Q3 2022 Ensign Group Inc Earnings Call

October 27, 2022

[music].

Good day, and thank you for standing by.

Welcome to the Ensign Group Q3, 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

You ask a question during this session you will need to press star one one on your telephone.

It is now my pleasure to introduce executive Vice President Chad Keetch.

Thank you welcome everyone and thanks for joining us on our call today.

We filed our earnings press release yesterday and it is available on the Investor Relations section of our website at enzyme group Dot net.

A replay of this call will also be available on our website until five PM Pacific on Friday November 25th 2022 and.

We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today October 27, 2022, and these statements have not been nor will be updated subsequent to today's call.

Also any forward looking statements made today are based on management's current expectations assumptions and beliefs about our business and the environment in which we operate.

These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed.

First or implied on today's call listeners should not place undue reliance on forward looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results.

Except as required by federal law.

Okay.

Perfect.

Okay.

Yes.

Good afternoon.

Okay.

This is Dan.

Okay.

Alright.

Perfect.

Absolutely.

Mark.

Okay.

Good afternoon.

Okay.

Terrific.

Okay.

Okay great.

Perfect.

Okay.

Hey, Paul.

All of our operating companies that service Center standard there and the insurance captive are operated by separate wholly owned independent entities that have their own management employees and assets.

References herein to the consolidated company and its assets and activities as well as the use of words like we us our and similar terms are not meant to imply nor should it be construed as meaning that the ensign group has direct operating assets employees or revenue or that any of the subsidiaries are operated by the <unk>.

Also we supplement our GAAP reporting with non-GAAP metrics when viewed together with our GAAP results. We believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports.

GAAP to non-GAAP reconciliation is available in yesterday's press release and is available on our Form 10-Q.

And with that I'll turn the call over to Barry Port our CEO Barry.

Thanks, Chad and thank you for joining us today.

We're proud to report another strong quarter and are pleased that we have been able to continue to improve our clinical and financial results across our portfolio.

We are grateful for the efforts and commitment of our teams caregivers and leaders who work endlessly to love one another and support each other which allows for the high quality patient outcomes they consistently achieve.

In spite of yet another quarter of impressive results. We also recognize that there are many opportunities to improve on certain operational fundamentals both in the existing operations and the growing number of new acquisitions.

During the quarter, we experienced steady improvement in Occupancies Medicare revenue in managed care revenue. Our operators also achieved sequential growth in overall occupancy for the seventh consecutive quarter.

Our operations experienced strong quarter over quarter growth in skilled mix revenue was same store skilled mix revenue of 54% and transitioning skilled mix revenue of 48%.

Additionally, we saw continued improvement in occupancy with same store and transitioning operations, increasing by two 4% and five 3% respectively over the prior year quarter.

Recently, the federal government extended the state of emergency to January 2023, which keeps in place many of the regulatory and other forms of assistance helpful that patient care, we continue to benefit from improved Medicaid funding in several states.

And while we certainly can't know for sure what the Covid future looks like it is possible that this additional funding will not continue to be extended.

Given the improvements we continue to see in occupancy skilled mix and reimbursement we are raising our annual 2022 earnings guidance again to $4 10, and $4 18 per diluted share up from the previously increased guidance of $4 five.

To $4 15 per diluted share in.

In addition, we are raising our annual revenue guidance to $3 1 billion to $3 3 billion up from the previously increased revenue guidance of $2 $96 billion to $3 billion.

The new midpoint of this 2022 earnings guidance represents an increase of 14% over our 2021 result, and is 32% higher than our 2020 results were.

We remain confident that our operating model will continue to allow each operator to form their own market specific strategy and to adjust to the needs of their local medical communities, including methods for attracting new health care professionals into our workforce and retaining and developing our existing staff.

We're very excited to be adding new operations in several geographies.

These transitions will take time, particularly given the continued labor pressures, but with each new operation, we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation REIT reaches the enormous clinical and financial potential.

An important part of the <unk> story has been our local leaders the ability to acquire struggling operations and transform them into facilities and choice to their communities. We are confident that as we diligently apply our proven principles.

All of our recently acquired operations will become high performing ensign caliber operations.

To be clear when we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before.

Find that with a number of very attractive acquisition opportunities, we see in the near and far horizon, and we are poised to again showcase our ability to find acquire and transition performing and underperforming operations by applying proven ensign principles developed over two decades.

As we relentlessly follow and protects the cultural fundamentals that got US here. We are confident that we will continue to consistently produce world class clinical and financial performance.

Next I'll ask Chad to discuss our recent growth Chad.

Thank you Barry as we expected we continue to add to our growing portfolio and are very excited about the 17, new operations, we added during the quarter and.

Making this one of the biggest acquisition quarters in several years.

All of these additions were carefully selected amongst the many opportunities that came our way so far this year and were chosen because of the enormous clinical and financial potential we saw in each operation.

We have mentioned many times that we are seeing many opportunities, but that if pricing that was still in our view too high in many cases however.

However, as the consummation of these recently announced deals show, we haven't seen pricing improve in certain pockets we.

We have been patient and are very excited to see our disciplined paying off.

With the successful addition of these additional operations all of which represent significant potential for operational and financial improvement.

We look forward to seeing them contribute to the success of their clusters in their markets as they implement proven enzyme operational and clinical principles.

These operations include health care campus, and a skilled nursing operation in Arizona, one skilled nursing operation in Nevada, two skilled nursing operations in South Carolina, and 12 skilled nursing operations in Texas totaling an additional 2276 new operational beds.

