Q3 2023 Ensign Group Inc Earnings Call
Thank you for standing by my name is Bailey and I will be your conference operator today.
At this time I would like to welcome everyone to the inside Q3 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press star and the number one.
I would now like to turn the call over to Chad Keetch, Chief Chief Investment Officer. Please go ahead.
Thank you operator and welcome everyone.
We filed our earnings press release yesterday and it is available on the Investor Relations section of our website at Ensign group Dot net a replay of this call will also be available on our website until five P. M Pacific on Friday November 24th 2023.
We want to remind any listeners that may be listening to a replay of this call that all the statements made are as of today October 26, 2023, and these statements have not been nor will be updated subsequent to today's call.
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 list.
Listeners should not place undue reliance on forward looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results.
Except as required by federal Securities laws Ensign and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason. In addition, the Ensign Group, Inc. Is a holding company with no direct operating assets employees or revenues.
Certain of our wholly owned independent subsidiaries collectively referred to as the service center provide accounting payroll human resources information technology legal risk management and other services to other operating subsidiaries through contractual relationships with such subsidiaries.
In addition, our wholly owned captive insurance subsidiary, which we referred to as the insurance captive provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities.
<unk> also own standard bare health care REIT, Inc, which is a captive real estate investment trust that invest in health care properties and enters into lease agreements with certain independent subsidiaries of enzyme as well as third party tenants that are unaffiliated with the enzyme <unk>.
The words enzyme company, we our and US refer to the Ensign Group, Inc. And its consolidated subsidiaries all of our operating subsidiaries. The service Center standard bare healthcare REIT and the insurance captive are operated by separate wholly owned independent companies that have their own management employees and assets.
References herein to the consolidated company and its assets and activities as well as the use of words, we us our and similar terms. We may use today are not meant to imply nor should it be construed as meaning that the ensign group has direct operating assets employees or revenue or that any of the subsidiaries are operated by the Ensign group.
Operator: Thank you for standing by.
Bailey: My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensign Q3 earnings call.
Bailey: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one.
Also we supplement our GAAP reporting with non-GAAP metrics when viewed together with our GAAP results. We believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports a GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our Form 10-Q.
Chad Keetch: I would now like to turn the call over to Chad Keetch, Chief Investment Officer. Please go ahead.
Chad Keetch: Thank you operator and welcome everyone. We filed our earnings press release yesterday and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5 p.m. Pacific on Friday, November 24, 2023. We want to remind any listeners that may be listening to a replay of this call that all the statements made are as of today, October 26, 2023, and these statements have not been nor will be updated subsequent to today's call.
And with that I'll turn the call over to Barry Port Our CEO Barry Thanks, Shannon and thank you all for joining us today.
We are 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 and caregivers and leaders who worked endlessly to support.
And love one another which allows for a high quality patient outcomes they consistently achieve.
During the quarter, we saw continued improvement in Occupancies in managed care revenues, which is particularly impressive given the persistent labor market pressures and the return of more typical seasonality.
Chad Keetch: 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 under reliance on forward-looking statements and are encouraged to review our SEC filings for more complete discussion of factors that could impact our results.
More specifically we were pleased to see same store occupancy of 79, 5%, which grew by 290 basis points over the prior year quarter and by 97 basis points sequentially over the second quarter.
Given the upward trend in same store occupancy through the quarter. We are confident that we are in a path to reach and eventually exceed our pre COVID-19 same store occupancy of 81% as we move into higher admission months of fall and winter.
Chad Keetch: Except as required by federal securities laws, ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, the enzyme grouping is a holding company with no direct operating assets, employees, or revenues. Certain of our wholly-owned independent subsidiaries collectively refer to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to other operating subsidiaries through contractual relationships with such subsidiaries.
We also continue to build stronger relationships with our managed care partners due to better coordination of care increased capabilities and strong clinical outcomes.
As a result, we saw increased volume in our same store and transitioning combined managed care centers and managed care revenue, which increased during the quarter by six 6% and 13, 8% respectively over the prior year.
Chad Keetch: In addition, our wholly-owned captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional liability, as well as for workers' compensation insurance liabilities. Enzyne also owns Standard Bear Healthcare Read Inc, which is a captive real estate investment trust that invests in healthcare properties and enters into lease agreements with certain independent subsidiaries of Enzyne as well as third-party tenants that are unaffiliated with the Enzyne Group.
As expected we saw a seasonal decrease to skilled mix during the quarter.
However, due to our local operators strong clinical reputation, we're continuing to see elevated skilled mix when compared to pre COVID-19 levels.
This continued growth in skilled mix demonstrates the increasing and sustainable demand for skilled post acute services, including within the context of our managed care patients.
We are very excited to see our local field and service center partners share and apply best practices as they respond to the persistent labor market challenges.
Chad Keetch: The words Enzyne company, we, our, and us refer to the enzyme grouping and its consolidated subsidiaries. All of our operating subsidiaries, the service center, Standard Bear Healthcare Read, and the insurance captive, are operated by separate wholly-owned independent companies that have their own management, employees, and assets. References here into the consolidated company and its assets and activities, as well as the use of words we, us, our, and similar terms we may use today, are not meant to imply nor should it be construed as meaning that the Enzyne Group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the Enzyne Group.
As they are still our customer second culture into each operation, we have seen and will continue to see lower turnover.
Likewise, we are also seeing less usage of third party nursing agencies, which improved again for the ninth month in a row as of September representing a reduction in agency usage of 55% since its peak in December of 2022.
We're also encouraged to see wage inflation has slowed down and our ability to successfully recruit new talent growth.
