreciated as well. How you're thinking about some of the segments playing out for the year?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Sure, Justin. This is Marty. The outlook we provided reflects an assessment of the four business segments, considering both challenges and opportunities. The inpatient rehab and Concentra are performing very well. However, we faced some challenges in our critical illness recovery hospitals due to high-cost outliers, and there were cuts to the Medicare portion of our outpatient rehab. This is all factored into the outlook. Therefore, you can expect that the performance of the critical illness recovery hospitals and outpatient rehab will be somewhat subdued because of these factors. Nonetheless, both inpatient rehab and Concentra continue to show strong revenue and EBITDA growth.

Justin Bowers, Analyst

Okay. Understood. And I just wanted to ask one about a couple about LTAC and then one on outpatient rehab. So I think you said that LTAC is tracking towards 55% SWB in first quarter. I just want to clarify that I heard that correctly. And then is that sort of the implication there, that volumes are up sequentially? And then just one more. Do you have another LTAC coming online in 2024 this year? So, I guess, a bit of a three-parter.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Sure. The first part of the question was the 55%. And yes, you did hear that correctly. We are trending towards 55%. We have seen volumes up in the first quarter, and we do have a hospital coming on critical on this recovery hospital in Q2.

Justin Bowers, Analyst

Okay, I understand. Regarding outpatient rehab, I recognize there have been challenges with Medicare, but your team has been making consistent operational improvements over the past four to six quarters. Do you anticipate margins in that segment will improve this year? Also, I'd like your thoughts on the path to reaching the low to mid-teens margin that you aim for.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yes. As I mentioned before, we experienced cuts from Medicare, which dulled our growth in that area. We anticipate that as clinical efficiencies improve, we will likely reach margins in the low to mid-range teens within the next two to three years.

Justin Bowers, Analyst

Okay. Thanks. I'll jump back in queue.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Thanks, Justin.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck from Bank of America.

Kevin Fischbeck, Analyst

Great. Thanks. Maybe just to go back to the guidance, the range, I guess, from a percentage perspective, looks a little wide. What are the things that you think are kind of the things that could push you to the high end or the low end of the guidance range?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

I think the primary item for us, Kevin, is the potential impact on the high-cost outliers on the critical illness recovery hospitals. And that's why we were pretty wide on the range.

Kevin Fischbeck, Analyst

Okay. And then, I guess the improvement that you made in the Q4 on the labor side of things happened with volume being a little bit weak. And I just want to see, it seems it should be easier to staff when volumes are a little bit light. It sounds like you're expecting volumes to kind of come back. Is there anything you need to do on the hiring side or any trends you could point to on the hiring side that kind of say, as volumes normalize, you still be able to make progress on the temp staffing side of things?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yeah. For us, what we've seen is we are back to pre-pandemic with regards to our staffing. If you recall, we talked about, on average, pre-pandemic what our different buckets of nurses are in. So we have our full-time nurses. That's pretty much back to where we've been pre-pandemic. We think we're seeing PRN actually increase, which is a good thing. And historically we've been in that 15% to 18% as far as agency nursing, and we're down to 13%, 14%.

Kevin Fischbeck, Analyst

I think what the..

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

I think what the...

Kevin Fischbeck, Analyst

If you consider reducing the staffing level, what factors will help decrease the percentage of salaries and benefits? Is it primarily related to occupancy and its impact, or does it involve rates as well?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yeah. It really is. It's volume. Volume will do wonders to get that percentage down. Yeah. I mean, volume is going to increase your top line.

Kevin Fischbeck, Analyst

Yeah. Okay. And then maybe the Concentra spin-off sounds really interesting. I was wondering if you could just maybe provide us or remind us kind of how you're thinking about the growth of Concentra and what that company might look like as a standalone company. You've done a really good job bringing the margins up in that business. Is there still room on the margin side, or is it more about organic growth, de novos and tucking acquisitions? How should we think about the growth of that business as a separate?

Robert Ortenzio, Executive Chairman

Well, it's Bob. I think Concentra is just a fabulous company because of their dominance in that occupational medicine space and their various levers they have to grow. I mean, they can grow by de novo, they can grow by acquisitions either in new markets or existing markets. So they have a lot of levers that they can press, and I think that they enjoy solid margins. Now, I'm not sure that I could sit here and project that their margins are going to go very much higher than they are right now, but they do have a lot of opportunities for growth. So we're pretty excited to have Concentra, as you know, all these years that we've had it, and I'm pretty enthusiastic about their prospects as a standalone company.

Kevin Fischbeck, Analyst

All right. Great. Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Ben Hendrix, Analyst

Hey. Thank you very much. You guys are continuing to deliver a really impressive margin in the inpatient rehab business despite what looks like a fairly aggressive development strategy. I just wondered if you could kind of go in a little bit more into your development pipeline, how you're thinking about that, and if there's any risk that we could see some drag on the margin over the next several quarters given the expansion. Thanks.