While most of them are located in some of our more mature geographies like Arizona and Texas, others are in relatively new healthcare markets for us like South Carolina and Nevada.

We are particularly excited about doing our first set of acquisitions in South Carolina since we entered that space several years ago.

As we've said before entering new states is challenging and can often take time to gain the trust of the local health care community.

With this new growth in South Carolina, we hope that we will be able to continue to build the enzyme footprint in the mid Atlantic region.

And total standard-bearer added seven new real estate operations, all of which will be leased to an enzyme affiliated tenant and enzyme affiliates entered into 13, new long term leases with third party landlords.

As this recent activity illustrates the ratio between leased and owned will vary depending on the circumstances.

We are first and foremost focused on the operational health of acquisitions. So when it makes sense and the pricing is right. We will opportunistically purchase of real estate. The same time when attractive long term leases come our way we'll sign those two as we've shown over our 23 year history, there will be many opportunities to do both.

Looking forward, we have another busy fall and winter ahead of us and are preparing for even more growth in 2023.

While we expect the pace of closings to slow for the remainder of the year. We continue to see a wide range of large medium sized and small portfolios. Some of which are strong performers that we expect to participate in early next year.

With our locally driven operating model, we have lots of operational bandwidth to grow across dozens of markets and with our recently updated credit agreement and a healthy amount of cash on hand, we have a lot of dry powder to grow and expect some of the industry wide changes to lead to even more opportunities in the near and long term future.

We continue to provide additional disclosure on standard bear, which is now comprised of 102 properties owned by the company and leased to 74% affiliated skilled nursing and senior living operations in 2019 year living operations that are leased to the pennant group.

Each of these properties are subject to a triple net long term leases and generated rental revenue of $18 7 million for the quarter of which 15 million was derived from ensign affiliated operations.

Also for the quarter standard bearer produced $12 5 million in <unk> as of the end of the quarter had an EBITDAR to rent coverage ratio of two two times.

Lastly, during the quarter, we paid a quarterly cash dividend of $5 five per share.

Given our strength, we plan to continue our 20 year history of paying dividends into the future. We also continue to delever our portfolio achieving our lease adjusted net debt to EBITDA ratio of two times.

Currently we have $593 million of available capacity under our line of credit which were combined with the cash on our balance sheet gives us nearly $900 million in dry powder for future investments. We also own a 107 assets of which 102 are held by standard there and 83 of which are one completely debt free.

And are gaining significant value over time, adding even more liquidity to help us with future growth.

And with that I'll turn the call back over to Spencer, our COO to add more color around operations Spencer.

Thanks, Chad is berrien chat have indicated an important part of our story has been our local leaders ability to acquire struggling operations entering.

And formed them into enzyme caliber operations.

We also want to be clear that while our teams are urgent and decisive in taking steps to quickly improve the operations. We acquire are primary commitment and acquisitions is building sustained performance and long term value.

This is important because after years of Covid related challenges expiring emergency funding from the government.

And in the midst of a very difficult staffing environment. Many of the deals we're seeing including the recently acquired facilities are deeply distressed operations.

The past couple of years have been very difficult for skilled nursing operators and we see evidence of that in the low occupancy high utilization of contract labor and poor clinical and financial health of the facilities. We recently acquired.

However, we are confident that as our clusters in resource teams continue to infuse culture and systems into these facilities.

Like the one hundreds of others that we have transitioned over the past two decades will become sustainable quality operations that provide strength to our organization.

Benefiting the communities they serve.

Notably many of the acquisitions of the past few months are located in Texas, and so we'd love to share. An example of a Texas facility that was acquired a few years back to illustrate the post acquisition turnaround process that continues to be sell fundamental to our long term success.

On November one 2019, we acquired west over Hills rehabilitation and healthcare.

124 bed skilled nursing operation located in San Antonio, Texas.

This operation was a one star facility when we acquired it and it suffered from a poor reputation in the community.

Which was evident in persistent staffing challenges low occupancy and poor survey results.

In spite of these challenges Jerry <unk> executive director, and Ginny Rodriguez nurse practitioner and director of nursing boundless potential in the facility safe.

<unk>, the strong partnership and build a culture of developing staff and increasing clinical competence.

For example to ensure adequate staffing and an extremely tight labor market. They became one of just a few facilities in Texas to be approved and licensed to have their own CNA classes.

At the same time, they pursued partnership agreements with multiple nursing schools in their area.

And became a training site for LPN and RN.

Because people want to work at West over hills, they have increased their clinical competency, which enables them to accept high acuity admissions and deliver great outcomes and to increase their CMS quality rating to five stars.

As a result hospital systems and managed care organizations have chosen west over hills for preferred partnership agreements.

This is led to an incredible 225% increase in managed care days compared to Q3 from last year.

While overall occupancy has jumped by over 25% during that same period.

As you would expect financial results have followed revenues increased over the prior year quarter by 32%, while EBIT has improved by an incredible 151%.

While these changes didn't happen overnight the tireless efforts of the west over team and doing the right things for their residents and staff and their community has built a sustainable enzyme caliber operation that will produce exceptional results long into the future.

The second example comes from South Carolina, We entered the state back in 2016 and since then our talented leaders at the four existing facilities have relentlessly strengthened their results to the point, where each facility is financially solid and has achieved an overall CMS rating of four or five stars.

Because of these results our local teams have determined that they are strong enough to help bring on new growth as evidenced by our recent announcement of acquisitions in that state.

For example, <unk> post acute rehabilitation is a skilled nursing facility in the Columbia Metro area.