As of the end of the quarter, we saw a number of new hires increased by 69% since the end of March.
Chad Keetch: Also, we supplement our gap reporting with non-gap metrics. When viewed together with our gap 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 gap reports. A gap to non-gap reconciliation is available in yesterday's press release and is available in our Form 10Q.
Due to our solid results during the quarter as well as continued strength from our recent acquisitions, we are increasing our annual 2023 earnings guidance to between $4 73.
And $4 79 per diluted share up from $4 70 to $4 78 per diluted share.
This new mid point of our 2023 earnings guidance represents an increase of 15% over our 2022 results and is 38% higher than our 2021 results.
We are also raising our annual revenue guidance to between $3 72 billion and $3 73 billion up from our previous guidance of $3 69 billion to $3 73 billion.
Chad Keetch: We are grateful for the efforts and commitment of our teams and caregivers and leaders who work endlessly to support and love one another, which allows for the high quality patient outcomes they consistently achieve. During the quarter, we saw continued improvement in occupancies in managed care revenues, which is particularly impressive given the persistent labor market pressures and the return of more typical seasonality. More specifically, we were pleased to see same-store occupancy of 79.5%, which grew by 290 basis points over the prior year quarter, and by 97 basis points sequentially over the second quarter.
This increased guidance comes on top of the enormous growth we experienced in the last few years to put this performance in perspective.
Since we spun out the pennant group in 2019, we have seen adjusted EPS grew by 167% with a compounded annual growth rate of 28%.
This performance is not due to some large events or single transformative transaction, but instead is the result of consistent growth and performance quarter after quarter that comes from following proven ensign principles.
Chad Keetch: Given the effort trend in same-store occupancy through the quarter, we are confident that we are on a path to reach and eventually exceed our free COVID same-store occupancy of 80.1%, as we move into higher admission months of fall and winter. We also continue to build stronger relationships with our managed care partners due to better coordination of care, increased capabilities, and strong clinical outcomes. As a result, we saw increased volume in our same-store and transitioning combined managed care census and managed care revenue, which increased during the quarter by 6.6% and 13.8% respectively over the prior year.
We are excited about the upcoming year and are confident that our partners will continue to manage and innovate through all the lingering challenges on the labor front.
In spite of our impressive results. We also recognize that there are many opportunities to improve on certain operational fundamentals both in existing operations and the growing number of new acquisitions.
As we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before.
There are so many opportunities in front of us to improve labor and drive occupancy and skilled mix as we continue to successfully transition dozens of recently acquired operations.
Chad Keetch: As expected, we saw a seasonal decrease to skilled mix during the quarter. However, due to our local operator strong clinical reputations, we are continuing to see elevated skilled mix when compared to pre-COVID levels. This continued growth in skilled mix demonstrates the increasing and sustainable demand for skilled post-acute services, including within the context of our managed care patients. We are very excited to see our local field and service center partner share and apply best practices as they respond to the persistent labor market challenges.
We also see enormous growth opportunities in skilled mix in a way that best serves each unique healthcare market when combined with a number of very attractive acquisition opportunities that we see on the near and far horizon. We are poised to again showcase our ability to find acquire and transitioned performing and underperforming operations by it.
Applying proven ensign principles developed over two decades.
As we relentlessly follow and protect the cultural fundamentals that got US here. We are confident that we will continue to consistently produce world class clinical and financial performance.
Chad Keetch: As they instill our customer's second culture into each operation, we have seen and will continue to see lower turnover. Likewise, we are also seeing less usage of third-party nursing agencies, which improved again for the ninth month of the row, as of September, representing a reduction in agency usage of 55% since its peak in December of 2022. We are also encouraged to see wage inflation slowdown and our ability to successfully recruit new talent growth.
Next I'll ask Chad to add some additional insights regarding our recent growth Chad.
Thank you Barry as we expected we continue to add to our growing portfolio and are very excited about the six new operations and for real estate assets, we added during the quarter and sets, bringing the number of operations in our newly acquired bucket to 51.
These skilled nursing operations include two operations in South Carolina, one operation in Kansas, One operation in Colorado, and two operations in Washington, totaling an additional 621, new operational beds.
Chad Keetch: As of the end of the quarter, we saw a number of new hires increased by 69% since the end of March. Due to our solid results during the quarter, as well as continued strength from our recent acquisitions, we are increasing our annual 2023 earnings guidance to between $4.73 and $4.79 per diluted share, up from $4.70 to $4.78 per diluted share. Chair. This new midpoint of our 2023 earnings guidance represents an increase of 15 percent over our 2022 results and is 30.8 percent higher than our 2021 results.
We are excited to continue to grow in some of our most mature states, including Colorado and Washington.
And to add an operation in Kansas that was formerly operated by hospital.
We are also thrilled to close on a transaction where standard bearer was able to acquire the real estate in Washington, and lease a portion of the portfolio through a third party tenant.
We have seen many transactions and similar to the one we closed in Washington that have been presented to us in the past and are anxious to utilize this new strategy to do more deals we likely would have missed out on prior to implementing this approach.
Chad Keetch: We are also raising our annual revenue guidance to between 3.72 billion and 3.73 billion up from our previous guidance of 3.69 billion to 3.73 billion. This increased guidance comes on top of the enormous growth we experienced in the last few years. To put this performance in perspective, since we spun out the Penn group in 2019, we have seen adjusted EPS grow by 167 percent with a compound annual growth rate of 28 percent.
All of these additions were carefully selected amongst the many opportunities we had in each of these were chosen because of the enormous clinical and financial potential in each operation.
We have been patient and look forward to seeing our disciplined pay off as these new operations continue to improve.