Robert Ortenzio, Executive Chairman

We feel optimistic about the development pipeline for inpatient rehab due to our strategy. Our approach involves partnering with large acute care systems, which means we don't have complete control over the timing of when those hospitals open. As you know, we typically wait to announce our rehab projects until they are signed and underway, but today I shared more information regarding the hospitals we hope to begin construction on or have completed in 2024. This includes 533 rehab beds and a much smaller number of critical illness beds. Any potential negative impact on earnings from this development has been taken into account in our guidance. We believe our size and platform will allow us to manage these additions without hindering growth in that division.

Ben Hendrix, Analyst

Thanks. And just if I may ask a different question here, we're getting some questions about the recently announced subpoena in California for Concentra. And I know these types of things pop up from time to time. But is there anything unique or notable about this subpoena, and is there any potential for it to delay your timeline on the spin? Thanks.

Robert Ortenzio, Executive Chairman

No, we do not believe that it will delay the separation of Concentra. These subpoenas can be issued for various reasons, and this one comes from the California State Department of Insurance. Investors in healthcare are often familiar with the qui tam actions that arise from whistleblower lawsuits, and these can occur at both state and federal levels. While we do not like receiving them, I hesitate to say they are routine, but they have become more common over the years. We disclosed it, as we feel it is our obligation. Beyond that, I cannot predict the outcome, but I can assure you that we will vigorously defend our business practices in California with Concentra.

Ben Hendrix, Analyst

Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Bill Sutherland from the Benchmark Company.

Bill Sutherland, Analyst

Thank you. Good morning, everyone. Bob, you mentioned that volumes for critical illness are starting to improve this quarter. Could you provide more details on that and your thoughts on its sustainability?

Robert Ortenzio, Executive Chairman

I can't provide much more detail on that. We are working to increase our disclosure, and discussing how the first quarter is developing is somewhat atypical for us, but we are happy to report that volumes are rising. This time of year, volumes can be influenced by various factors, but it was widespread and consistent across the country for our critical illness hospital, which I found significant. It's difficult to determine without more up-to-date data whether this increase is due to more respiratory cases, COVID, or other acute illnesses leading to that volume. Typically, our critical illness volumes rise when ICU admissions at acute care hospitals increase. Therefore, we can infer that the increase in our volumes is largely because the ICU volumes at our referral hospitals are also up. I hope this trend is sustainable. I don't see any signs indicating a health crisis in the United States. We expect to see patients, especially with an aging population, who have respiratory conditions that require ICU care suitable for our services. I remain optimistic, but as we've observed over the years, patient census can fluctuate. The first quarter usually performs well seasonally due to winter and colder months.

Bill Sutherland, Analyst

Yeah. It was interesting on a year-over-year basis. It's because you were kind of flattish last year. At Concentra, curious if you could give us a little more color on the blend of the business and why the employer visit side is not as strong and what might be the outlook for that. I know it helps the mix, but just curious about that.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yes, Bill. This is Marty. On the employer side, the various activities they engage in include pre-employment physicals and drug testing, which has decreased somewhat. This decline may be linked to our recent pricing increases, and there is significant price sensitivity related to that product.

Bill Sutherland, Analyst

But there is a pretty standard, I mean, steady demand side for drug testing.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yes, the Department of Transportation requires drug testing for all truck drivers, which has been beneficial. Employment has remained relatively steady.

Bill Sutherland, Analyst

Okay. Thinking about outpatient rehab for a second and the revenue per visit and I know the pressure there from Medicare. How do you think things could go this year for that number?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

I think we will see net revenue per visit increase. Our expectation is for that increase to be at least a couple of dollars, whether it's $2 or $3.

Bill Sutherland, Analyst

Okay.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

By the end of the year.

Bill Sutherland, Analyst

Right. I have a broader question for you, Bob. I'm examining the significant expansion plan for beds in the rehab hospital sector in relation to critical illness. I'm curious if this is merely a matter of timing or if it reflects the Board and Management's perspective on capital allocation, especially considering the margin profile of rehab hospitals and the growth opportunities in the critical illness market.

Robert Ortenzio, Executive Chairman

It's a good question regarding how we approach capital allocation. Our rehab division, which includes over 107 hospitals, has historically been our largest. I believe there will always be opportunities in that area. We've faced some reimbursement challenges in critical illness, particularly with the high-cost outlier threshold issue. However, rehab hospitals will likely encounter challenges as well in the future. We prioritize capital for significant partnership opportunities, typically involving investments to build new hospitals, which can be expensive. We choose critical illness projects that are particularly compelling. We will keep adding new hospitals in that area. When presented with the chance to collaborate with strong partners in inpatient rehab, we aim to capitalize on those opportunities. Our development pipeline, which we've been building for many years, is currently strong, with excellent prospects for rehab deals. Historically, partnerships have demonstrated compelling returns and growth. The structure of these partnerships gives us confidence that we can better navigate any potential reimbursement challenges with a large system. Furthermore, the growth within these partnerships is noteworthy. We recently began construction of our fourth inpatient rehab facility in collaboration with the Cleveland Clinic. These opportunities are very attractive. Sometimes, replacing or relocating hospital units with our partners results in great deals. Therefore, while we anticipate growth in both areas, there may be faster acceleration in inpatient rehab. With the planned separation of Concentra, we expect to see growth in outpatient rehab, inpatient, and critical illness, but rehab presents a particularly good opportunity.