It is led by administrator, Andrew Mcquillan, and director of nursing Amanda customer.

These two meters have helped turn opus into a facility of choice in.

In addition to cutting their clinical turnover rate in half they have grown occupancy by 18% and skilled revenues by 58% over Q3 of 2021, all without using any contracted labor.

These results in combination with similar progress in the other three cluster facilities have allowed to opus team to play a very active role in supporting the two new South Carolina acquisitions and now they are hard at work, helping these new partner operations begin their own similar transformation.

We hope that these examples are helpful. In illustrating some of the many different levers that our local operators are pulling in order to meet the needs of their healthcare continuum partners with that I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance Suzanne.

Thank you.

Morning, everyone. Please have financials for the quarter are contained in our 10-Q and press release filed yesterday.

Additional highlights from the quarter include the following.

GAAP diluted earnings per share.

An increase of 19% and.

Adjusted diluted earnings per share of $1 restaurant, an increase of 14%.

Total GAAP and adjusted revenue for both the $770 million an increase of 15%.

GAAP net income was $56 2 million an increase of 19%.

Adjusted net income was $59 2 million an increase of 14%.

Other key metrics as of September 30.

Cash and cash equivalent of 399 and cash flow from operations of $222 million.

We also wanted to address the current status of the state of emergency on reimbursement models.

All such as extending the public health emergency for another 90 days.

With this extension of the federal government will continue to evolve getting a flavor enhanced avnet funding through January 11 2023.

Also on October one 2020.

PDP and Medicare payment rate increase.

7%.

Which included a net <unk>.

That's an increase of five 1% that incorporated a positive forecasting error and negative productivity adjustment offset by multiple key 3% parity adjustments.

Additionally, as a reminder, the four 2% sequestration Bakken price on July 22004.

As Barry mentioned, we are once again, raising our 2020.

Any problem as.

At $4 10 to $4 18 per diluted share.

Our revenue guidance to $3 1 billion to.

The $3 <unk> billion.

This guidance is based on diluted weighted average common shares outstanding of approximately 37 million.

Tax rate of 25%.

The inclusion of acquisitions closed to bolt and the inclusion of management's expectation on reimbursement.

With the primary exclusion coming from stock based compensation, one time labor pool gains.

Gains on the sale of alcohol.

Okay.

Additionally, other factors that can impact quarterly performance include variations in reimbursement systems delays and.

<unk>.

Thank you.

Seasonality occupancy skilled mix the influence of the general economy on census, and staffing.

Short term impact of our acquisition activity.

Variations in insurance accruals.

And COVID-19, and other factors.

With that I'll turn the call over to Gary Gary.

Thanks Suzanne.

We'd like to apologize for the earlier delayed due to technical difficulties and we also just want to thank you all for joining US today once again express our appreciation to our shareholders for their continued confidence and support.

It's always important to conclude by recognizing our local leaders service Center partners and field resources for their heroic efforts along with those of our nurses therapists and other frontline care providers.

<unk> continue to provide industry, leading example of life enriching service to our residents co workers and communities.

We simply would not be who or what we are today without their incredible ownership and personal sacrifices.

Everyone mentioned is working tirelessly to love one another as they provide a wonderful experience for our residents and patients in spite of the challenges. They continue to face. So thank you for making us better every day.

I will now turn to the Q&A portion of our call. Andrew can you. Please instruct the audience on the Q&A procedure.

Certainly as a reminder, ladies and gentlemen to ask a question you will need to press star one one on your phone.

Again to ask a question. Please press star one one Psa.

We.

Compile the Q&A roster.

Our first question comes from the line of <unk> with Stifel.

Hi, Good morning, guys. So berrien Suzanne you talk about the phasing out of some temporary state relief next year.

Just thinking about the various drivers and a recovery in occupancy is doing progress skill mix may normalize and we got the <unk>.

Medicare rate update.

Pretty strong Medicaid rate increases so could you maybe give us some pointers on how we should think about the revenue building blocks.

In terms of growth through 2023, and whether we can see the impressive 8% organic growth that you achieved this quarter, maybe that will moderate, but maybe offset by higher transitional performance similar to the two examples that <unk> highlighted and obviously more acquisitions and how about any early read on them.

Commscope for next year as well.

Okay I'll try to remember all of those Tao.

I'll start I'll start with I'll start with the revenue side I mean, obviously there are some.

Some pieces to the revenue picture next year that aren't entirely clear, but but for the most part.

There's a lot of visibility into kind of where we're headed.

I feel like the CMS has been.

Really thoughtful about that.

The changes they've made.

Within the confines that they operate in.

And so we have we have.

Good outlook there on the state side, obviously, the overhang there would be on the match funding and whether or not the state of emergency continues that.

All said, we have really good visibility into our state by state funding for the most part.

Whether the state of emergency sticks with us or not.

We have in our larger states like Arizona, and California in some of our other states. We've got good long term visibility into into our rates for 2023 that will be stable, regardless of the state of emergency and Aetna that funding.

We also have a pretty clear indication that in Texas, one of our bigger states that <unk>.

Our rate increases on the horizon.

Healthy increase its much needed.

The only piece of uncertain there is on the.

On the timeframe between when the potential funding might go away and when the rate increase would happen towards the latter half of the year.

And that's a piece of it will become more clear over the next couple of months and Thats really kind of the only piece of the picture that that isn't entirely clear for us. So overall, we feel really good about.

The revenue picture for 2023, and how it's shaping up.

<unk>.

On the other front.