As a result of skilled service expansion so far in 2023 occupancy and skilled mix days for the skilled nursing operations and the newly acquired bucket was 77, 4% and 26, 1% respectively for the quarter for those that have been following us for years will know this is a very impressive starting point from which to build however, when <unk>.
Chad Keetch: This performance is not due to some large events or single transformative transaction, but instead is the result of consistent growth in performance quarter after quarter that comes from following proven inside principles. We are excited about the upcoming year and are confident that our partners will continue to manage and innovate through all the lingering challenges on the labor front.
Compared to our same store occupancy and skilled mix days of 79, 5% and 37% respectively.
Enormous upside in each of these operations as they continue to transform into same store caliber operations.
Chad Keetch: In spite of our impressive results, we also recognize that there are many opportunities to improve on certain operational fundamentals, both in existing operations and the growing number of new acquisitions. As we evaluate our expanding portfolio, we see more of our organic growth potential within our existing portfolio than ever before. There are so many opportunities in front of us to improve labor and drive occupancy and skilled mix as we continue to successfully transition dozens of recently acquired operations.
We are very optimistic about the organic growth potential within our existing portfolio as our newer acquisitions are already contributing to our results in many cases ahead of schedule.
Looking forward, we have another busy fall and winter ahead of us and are preparing for even more growth in 2024, we continue to see a steady pipeline of new opportunities and are beginning to see the effects of higher interest rates on pricing with more real estate opportunities coming to market at reasonable prices due to tighter financial markets.
Chad Keetch: We also see enormous growth opportunities and skilled mix in a way that best serves each unique healthcare market. We combine with a number of very attractive acquisition opportunities that we see on the near and far horizon. We are poised to, again, showcase our ability to find, acquire and transition performing and underperforming operations by applying proven inside principles developed over two decades. As we relentlessly follow and protect the cultural fundamentals that got us here, we are confident that we will continue to consistently produce world-class clinical and financial performance.
We also continue to see evidence that many operators are struggling and as a result, we still expect there will be lots of opportunities that will arise.
However, as we always remind you we do not set arbitrary growth goals.
And we will remain true to our disciplined acquisition strategy only growing when we have the right leaders in place and the pricing is right.
With our locally driven operating model, we have lots of operational bandwidth to grow across dozens of markets.
We continue to provide additional disclosure on standard bear, which is now comprised of 107 properties owned by the company and leased to 78 affiliated skilled nursing and senior living operations, one campus operation to an unaffiliated tenant and 29 senior living operations that are at least to the pennant Group Inc.
Chad Keetch: Next, I'll ask Chad to add some additional insights regarding our recent growth. Chad? Thank you, Barry.
Chad Keetch: As we expected, we continue to add to our growing portfolio and are very excited about the six new operations and four real estate assets we added during the quarter-incense, bringing the number of operations in our newly acquired bucket to 51. These skilled nursing operations include two operations in South Carolina, one operation in Kansas, one operation in Colorado, and two operations in Washington, totaling an additional 621 new operational beds. We are excited to continue to grow in some of our most mature states, including Colorado and Washington, and to add an operation in Kansas that was formerly operated by a hospital.
Each of these properties are subject to a triple net long term lease and generated rental revenue of $21 million for the quarter of which 17 million was derived from ensign affiliated operations also for the quarter standard-bearer produced $13 6 million and <unk> and as of the end of the quarter had an EBITDAR.
<unk> to rent coverage ratio of two three times.
Looking forward, we are poised to grow with over $1 billion in dry powder for future investments, but more importantly, our local leaders are constantly recruiting future Ceos of our operations and we have a deep bench of Ceos in training that are eagerly preparing for their opportunity to lead <unk>.
Chad Keetch: We are also thrilled to close on a transaction where standard bear was able to acquire the real estate in Washington and lease a portion of the portfolio to a third-party tenant. We have seen many transactions in similar to the one we close in Washington that have been presented to us in the past, and are anxious to utilize this new strategy to do more deals we likely would have missed out on prior to implementing this approach.
We look forward to actively seeking opportunities to acquire real estate and to lease both well performing and struggling skilled nursing senior living and other healthcare related businesses in our current footprint and in a few new states and with that I'll turn the call over to Spencer, our COO to add more color around our operations Spencer.
Chad Keetch: All of these additions were carefully selected amongst the many opportunities we had and each of these were chosen because of the enormous clinical and financial potential in each operation. We have been patient and look forward to seeing our discipline pay off as these new operations continue to improve. As a result of the skilled service expansion so far in 2023, occupancy and skilled mix days for the skilled nursing operations in the newly acquired bucket with 77.4% and 26.1% respectively for the quarter.
Thank you Chad and Hello, everyone.
As Barry highlighted we've seen some exciting trends in occupancy managed care growth and cost containment as.
As well as continued progress in our recently acquired operations.
So the next few minutes I'd like to share highlights from two facilities to illustrate how local leaders are driving these improvements in.
In spite of ongoing headwinds.
Chad Keetch: For those that have been following us for years we'll note this is a very impressive starting point from which to build. However, when compared to our same store occupancy and skilled mix days of 79.5% and 30.7% respectively, there is enormous upside in each of these operations as they continue to transform into same store caliber operations. We are very optimistic about the organic growth potential within our existing portfolio as our newer acquisitions are already contributing to our results in many cases ahead of schedule.
The first example comes from Santa Rosa, California, one of the first facilities, we ever acquired.
Since joining the organization in the year 2000, Summerfield Health care Center has consistently achieved strong outcomes year after year.
While also providing strength to sister facilities in the northern California area How's.
However over the past year, CFO and director of nursing and Edina daylight crews and CEO case, and Bush have taken performance to the next level.