Bill Sutherland, Analyst

Got it. Thanks, Bob.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice from UBS.

A.J. Rice, Analyst

Hi, everyone. I have a couple of questions. I want to clarify something regarding the outlier threshold increase for critical access facilities or critical illness facilities, which I believe took effect on October 1. Do you have an early assessment of how that has impacted things? I'm trying to understand why it continues to be a significant variable in the guidance when we have already experienced a quarter with it in place.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

A.J., it really takes some time to evaluate something that significant regarding the high-cost outlier. We went from a little over $38,000 to $59,000. And remember, the length of stay for our patients is not five to six days; it's over 30 days.

Robert Ortenzio, Executive Chairman

I think it's not difficult for us, given our strong systems and data collection, to understand the impact. We recognized the effect well before it was implemented. The key concern is how effective our mitigation strategies will be. This year, the success of operators in mitigating the impact will unfold, and it can be more complex than anticipated because we need to keep our referral sources satisfied. However, we also need to consider that hitting more high-cost outliers will lead to greater losses. This is why we have kept some flexibility in our guidance.

A.J. Rice, Analyst

Could you please remind me what percentage of your admissions typically fall into that status? I understand this may change with the higher threshold, but can you provide an estimate of how many patients are affected in that area of your business?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yeah, A.J. It varies pretty significantly hospital by hospital and then on average also. So we really have not provided that because of that variation.

Robert Ortenzio, Executive Chairman

As we analyze the entire industry, Select Medical likely has a higher number of high-cost outliers compared to the industry average because we accept patients with greater acuity. Our long-standing strategy has been to avoid site-neutral patients and focus solely on those with the highest acuity. We believe this aligns with the intent of the 2014 criteria. Our clinical programs are designed specifically to care for these very complex patients. Therefore, the increase in the high-cost outlier threshold negatively impacts providers who are dedicated to caring for the patients that the policy intends for LTACs. Consequently, our outliers tend to be higher, and we are affected more by these changes.

A.J. Rice, Analyst

Okay. That makes sense. And, I think in the fourth quarter, you called out that you had about $3 million of startup costs for development, and that's similar to what you had in the fourth quarter of '22. Have you talked about the total amount given the development projects that are underway, joint ventures, et cetera? How much '24 startup costs will be compared to what startup cost ended being up in '23? Is it a headwind, tailwind? How does it shake out?

Robert Ortenzio, Executive Chairman

I think for '24, our projected startup loss is $12.3 million, and that is reflected in the business outlook.

A.J. Rice, Analyst

Do you know how that compares with 2023? Is it a similar amount?

Robert Ortenzio, Executive Chairman

Yeah. It's a similar amount in 2023.

A.J. Rice, Analyst

Okay. All right. And then just last question. Marty called out that obviously some of these interest rate caps and swaps, et cetera, expire in September. What is your assumption when you think about your outlook as to what happens in the fourth quarter with respect to your borrowing cost or what mitigation strategies are you thinking about, or any comment on that?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yeah, A.J. We anticipate that we'll see probably about a $20 million increase in interest expense for the fourth quarter. On an EPS basis that's about $0.12 a share.

A.J. Rice, Analyst

Okay. Is there any way to address that, or is it just a matter of accepting that the rates are what they are?

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

Yeah. At this point in time, the only way to mitigate it is to have the indices come down, right?

A.J. Rice, Analyst

I was considering the possibility of focusing on paying down debt or something similar. I understand you mentioned there were no buybacks this quarter, and I was wondering if that topic is being reviewed or not.

Martin Jackson, Senior Executive VP of Strategic Finance and Operations

We will be very opportunistic as we always are and take advantage of any opportunity we can to reduce that interest expense.

Robert Ortenzio, Executive Chairman

We are currently evaluating our options and have over six months to consider potential opportunities. As Marty mentioned, this accounts for a reduction of $0.12 in the earnings per share reflected in our guidance due to the cap being lifted. However, we will seek out opportunities.

A.J. Rice, Analyst

Okay. All right. Thanks a lot.

Operator, Operator

Thank you. At this time, I would now like to turn the conference back over to Mr. Ortenzio for closing remarks.

Robert Ortenzio, Executive Chairman

No closing remarks. Thank you, operator, and thanks, everybody, for joining us.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.