I would just tell you the fundamentals behind our revenue, which is obviously occupancy we feel really strongly about our continued progress that we've had through this last quarter, but also more importantly, the <unk>.

Six preceding quarters, where we've had very stable steady growth regardless of whatever COVID-19 challenges, we faced and thats been very encouraging to see that trend continue in spite of what is typically somewhat of a.

Somewhat of an up and down road as we experienced seasonality and so we feel real confident about that.

As far as the labor environment goes.

<unk>.

We were seeing some really good indicators from going from first to second quarter, where we saw our agency utilization drop.

When we entered into the third quarter is as you know we experienced.

Quite a quite a large step up in Covid cases.

That affected both our patient population as well as our employees.

We had 80% growth in both those populations both employees and patients and obviously when you've got a situation like that you tend to go backwards a little bit on your on your progress with agency.

But that all said in spite of that because of the offset we saw.

Really good skilled mix.

The acuity level of the patients that we were taking care of we were we were able to mitigate a lot of that we.

We expect our progress to continue on.

Decreasing agency utilization.

Amongst our affiliated entities, we we also see indicators that.

Our wage growth is stabilizing it's the lowest it's been since last year in terms of quarter over quarter wage growth.

It's not that we expected.

Sure.

The labor situation will.

Moderate in the near term it will probably take several quarters for us to get to more of a stable steady state, but that said our expectation is that we'll continue to see progress when especially when we're not dealing with.

Ups and downs of Covid cases, but that all said, even when we do have.

Covid surge surges that affect our operations.

I think we've shown and we feel confident that we'll be able to deal with it even if we have to have a temporarily.

Increased utilization of agency labor.

Got it thanks for that great.

Great color.

Pull up is what I saw in the press release that you said you expect some.

Do you expect the pace of deal closing just slightly slowed down in the next few bonds I think Spencer also mentioned some deals.

You recently closed on more distressing nature. Just curious if you are seeing more macro uncertainties out there the slowdown anything unique to that type of transaction you are working on.

Yes, no great question, Todd Thanks for that.

Really just a matter of.

Just the rhythms of the deals in closings.

The timeline that it takes to get licenses in place and those sorts of things. So theres, probably no science really around that so much we will have some deals that will happen throughout the remainder of the year, but just <unk>.

17.

Quarter.

A significant amount and certainly.

In certain markets.

The Austin, Texas market.

Added for.

Four buildings.

And so.

The way our model works right at each each local geography is responsible to transition those new operations and in doing so.

<unk>.

Leave their existing building to go support the new operation and so our bandwidth to grow varies by geography and based on the number of deals we've done in that particular geography. So that's also probably something.

Just to mention that we always keep in mind.

When we have a big surge in deals we want to make sure we're able to digest those and transition them the right way.

But that said doing.

For deals in Austin, Texas doesn't impact our ability to grow in Houston are obviously other states. So so yes.

We definitely continue to see a healthy pipeline of opportunities and are excited about.

The deals that we see on the on the near term horizon at this point in the year.

The deal is pretty far along and its likely to slip into next year and so that's a little bit why we're kind of guiding towards.

Next year Q1 is maybe the next quarter, where we see some.

Some more significant growth activity, so hopefully that helps.

Great. Thank.

Thank you.

Thanks.

Thank you.

Your next question comes from the line of Scott Fidel with Stephens.

Great.

Thanks, Good afternoon.

First question just wanted to just pick back up on occupancy and you've.

<unk> had a pretty.

Sort of predictable ramp and recovery in occupancy that you've been talking about now and we've been seeing for a while just interested as we sort of look ahead now.

It's about the fourth quarter and then into 2023.

How youre thinking about sort of occupancy trends and would you expect to see sort of that continued ramp higher or is there any seasonality that you would also call out that we should be thinking about.

Yes look I mean I think.

It's a great question, Scott and it's obviously one that we're focused on.

A bunch operationally.

I think there is a pretty high degree of confidence that our trend will continue.

We're sitting on a same store basis, 70, almost 77%, which is getting really close to kind of where we were pre pandemic.

We have several markets that are ahead of their pre pandemic occupancy.

It's more the kind of rural markets and secondary markets and kind of take their time to build back.

So, but fundamentally I think we feel optimistic that the pace will continue it typically accelerates in the fall so I wouldn't be surprised for a rate of growth in the fall is higher than is typical.

And that might accelerate our ability to get that closer to kind of where we were before but but.

That is one area that we look at is kind of getting back to pre pandemic occupancy I think our thought and expectation, though is that there is so much potential in so many of these opt.

Operations that our sites are well beyond kind of pre pandemic levels I think our feeling is that we will.

We will continue to see growth.

For for quite a while.

Okay got it.

And then just.

We drove into pricing across the payer classes quite a bad word.

Would be interested just just if you could give us an update on your managed care contracting for for 2023.

How are how are your updates looking in terms of factoring in the inflationary environment and then just interested just.

With some of the Medicare advantage plans and some of the focus around value based contracting if theres any.

Sort of a new or innovative contracts that youre exploring.

When you think about your commercial managed care payers.

Yeah. Thanks for the question and thank everyone now as we've been talking to a lot of our managed care payers are starting to recognize the additional inflation both on the wage front and other supplies Brandon So definitely looking at in negotiation with a lot of them to have higher than typical rate going into next year.

As a recognition of that additional inflation on the way as well.

Okay, and then just a last quick one just on adjusted EBITDA margins all in.

You settled at around 12, 5% of the <unk> just interested ads.

How you see that as the jumping off point for fourth quarter, and obviously there is a number moving to.