Compared to the prior year quarter Summer films overall occupancy has increased by seven 5% and skilled days have increased by 52, 3% with meaningful improvement in both Medicare and managed care payers.
Chad Keetch: Looking forward, we have another busy fall and winter ahead of us and are preparing for even more growth in 2024. We continue to see a steady pipeline of new opportunities and are beginning to see the effects of higher interest rates on pricing with more real estate opportunities coming to market at reasonable prices due to tighter financial markets. We also continue to see evidence that many operators are struggling and as a result, we still expect there will be lots of opportunities that will arise.
As a result total net revenue has improved by 40%, while EBIT have soared by 126%.
All while maintaining top notch customer satisfaction, and five star CMS ratings and quality measures and overall.
Chad Keetch: However, as we always remind you, we do not set arbitrary growth goals and will remain true to our discipline acquisition strategy only growing when we have the right leaders in place and the pricing is right. With our locally driven operating model, we have lots of operational bandwidth to grow across dozens of markets.
But the impact of Summerfield goes far beyond just the performance of their facility for.
For example, when the North American transition occurred in February three of these newly acquired facilities joined Summerfield cluster.
Leading up to the transition and since casing and Edina as cluster leaders have given countless hours of time and support to help their new partners acclimatized to the new culture and embraced the rigor of the cluster model.
Chad Keetch: We continue to provide additional disclosure on standard bear, which is now comprised of 107 properties owned by the company and leads to 78 affiliated skilled nursing and senior living operations, one campus operation to an unaffiliated tenant and 29 senior living operations that are at least to the pen and group ink. Each of these properties is subject to a triple net long term lease and generated rental revenue of $21 million for the quarter of which 17 million was derived from enzyme-affiliated operations.
Results have followed for example, despite initially having high agency and some of the newly acquired facilities. The entire cluster is now agency free.
At the same time clinical systems have strengthened skilled mix has increased and financial results have consistently improved.
The second highlight demonstrates a similar story of highly competent leaders achieving great results in spite of challenges.
Chad Keetch: Also for the quarter, standard bear produced 13.6 million in FFO and as of the end of the quarter had an EBITDA to rent coverage ratio of 2.3 times. Looking forward, we are poised to grow with over a billion dollars in dry powder for future investments. But more importantly, our local leaders are constantly recruiting future CEOs of our operations. And we have a deep bench of CEOs and training that are eagerly preparing for their opportunity to lead.
Redmen care and rehabilitation as a five star building located in Redmond, Washington.
This amazing team led by longtime CEO, Nate homes, and COO Debbie demanding.
One of the first facilities to confront COVID-19, when the pandemic emerged in Washington in early 2020.
And like many of our strongest affiliates the Redmond team found a way to turn the crucible.
The past few years into clinical cultural and financial excellence that far exceeds their pre pandemic performance.
Chad Keetch: We look forward to actively seeking opportunities to acquire real estate and to lease both well performing and struggling skilled nursing, senior living and other healthcare related businesses in our current footprint and in a few new states.
For example by focusing on infection prevention, and prioritizing their employees' well being.
<unk> been able to recruit and develop some of the top clinical talent in the greater Seattle area. During a time of intense staffing shortages.
Spencer Burton: And with that, I'll turn the call over to Spencer, our COO, to add more color around our operations. Spencer, thank you Chad and hello everyone. As Barry highlighted, we've seen some exciting trends in occupancy, managed care growth and cost containment, as well as continued progress in our recently-acquired operations.
Strong recruiting combined with turnover rates far below state and national averages has in turn led to consistently exceptional clinical outcomes such as a five star CMS ratings and some of the lowest hospitalization rates in the state.
Spencer Burton: For the next few minutes, I'd like to share highlights from two facilities to illustrate how local leaders are driving these improvements, in spite of ongoing headwinds. The first example comes from Santa Rosa, California, one of the first facilities we ever required. Since joining the organization in the year 2000, Summerfield Healthcare Center has consistently achieved strong outcomes year after year, while also providing strength to sister facilities in the Northern California area. However, over the past year, COO and Director of Nursing and Adina Dela Cruz and CEO Kason Bush have taken performance to the next level.
These outcomes in turn enhanced relationships of trust with hospitals and other health care continuum providers, which result in increased referrals.
For example, Redmond grew overall occupancy by 9% and skilled days by 30% compared to Q3 of 2022.
And as you would expect revenues have soared by nearly 20%.
The benefits of Redmond is employee first formula extend far beyond just improves clinical reputation and occupancy.
Redmond carriers emphasis on taking care of employees has actually led to a decrease in the cost of services, because they arent incurring expensive recruiting and onboarding costs.
Spencer Burton: Compared to the prior year quarter, Summerfield's overall occupancy has increased by 7.5 percent, and skilled days have increased by 52.3 percent, with meaningful improvement in both Medicare and managed care payers. As a result, total net revenue has improved by 40 percent, while EBIT has soared by 126 percent, all while maintaining top-notch customer satisfaction and five-star CMS ratings in quality measures and overall.
You're wasting money on high priced agency staffing.
Instead, the facility continues to invest in a rewarding their own staff and increasing clinical competency, which will allow the impressive results to continue perpetually.
We recognize there is still so much opportunity to improve in our operations and having examples like summerfield in Redmond gives us confidence that as we are disciplined in applying tried and true principles our future is bright.
With that I'll turn the time over to Suzanne to provide more detail on the Companys financial performance and our guidance and then we'll open it up for questions Suzanne.
Spencer Burton: But the impact of Summerfield goes far beyond the performance of their facility. For example, when the North American transition occurred in February, three of these newly acquired facilities joined Summerfield's cluster. Leading up to the transition and since Kason and Adina as cluster leaders have given countless hours of time and support to help their new partners acclimatize to the new culture and embrace the rigor of the cluster model. Results have followed. For example, despite initially having high agency and some of the newly acquired facilities, the entire cluster is now agency free. At the same time, clinical systems have strengthened, skilled mix has increased, and financial results have consistently improved.
Thanks, Sarah and good morning, everyone detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include the following.
GAAP diluted earnings per share was $1 11, an increase of 12, 1%.
Adjusted diluted earnings per share was $1 20.
The 15, 4%.
<unk> GAAP revenues and adjusted Rodney are both at $940 8 million an increase of 22, 2%.
GAAP net income was $63 9 million, an increase of 13, 7% and adjusted net income was $69 million an increase of 16, 6%.
Spencer Burton: The second highlight demonstrates a similar story of highly competent leaders achieving great results in spite of challenges. Redmond care and rehabilitation is a five-star building located in Redmond, Washington. This amazing team, led by longtime CEO Nate Holmes and COO Debbie Dumondon, were one of the first facilities to confront COVID-19 when the pandemic emerged in Washington in early 2020. And like many of our strongest affiliates, the Redmond team found a way to turn the crucible of the past few years into clinical, cultural, and financial excellence that far exceeds their pre-pandemic performance.
Other key metrics as of September 32023 include cash and cash equivalents of $467 9 million in cash flow from operations of $291 4 million.
Spencer Burton: For example, by focusing on infection prevention and prioritizing their employees' well-being, they have been able to recruit and develop some of the top clinical talent in the greater Seattle area during a time of intense staffing shortages. Strong recruiting, combined with turnover rates far below state and national averages, has in turn led to consistently exceptional clinical outcomes, such as a five-star CMS rating and some of the lowest hospitalization rates in the state.
Currently we have $593 million of available capacity under our revolving line of credit, which combined with the cash on our balance sheet give us over $1 billion in dry powder for future investment.
Spencer Burton: These outcomes in turn enhance relationships of trust with hospitals and other healthcare continuum providers, which result in increased referrals. For example, Redmond grew overall occupancy by 9% and skilled days by 30% compared to Q3 of 2022. And as you would expect, revenues have soared by nearly 20%. The benefits of Redmond's employee first formula extend far beyond just improved clinical reputation and occupancy. Redmond cares emphasis on taking care of employees has actually led to a decrease in the cost of services, because they aren't incurring expensive recruiting and onboarding costs, nor wasting money on high-priced agency staffing. Instead, the facility continues to invest in rewarding their own staff and increasing clinical competency, which will allow the impressive results to continue perpetually.
We also own a 112 assets of which a 107, our hopper standard bearer.
Our own completely debt free and gaining significant value over time, adding even more liquidity to help us with future growth.
During the quarter, we paid a quarterly cash dividend of five and three quarter cents per share. We also continue to delever our portfolio achieving our lease adjusted net debt to EBITDA ratio of 199 times, which is particularly noteworthy given the amount of growth we have taken over the last year.
As many of you know CMS issued a proposed federal minimum staffing where we are now on the commentary and CMS has received and will continue to receive thousands of comments on the call.
However, if a final rule is implemented we do not expect it to impact us in 2023 or 2024.
We are encouraged by the strong reimbursement environment for Medicare and other payers as of October 1st we will receive a healthy net Medicare rate increase by 4%.
In addition, most of the states we operate in have already adjusted our reimbursement to offset some of the reimbursement linked to the public health emergency button given me.
For example, key states like Washington, and Colorado, and Thats encouraging increases to the rate.
The combination of the rate environment, and a slowing of inflation in some of our biggest cost including labor will continue to add to the operational momentum we have gained this year.
As Gary mentioned, we are increasing our annual 2023 earnings guidance to between $4 73 to $4 79 per diluted share up from $4 70 to $4 78 per diluted share.
Spencer Burton: We recognize there is still so much opportunity to improve in our operations, and having examples like Summerfield and Redmond gives us confidence that, as we are disciplined and applying tried-and-through principles, our future is bright.
We're also raising our annual revenue guidance to between $3, seven Q and $3 73 billion.
We have evaluated multiple scenarios and based on the strength in our performance and the positive momentum we have seen in occupancy and a strong skilled mix as well as some additional strength in Medicaid managed care program. We are confident that we can meet this guidance.
Suzanne Snapper: With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance. And then we'll open it up for questions. Suzanne?
Suzanne Snapper: Thanks, Spencer, and good morning, everyone. Detailed finances for the quarter are contained in our TANQ and press release filed yesterday. Some additional highlights for the quarter include the following. Gap diluted earnings per share with $1.11, an increase of 12.1%. Adjusted diluted earnings per share with $1.20, an increase of 15.4%. Consolidated gap revenues and adjusted revenues were both $940.8 million, an increase of 22.2%. Gap net income was $63.9 million, an increase of 13.7%.
Our 2023 guidance is based on diluted weighted average common shares outstanding of approximately $57 7 million a tax rate of 25% the inclusion of acquisitions closed in 2023.
<unk> of management's expectations for Medicare and Medicaid reimbursement rates net of provider tax with the primary exclusion coming from stock based compensation and certain expenses related to legal defense.
Additionally, other factors that could impact quarterly performance include variations in reimbursement systems delays and changes in state budgets seasonality in occupancy and skilled mix influence of the general economy on census, and staffing the short term impact of acquisition activity variations in insurance accruals and other factors.