2023, I think in the guidance, yet, but would you view this as being in the range of what you would see as a sustainable sort of margin in terms of what you've been producing.

Looking out at the third quarter and Thats It for me.

I'll start and Suzanne can add any color.

Yes, I think so.

With the high acquisition activity there is some obvious.

Pressure on margins whenever we acquire a bunch, we typically see higher expenses in the beginning.

The offset though.

Thankfully with the timing of this growth is that.

You will see the full impact of our Medicare increase will we.

We start to see some of the state increases kick in more fully during the fourth quarter as well and so I think all in all of that sets the stage for AR.

What we think is a pretty stable margin going from Q3 to Q4 and I think the other X factor related to the cabinet again, what you see next year every single time, when we wouldn't have it does come in is that we grow revenue.

Our revenue growth and with maybe a little bit higher.

Cost of services on that.

And then one kind of consistent with what we saw during Q3.

Yes.

Okay. Thank you.

Thank you and our next.

Next question comes from the line of Ben Hendrix, with RBC capital markets.

Hey, Thanks, guys. Most of my questions have been answered, but just a quick numbers question on standard bear can you guys offer any guidance on the total rental revenue in SFO on a run rate basis suggested for the guest the pro forma contribution of the real estate acquisitions that you guys have done over the past quarter. Thanks.

Yes, I appreciate the question Ben.

Really it was only one.

<unk>.

So.

Yes.

Certainly there isn't.

A material increase or change there, but I don't know if that would add anything else we can say.

Sorry about that I would say you know that there is there's one that's happening in Q4, and then you see the other ones are already in the <unk>.

Ones that happened during the quarter.

<unk> occurred already in the Q3 number so it's going to be just a small increase is not going to be a large increase kind of running into.

In Q4.

Yes.

Okay. Thank you very much.

Thanks Pat.

Thank you.

Showing no further questions so with that I'll hand, the call back over to CEO , Barry Port for any closing remarks.

Yes, Thank you Andrew and we'd like to thank everyone for joining us today. Once again, we appreciate your time and support and hope you have a great day. Thanks.

Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Yeah.

Okay.

Yes.

Sure.

Yes.

Okay.

Yeah.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Sure.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Yeah.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Sure.

Okay.

Sure.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

[music].

Okay.

Sure.

Yes.

Okay.

Right.

Sure.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

[music].

Yes.

Sure.

Yes.

Okay.

Yes.

Sure.

[music].

Okay.

Sure.

Okay.

Yes.

Okay.

Great.

Yes.

Great.

Thanks.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Yes.

Sure.

Yes.

Sure.

Yes.

Right.

Okay.

<unk>.

Yes.

Thanks.

Okay.

Thanks.

Sure.

Okay.

Yes.

Great.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Thanks.

Yes.

Sure.

Yes.

Okay.

Yes.

Thanks.

[music].

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Thanks.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Thanks.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Great.

Okay.

Yes.

Okay.

Yes.

Sure.

Hum.

Yes.

Greetings.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Steve.

Sure.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Yeah.

Okay.

Great.

Sure.

Yes.

Good day, and thank you for standing by welcome.

Welcome to the enzyme group Q3, 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

It is now my pleasure to introduce executive Vice President Chad Keetch.

Thank you welcome everyone and thanks for joining us on our call today.

We filed our earnings press release yesterday and it is available on the Investor Relations section of our website at enzyme group Dot net.

A replay of this call will also be available on our website until five PM Pacific on Friday November 25 2022.

Also any forward looking statements made today are based on management's current expectations assumptions and beliefs about our business and the environment in which we operate.

These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call.

Listeners should not place undue reliance on forward looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results.

Except as required by federal law.

Okay.

Sure.

Yes.

Okay.

Good afternoon.

Okay.

The subsidiary.

Okay.

Perfect.

Okay.

Alright.

Correct.

Yes.

Okay.

I understand.

Okay.

Perfect.

Okay.

Bob.

All of our operating companies that service Center standard bear and the insurance captive are operated by separate wholly owned independent entities that have their own management employees and assets.

GAAP to non-GAAP reconciliation is available in yesterday's press release and is available on our Form 10-Q.

And with that I'll turn the call over to Barry Port our CEO Barry.

Thanks, Chad and thank you for joining us today for.

We're proud to report another strong quarter and are pleased that we have been able to continue to improve our clinical and financial results across our portfolio.

Our operations experienced strong quarter over quarter growth in skilled mix revenue was same store skilled mix revenue of 54% and transitioning skilled mix revenue of 48%.

Additionally, we saw continued improvement in occupancy with same store and transitioning operations, increasing by two 4% and five 3% respectively over the prior year quarter.

And while we certainly can't know for sure what the Covid future looks like it is possible that this additional funding will not continue to be extended.

To $4 15 per diluted share.

In addition, we are raising our annual revenue guidance to $3 1 billion to $3 3 billion up from the previously increased revenue guidance of $2 96 billion to $3 billion.

The new midpoint of this 2022 earnings guidance represents an increase of 14% over our 2021 result, and is 32% higher than our 2020 results were.

We are very excited to be adding new operations in several geographies.

These transitions will take time, particularly given the continued labor pressures, but with each new operation, we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reason reaches enormous clinical and financial potential.

An important part of the story has been our local leaders ability to acquire struggling operations and transformed into the facilities and choice to their communities. We are confident that as we diligently apply our proven principles.

All of our recently acquired operations will become high performing ensign caliber operations.

To be clear when we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before.