Suzanne Snapper: An adjusted net income was $69 million, an increase of 16.6%. Other key metrics as of September 30 of 2023 include passing cash equivalents of $467.9 million, and cash footprint operations of $291.4 million. Currently we have $593 million of available capacity under our revolving line of credit, which combined with the cash on our balance sheet give us over $1 billion in dry powder for future investments. We also own 112 assets of which $107 are held by Standard Bear, and 88 are owned completely debt-free and gaining significant value over time, adding even more liquidity to help with future growth.
That I will turn it back over to Barry Barry.
Thanks, Suzanne as we wrap up I can't emphasize enough how incredibly honored and grateful we are to work along center facility leaders field resources clinical partners and our service center team that are behind these record setting results, we never cease to be amazed by the impressive resiliency as they focus on support.
One another.
In new and innovative ways their commitment has blessed the lives of so many including our own and we're excited about our future because of these amazing partners, we have complete faith in them and the culture. They have collectively built.
Suzanne Snapper: During the quarter, we paid a quarterly cash divinum of $5.3 per share. We also continue to deliver our portfolio, achieving at least adjusted net debt to even our ratio of $1.999, which is particularly noteworthy given the amount of growth we have taken over the last year.
With that we'll turn it now over to the Q&A portion of our call Daily can you. Please instruct the audience on the Q&A procedure.
At this time I would like to remind everyone in order to ask a question Press Star and then the number one on your telephone keypad.
Your first question comes from the line of Ben Hendrix with RBC capital markets. Your line is open.
Barry Port: As many of you know, CMS issued a proposed minimum staffing rule. We are now in the comment period and CMS has received and will continue to receive thousands of comments on the rule. However, if the final rule is implemented, we do not expect the rule to impact us in 2023 or 2024. We are encouraged by the strong reimbursement environment for Medicare and other payers. As of October 1st, we will receive a healthy net Medicare rate increase of 4%.
Okay. Thank you very much quick M&A related question and I think I've asked this on past calls, but wanted to get an update.
Appreciate the commentary on the leadership development and price being kind of gating items for M&A, but wanted to get any thoughts on that.
Or any changes to strategy with regard to financing acquisitions in mid the current rate environment, and if theres any kind of capital allocation considerations from that perspective. Thanks.
Barry Port: In addition, most of the states we operate in have already adjusted their reimbursement to offset some of the reimbursement linked to public health emergency that ended in May. For example, peace states like Washington and Colorado, and that's encouraging increases to the rates. The combination of the rate environment and the flowing of inflation some of our biggest costs, including labor, will continue to add to the operational momentum we have gained this year.
Yes, Great question, Ben Thanks for that as we mentioned in the call we have over $1 billion in dry powder.
A good portion of that is cash so we've got a lot of cash and then our revolver.
Been completely.
Totally available to us so usually what we do is some.
Some kind of a blend between the two.
Barry Port: As Barry mentioned, we are increasing our annual 2023 earnings guidance to between $4.73 to $4.79 per deleted share, up from $4.70 to $4.78 per deleted share. We are also raising our annual revenue guidance to between $3.72 and $3.73 billion. We have evaluated multiple scenarios and based on the strengths in our performance and the positive momentum we have seen in occupancy and a strong skilled mix, as well as some additional strength and Medicaid and managed care programs, we are confident that we can meet this guidance.
And our debt levels are extremely low.
And frankly, our overall sort of cost of capital is attractive so for base with with the spread to it that I think is very very competitive and certainly puts us in a spot.
That is enviable amongst many financial buyers in particular.
So pretty excited about the ability we have both with both with cash in.
To use our revolver to fund it.
Obviously, we have a lot of real estate that we own that's completely unlevered as well.
Barry Port: Our 2023 guidance is based on deleted weighted average common shares outstanding of approximately $57.7 million, a tax rate of 25%, the inclusion of acquisitions closed in 2023, the inclusion of management expectations for Medicare and Medicaid reimbursement rates, net of provider tax, with the primary exclusions coming from stock base compensation and certain expenses related to legal defense. Additionally, other factors that could impact poorly performance include durations in reimbursement systems, delays in changes in state budget, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, the short term impact of acquisition activities, variations in insurance to curals and other factors.
That's doing mortgage financings is something that we've done in the past.
Given current rates, though thats probably not.
Not on the horizon at least in the near term.
Thank you.
Your next question comes from the line of Scott Fidel with Stephens. Your line is open.
Hi, Thanks.
Actually wanted to just follow up on the same topic as Ben just talked about with the M&A opportunity and just given the extensive capital available to you just interested if maybe you could drill into the.
Barry Port: And with that, I'll turn it back over to Barry. Barry? Thanks, Suzanne. As we wrap up, I can't emphasize enough how incredibly honored and grateful we are to work alongside our facility leaders, field resources, clinical partners, and our service center team that are behind these record-setting results. We never seem to be amazed by the impressive resiliency as they focus on supporting one another in new and innovative ways. Their commitment has blessed the lives of so many, including our own, and we're excited about our future because of these amazing partners. We have complete faith in them and the culture they have collectively built.
The profile of deals looking out to 2024 that may be available.
When thinking about the larger portfolio deal you did.
With North American this year end.
I guess with the pipeline.
Sort of other portfolio opportunities may look like as compared to.
Some of that in a more targeted deals that you often.
So do during the course of the year.
Yes, Great question, Scott. So so first of all the onesie Twosies the deals.
Really built enzyme those are there's lots of them. So.
Barry Port: But that will turn it now over to the Q&A portion of our call. Barry, can you please instruct the audience on the Q&A procedure?
That's kind of.
I guess, our typical pattern, we expect to follow that but in terms of portfolio deals. We havent seen even just in the last couple of months and uptick in the number of larger deals that are out there.
Bailey: At this time, I would like to remind everyone in order to ask a question, press star, and then the number one on your telephone keypad.
Ben Hendrix: Your first question comes from the line of Ben Hendrix with RBC Capital Markets. Your line is Elin. Thank you very much. A quick M&A-related question, and I think I've asked this on past calls, but wanted to get an update. Appreciate the commentary on the leadership development and price being kind of gating items for M&A, but wanted to get any thoughts on any changes to strategy with regard to financing acquisitions and mid-to-current rate environment, and if there's any kind of capital allocation considerations from that perspective.
It's an interesting mix. Some some include real estate.
<unk>.
Would require an actual cash payment others are more lease heavy.
And as we've shown.
We prefer to buy the real estate, where we can but but really attractive leases are a great way for us to grow as well.
I would say.
So it really all of the portfolios that we've seen in the sizable ones are very much distressed and.
In a turnaround situation.
Ben Hendrix: Thanks. Yeah, great question, Ben. Thanks for that. As we mentioned in the call, we have over a billion dollars in dry powder. A good portion of that is cash, so we've got a lot of cash. And then our revolver has been completely, it's just totally available to us. So usually what we do is it's some kind of a blend between the two, and our debt levels are extremely low. And frankly, our overall sort of cost of capital is attractive.
That is a little bit different than the North American deal, we did last year that one.
What's unique for sure in terms of occupancy and California based.
So, but all that said the biggest factor as was alluded to earlier.
The leadership and having leaders in our pipeline that are waiting for those opportunities.
Obviously geography is important as well.
We want to stay in the states. We're in is sort of our first priority simply because theres a lot of benefit and building scale in.
Ben Hendrix: It's so-for-based with a spread to it that I think is very, very competitive and certainly puts us in a spot that is so pretty excited about the ability we have both with cash and to use our revolver to fund it. Obviously, we have a lot of real estate that we own that's completely unlevered as well. That's doing mortgage financing is something that we've done in the past.
In the same markets, we know them.
There's a lot of benefit in having.
Relationships with hospital systems, and managed care payers and all of that so thats. Our first of our very first priority is to grow in the states. We're in and some of these opportunities are in states where in the.
The next one would be the states that were not in but that are close by.
And that so.
So there are a few new states that could potentially happen.
Chad Keetch: Given current rates, though, that's probably not on the horizon, at least in the near term. Thank you.
Either at the end of this year early next.
We take those very seriously it's a lot of work to go into a new state.
But thats definitely something on the horizon as well.
Scott Segel: Your next question comes from the line of Scott Segel with Stevens, your line of open. Hi, thanks. I actually wanted to just follow up on the same topic as Ben just talked about with the M&A opportunity and just given the extensive capital available to you.
I, Miss Suzanne or Barry.
Okay.
Sure.
Okay, great. Thanks, guys.
Then a follow up question just wanted to pivot over to the.
Staffing rule and I guess, just asking a question about sort of I guess, how you are approaching that.
Chad Keetch: Just interested, maybe you could drill into the profile of deals, you know, looking out to 2024 that may be available, you know, when thinking about the larger portfolio deal you did with North American this year and I guess with the pipeline of, you know, sort of other portfolio opportunities may look like as compared to, you know, some of the more targeted deals that you often also do during the course of the year. Yeah, great question Scott.
From the advocacy versus the operational perspective.
I think everyone recognizes how disruptive this proposal would be for the industry. If it went forward and it seems realistic to think that there will be some meaningful changes made in the final rule.
But at the same time, we may not even see that Phil next summer or so so I'm. Just curious are you at this point largely just focusing your efforts on sort of the advocacy side.
Or are you also considering any types of starting to pursue operational adjustments.
Chad Keetch: So, so, you know, first of all, you know, the ones you choose, the deals that have really built enzyme, those are, there's lots of them. So, that's kind of, you know, I guess our typical pattern and we expect to follow that. But, but in terms of portfolio deals, we have seen even just in the last couple months an uptick and the number of larger deals that are out there. You know, it's an interesting mix, some include real estate, you know, that would require an actual cash payment.
Looking at looking out over a multiyear timeframe.
This rule would go into effect.
Yes, it's a great question.
Got it.
Operationally I don't think there is much that.
We feel like we need to do to adjust other than.
Making sure we're really really focused on the things that we're.
Focused on which are.
Chad Keetch: Others are more lease heavy and, you know, as we've shown, well, you know, we prefer to buy the real estate where we can, but really attractive leases are a great way for us to grow as well. I would say, you know, really all the portfolios that we've seen and the size of the ones are very much distressed in, you know, in a turnaround situation. That is a little bit different than the North American deal we did last year.
Keeping turnover.
As low as we can by by making sure. We've just got amazing practices around how we treat and incentivize and celebrate our people.
Making sure that we are the employer of choice in every market.
Making sure that we're very efficient in how we staff the communication, we have with our staff on how and why we're staffing in a certain way.
Getting their input on that as well so.
Chad Keetch: That one, you know, was unique for sure in terms of occupancy and, you know, California based. So, but all that said, you know, the biggest factor as it was alluded to earlier is the leadership and having leaders in our pipeline that are waiting for those opportunities and obviously geographies important as well. We want to stay, you know, in the states we're in is sort of our first priority simply because there's a lot of benefit in building scale and, you know, in the same markets.
That has been our focus for quite some time.
Removing agency and ensuring that the workplace is a.
As a place where people really want to be that that really is our focus because if if and when there is.
Adjustment to how the federal government decides we should staff.
On a building by building basis.