Combine that with a number of very attractive acquisition opportunities, we see in the near and far horizon, and we are poised to again showcase our ability to find acquire and transition performing and underperforming operations by applying proven ensign principles developed over two decades.

As we relentlessly follow and protects the cultural fundamentals that got US here. We are confident that we will continue to consistently produce world class clinical and financial performance.

I'll ask Chad to discuss our recent growth Chad.

Thank you Barry as we expected we continue to add to our growing portfolio and are very excited about the 17, new operations, we added during the quarter.

Making this one of the biggest acquisition quarters in several years.

We have mentioned many times that we are seeing many opportunities, but that or pricing that would still in our view too high in many cases however.

However, as the consummation of these recently announced deals show, we haven't seen pricing improve in certain pockets we.

We have been patient and are very excited to see our disciplined paying off.

With the successful addition of these additional operations all of which represent significant potential for operational and financial improvement.

We look forward to seeing them contribute to the success of their clusters in their markets as they implement proven ensign operational and clinical principles.

These operations include a health care campus and a skilled nursing operation in Arizona, one skilled nursing operation in Nevada, two skilled nursing operations in South Carolina, and 12 skilled nursing operations in Texas totaling an additional 2276 new operational beds.

While most of them are located in some of our more mature geographies like Arizona and Texas, others are in relatively new health care markets for us like South Carolina and Nevada.

We are particularly excited about doing our first set of acquisitions in South Carolina since we entered that space several years ago.

As we've said before entering new states are challenging and can often take time to gain the trust of the local health care community.

With this new growth in South Carolina, we hope that we will be able to continue to build the enzyme footprint in the mid Atlantic region.

And total standard-bearer added seven new real estate operations, all of which will be leased to an enzyme affiliated tenants and ensign affiliated entered into 13, new long term leases with third party landlords.

As this recent activity illustrates the ratio between leased and owned will vary depending on the circumstances.

As we've shown over our 23 year history, there will be many opportunities to do both.

Looking forward, we have another busy fall and winter ahead of us and are preparing for even more growth in 2023.

While we expect the pace of closings to slow for the remainder of the year. We continue to see a wide range of large and medium sized and small portfolios. Some of which are strong performers that we expect to participate in early next year.

We continue to provide additional disclosure on standard bear, which is now comprised of 102 properties owned by the company and leased to 74 affiliated skilled nursing and senior living operations and 29 senior living operations that are leased to the pennant group.

Each of these properties are subject to a triple net long term leases and generated rental revenue of $18 7 million for the quarter of which 15 million was derived from ensign affiliated operations.

Also for the quarter standard bearer produced $12 5 million in <unk> as of the end of the quarter had an EBITDAR to rent coverage ratio of two two times.

Lastly, during the quarter, we paid a quarterly cash dividend of $5.05 per share.

Currently we have $593 million of available capacity under our line of credit which were combined with the cash on our balance sheet gives us nearly $900 million in dry powder for future investments.

We also own a 107 assets of which 102 are held by standard bear and 83 of which are owned completely debt free and are gaining significant value over time, adding even more liquidity to help us with future growth.

And with that I'll turn the call back over to Spencer, our COO to add more color around operations Spencer.

Thanks, Chad is berrien chat have indicated an important part of our story has been our local leaders ability to acquire struggling operations.

And formed them into enzyme caliber operations.

We also want to be clear that while our teams are urgent and decisive in taking steps to quickly improve the operations. We acquire are primary commitment in acquisitions is building sustained performance and long term value.

This is important because after years of covered related challenges expiring emergency funding from the government.

And in the midst of a very difficult staffing environment. Many of the deals we're seeing including the recently acquired facilities are deeply distressed operations.

However, we are confident that as our clusters in resource teams continue to infuse culture and systems into these facilities.

Like the one hundreds of others that we've transitioned over the past two decades will become sustainable quality operations that provide strength to our organization.

Benefiting the communities they serve.

On November one 2019, we acquired west over Hills rehabilitation and healthcare.

124 bed skilled nursing operation located in San Antonio, Texas.

This operation was a one star facility when we acquired it and it suffered from a poor reputation in the community.

Which was evident in persistent staffing challenges low occupancy and poor survey results.

In spite of these challenges Jerry <unk> executive director, and Jenny Rodriguez nurse practitioner and director of nursing boundless potential in the facility safe.

<unk> forged a strong partnership and build a culture of developing staff and increasing clinical competence.

For example to ensure adequate staffing and an extremely tight labor market. They became one of just a few facilities in Texas to be approved and licensed to have their own CNI classes.

At the same time, they pursued partnership agreements with multiple nursing schools in their area.

And became a training site for LPN and RN.

As a result hospital systems and managed care organizations have chosen west over hills for preferred partnership agreements.

This is led to an incredible 225% increase in managed care days compared to Q3 from last year.

While overall occupancy has jumped by over 25% during that same period.

As you would expect financial results followed revenues increased over the prior year quarter by 32%, while EBIT has improved by an incredible 151%.

Because of these results our local teams have determined that they are strong enough to help bring on new growth as evidenced by our recent announcement of acquisitions in that state.

For example, <unk> post acute rehabilitation is a skilled nursing facility in the Columbia Metro area.

It is led by administrator, Andrew Mcquillan, and director of nursing Amanda customer.

These two meters have helped turn opus into a facility of choice.

In addition to cutting their clinical turnover rate in half they have grown occupancy by 18% and skilled revenues by 58% over Q3 of 2021.

All without using any contracted labor.

We hope. These examples are helpful in illustrating some of the many different levers that our local operators are pulling in order to meet the needs of their healthcare continuum partners with that I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance Suzanne.

Thank you Victor and good morning, everyone detailed financials for the quarter are contained in our 10-Q and press release filed yesterday and additional highlights from the quarter include the following.

GAAP diluted earnings per share.

An increase of 19%.

Adjusted diluted earnings per share with the dollar Revpar an increase of 14%.

Consolidated GAAP and adjusted revenue for both the $770 million an increase of 15%.

GAAP net income was $56 2 million an increase of 19%.

Adjusted net income was $59 2 million an increase of 14%.

Other key metrics as of September 30th.

Cash and cash equivalent of 309 million on cash flow from operations of $222 million.

We also wanted to address the current status of the state of emergency and reimbursement models.

All such as extending the public health emergency for another 90 days.

With this extension of the federal government will continue to evolve various flavor of.

Thank you.

February 11 2023.

Also on October one 2020.

The PDP and Medicare payment rate increase.

7%.

Which included a net.

A market basket increase of five 1% and incorporated a positive and negative productivity adjustment.

Multiple two 8% parity adjustments.

Additionally, as a reminder, the four 2% sequestration Bakken pulp on July one 2022.

As Barry mentioned, we are once again, raising our 2020.

<unk> got a $4.10 to $4 18 per diluted share.

Our revenue guidance to $3 1 billion to.

<unk> three <unk>.

This guidance is based on diluted weighted average common shares outstanding of approximately 37 million.

Tax rate 25%.

The inclusion of acquisitions close to bolt and the inclusion of management's expectation on reimbursement.

With the primary exclusion coming from stock based compensation of one time legal claims.

Gains on the floor.

Sure.

Okay.

Additionally, other factors that could impact quarterly performance include variations in reimbursement systems delays and changes in state budget.

Occupancy and skilled mix the influence of the general economy on census, and staffing the short term impact of our acquisition of.

Variations in insurance accruals.

Surgeons in COVID-19, and other factors.

With that I'll turn the call over to Gary Gary.

Thanks Suzanne.

<unk> continue to provide industry, leading example of life enriching service to our residents co workers and communities.

We simply would not be who or what we are today without their incredible ownership and personal sacrifices.

I will now turn to the Q&A portion of our call. Andrew can you. Please instruct the audience on the Q&A procedure.

Certainly as a reminder, ladies and gentlemen to ask a question you will need to press star one one on you.

Once they.

Again to ask a question. Please press star one one.

While we compile the Q&A roster.

Our first question comes from the line of Cao Chu with Stifel.

Hi, good morning, guys.

Berrien Suzanne you talk about the phasing out of some temporary state relief next year.

Just thinking about the various drivers in our recovery Occupancies doing progress skilled mix may normalize and we got the Medicare rate update some pretty strong Medicaid rate increases. So could you maybe give us some pointers on how we should think about the revenue building blocks flows in terms of growth through 2023 and whether we.

Can see the impressive 8% organic growth that you achieved this quarter, maybe that will moderate maybe offset by higher transitional performance similar to the two examples that spans three highlighting obviously more acquisitions and how about any early read on the labor cost for next year as well.

Okay I'll try to remember all of those Tao.

I'll start I'll start with Cerro was the revenue side I mean, obviously there are some.

Some pieces to the revenue picture next year that aren't entirely clear, but but for the most part.

There's a lot of visibility into kind of where we're headed.

I feel like CMS has been.

Really thoughtful about the changes they've made.

Within the confines that they operate and so we have we have.

Good outlook there on the state side, obviously, the overhang there would be on the <unk> funding and whether or not the state of emergency continues.

That all said, we have really good visibility into our state by state funding for the most part.

<unk>.

Whether the state of emergency sticks with us or not.

We also have a pretty clear indication that in Texas, one of our bigger states that.

Our rate increases on the horizon.

A really healthy increase thats much needed.

The only piece is uncertain there is on the.

On the timeframe between when the potential funding might go away and when the rate increase would happen towards the latter half of the year.

And that's a piece that will become more clear over the next couple of months and Thats really kind of the only piece of the picture that that isn't entirely clear for us. So overall, we feel really good about.

The revenue picture for 2023, and how it's shaping up.

On the other front.

Somewhat of an up and down road as we experienced seasonality and so we feel real confident about that.

As far as the labor environment goes.

We were seeing some really good indicators from going from first to second quarter, where we saw our agency utilization drop.

When we entered into the third quarter is as you know we experienced.

Quite a quite a large step up in Covid cases.

That affected both our patient population as well as our employees.

We had 8% growth in both those populations both employees and patients and obviously when you've got a situation like that you tend to go backwards a little bit on your on your progress with agency.

But that all said in spite of that we can.

Does the offset we saw.

Really good skilled mix.

The acuity level of the patients that we're taking care of we were we were able to mitigate a lot of that we.

We expect our progress to continue on.

Decreasing agency utilization.

Amongst our affiliated entities, we we also see indicators that.

Our wage growth is stabilizing it's the lowest it's been since last year in terms of quarter over quarter wage growth.

It's not that we expected.

The labor situation will.

Moderate in the near term it will probably take several quarters for us to get to more of a stable steady state, but but that said our expectation is that we'll continue to see progress when especially when we're not dealing with.

And downs of Covid cases, but that all said, even when we do have.

Covid surge surges that affect our operations.

I think we've shown and we feel confident that we'll be able to deal with it even if we have to have a temporarily.

Increased utilization of agency labor.

Got it thanks for that great.

Great color.

Paul Obviously, China I saw in the press release that you said you expect some.

Do you expect the pace of deal closing despite a slowdown in the next few bonds I think Spansion also mentioned some deals.

That you recently closed on more distressing nature, just curious if youre seeing more macro uncertainties out there.

Slowdown anything unique to that type of transaction you're working on.

Yes, no great question, Todd Thanks for that.

Really just a matter of.

Yes.

Just the rhythms of the deals in closings.

A significant.

Amount and certainly.

In certain markets.

The Austin, Texas market.

Added <unk>.

Four buildings.

So.

The way our model works right is each each local geography as is <unk>.

Sponsel to transition those new operations and in doing so.

Often.

Leave their existing building to go support the new operation.

And so our bandwidth to grow varies by geography and based on the number of deals we've done in that particular geography. So that's also.

Probably something.

Just to mention that we always keep in mind.

When we have a big surge in deals we want to make sure we're able to digest those and transition them the right way.

That said doing.

For deals in Austin, Texas doesn't impact our ability to grow in Houston are obviously other states. So so yes, we are.

We definitely continue to see a healthy pipeline of opportunities and are excited about.

The deals that we see on the on the near term horizon in.

At this point in the year unless the deal is pretty far along it is likely to slip into next year and so that's a little bit why we're kind of guiding towards.

Next year Q1 is maybe the next quarter, where we see some.

Some more significant growth activity, so hopefully that helps.

Great. Thank.

Thank you.

Thanks.

Thank you.

Your next question comes from the line of Scott Fidel with Stephens.

Great.

Thanks, Good afternoon.

First question just wanted to just pick back up on occupancy and you've.

<unk> had a pretty.

Sort of predictable ramp and recovery in occupancy that you've been talking about now and we've been seeing for a while just interested as we sort of look ahead now.

It's about the fourth quarter and then into 2023.

Yes look I mean I think.

It's a great question, Scott and it's obviously one that we're focused on.

A bunch operationally.

I think there is a pretty high degree of confidence that our trend will continue.

We are.

Sitting on a same store basis, 70, almost 77%, which is getting really close to kind of where we were.

Pre pandemic, we've had we have several markets that are ahead of their pre pandemic occupancy.

It's more kind of rural markets and secondary markets that kind of take their time to build back.

And that might accelerate our ability to get that closer to kind of where we were before but but.

That is one area that we look at is kind of getting back to pre pandemic occupancy I think our thought and the expectation though is that there is so much potential in so many of these.

Operations that our sites are well beyond kind of pre pandemic levels I think our feeling is that we will.

We will continue to see growth.

For quite a while.

Okay got it.

Ben just.

We drove into pricing across the payer classes quite a bad word.

Would be interested just just if you could give us an update on your managed care contracting for for 2023.

How are how are your updates looking in terms of factoring in the inflationary environment and then just interested just.

With some of the Medicare advantage plans and some of the focus around value based contracting if theres any.

Sort of new or innovative contracts that youre exploring when you think about your commercial managed care payers.

Yeah. Thanks for the question and thank everyone now as we've been talking to you with a lot of our managed care payers are starting to recognize the additional inflation both on the wage front and other supplies front and so definitely looking at in negotiation with a lot of them to have higher than typical rates going into next year.

As a recognition of that additional inflation on the way as well.

Sure.

Okay.

Okay, and then just a last quick one just on adjusted EBITDA margins. All in you settled at around 12, 5% of the <unk> just interested as.

How you see that as the jumping off point for fourth quarter, and obviously theres a number moving to 2023 and again the guidance yet.

Would you view this as being in the range of what you would see as a sustainable sort of margin in terms of what you've been producing.

At the third quarter and Thats It for me.

I'll start and Suzanne can add any color, yes, yes, I think so.

With the high acquisition activity there is some obvious.

Pressure on margins whenever we acquire a bunch, we typically see higher expenses in the beginning.

The offset though.

Thankfully with the timing of this growth is that we will see the full impact of our Medicare increase will.

We start to see some of the state increases kick in more fully during the fourth quarter as well and so I think all in all of that sets the stage for AR.

What we think is a pretty stable margin going from Q3 to Q4 and I think the other X factor related to the cabinet again, what you have.

The Netgear every single time, when we want to have it does come in is that we grow revenue.

The revenue lift maybe up a little bit higher.

Cost of services on that.

And then one kind of consistent with what we saw coming in.

During Q3.

Yes.

Okay. Thank you.

Thank you.

Question comes from the line of Ben Hendrix, with RBC capital markets.

Hey, Thanks, guys. Most of my questions have been answered, but just a quick numbers question on standard bear can you guys offer any guidance on the total rental revenue in <unk> on a run rate basis suggested for the guest the pro forma contribution of the real estate acquisitions that you guys have done over the past quarter. Thanks.

Yes, I appreciate the question Ben.

There really was only one.

So yes.

Yes.

Certainly there isn't.

A material increase or change there, but I don't know if that would add anything else we can say.

Sorry about that I would say that there's one that's happening in Q4, and then you see the other ones are already in.

Ones that happened during the quarter.

<unk> occurred already in the Q3 number so.

It's going to be just a small increase is not going to be a large increase kind of running into.

Q4.

Okay. Thank you very much.

Thanks Ben.

Thank you <unk>.

And im showing no further questions so with that I'll hand, the call back over to CEO , Barry Port for any closing remarks.

Yes, Thank you Andrew and we'd like to thank everyone for joining us today. Once again, we appreciate your time and support and hope you have a great day.

Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

Q3 2022 Ensign Group Inc Earnings Call

Request a DemoDemo

ENSG

Ensign Group

Earnings