If our people systems aren't where they ought to be then that becomes more challenging. So so our efforts operationally are around making sure that we continue to be the absolute best employer, we can be and so so the silver lining of this hole.
Chad Keetch: We know them, you know, there's a lot of benefit in having, you know, relationships with hospital systems and managed care payers and all of that. So, that's our very first priority is to grow in the states we're in and some of these opportunities are in states we're in. You know, the next one would be, you know, states that we're not in but that are close by and that, you know, so there are a few new states that could potentially happen, you know, either at the end of this year or early next. We take those very seriously. It's a lot of work to go into a new state, but that's definitely something on the horizon as well. Anything I miss is Annarberry? Okay, great. Thanks Chad.
Noise around this proposed rule is that.
It gives us impetus in a rally cry to kind of focus on making sure that we're the best.
Being great partners with our employees.
As it relates to what we're doing organizationally. It really is a very much a grassroots kind of focus so were in a heavy comment period right now in November six our organization has produced.
Well over 1000 comments the industry has produced over 11000 comments.
Scott Segel: And then a follow-up question just wanted to pivot over to the staff and rule. And I guess just ask the question about sort of I guess how you're approaching this, you know, from the advocacy verse, the operational perspective. I think everyone recognizes how disruptive this proposal would be for the industry if it went forward and it seems realistic to think that there will be some meaningful changes made in the final rule.
Congress just recently had.
Nearly 100 Congress people send a letter that they sign.
Scott Segel: But, you know, at the same time, we may not even see that until next summer or so. So I'm just curious, you know, are you at this point largely just focusing your efforts on sort of the advocacy side, or are you, you know, also considering any types of, you know, starting to pursue operational adjustments. You know, looking out, looking out, you know, over a multi-year timeframe that this rule would go into effect.
So.
So we're even getting comments from lawmakers and now our efforts really are focused on.
As an industry, making sure that we're in the offices and in front of legislators that that can have an influence over this.
And really the ultimate goal there isn't necessarily to fight it although you see some legislation that's been proposed and given the continuing resolution around the budget.
There is a window and potentially an opportunity to have that legislation somehow make its way into.
Our voting situation.
That's an outside chance really our focus is really on shaping.
The rule at this point.
Chad Keetch: Yeah, that's a great question. Scott, operationally, I don't think there's much that we feel like we need to do to adjust other than making sure we're really, really focused on the things that we're always focused on, which are keeping turnover as low as we can by making sure we've just got amazing practices around how we treat and incentivize and celebrate our people, making sure that we're the employer of choice in every market, making sure that we're very efficient in how we staff and the communication we have with our staff on how and why we're staffing a certain way and getting their input on that as well.
I think it would be a futile effort.
To rally too much energy around getting it just completely struck down there really is because it's so white house and Union driven there is there is there is far too much support.
For that to essentially be.
A real possibility so.
Our goal and our focus is to shape it and make it something that really that we can live with and makes some sense.
And then potentially set set that up for a legal challenge down the road.
And again Thats.
You deal with after the fact, but but again our focus is on shaping it rather than trying to do anything.
Less productive.
Chad Keetch: So, you know, that has been our focus for quite some time, you know, removing agency and ensuring that, you know, the workplace is a place where people really want to be, that really is our focus because if and when there is some adjustment to how the federal government decides we should staff on a building by building basis. If our people systems aren't where they ought to be, then that becomes more challenging.
Thanks, I appreciate those comments if I could just slip one more question and two for you.
I know there is a Medicaid rebates in process, that's underway I think in California.
Would appreciate maybe if you could just bring us up to speed on on sort of what exactly is going on there and sort of what what you'd be looking for.
Out of that process underway. Thanks, a lot.
Yes, Great question, Scott and definitely a lot of things happening in California with regards to the Medicaid rate.
Very very very active.
Chad Keetch: So, our efforts operationally are around making sure that we continue to be the absolute best employer we can be. And so, the silver lining of this whole noise around this proposed rule is that, you know, it gives us impetus and a rally cry to kind of focus on making sure that we're the best at being great partners with our employees.
For our association lobbyist in California, and the Department and shaking what that will ultimately look like and so we continue to be very active in that in.
Part of this discussion.
And as far as the any re basing I don't I don't.
We really don't feel like Theres any.
Overarching threat too.
The.
Chad Keetch: As it relates to what we're doing organizationally, it really is a very much a grassroots kind of focus. So, we're in a heavy comment period right now and some member six. Our organization has produced well over a thousand comments. The industry has produced over 11,000 comments. Congress just recently had nearly a hundred Congress people send a letter that they signed. So, we're even getting comments from lawmakers. And now our efforts really are focused on as an industry, making sure that we're in the offices and in front of legislators that can have influence over this.
The population that we serve it's more community based Medicaid patients that are being re determined in.
I know theres some questions about the redetermination process on Medicaid in some states and you've asked about that before too which is separate from what you asked Suzanne about.
That piece too is something that.
It is really not much of a threat to to what we're seeing in our facilities as far as our patient.
Patient population.
And other than it's just creating a slowdown.
And in terms of getting Medicaid patients approved.
Okay, great. Thank you.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Chad Keetch: And really, the ultimate goal there isn't necessarily to fight it, although you see some legislation that's been proposed. And given the continuing resolution around the budget, there is a window and potentially an opportunity to have that legislation somehow make its way into a voting situation. But that's an outside chance. Really, our focus is really on shaping the rule at this point. I think it would be a futile effort to rally too much energy around getting it just completely struck down.
Keith Thanks, Bally and thanks, everyone for joining us today, we appreciate obviously your support and look forward to a strong finish to the year.
This concludes today's conference call you may now disconnect.
Yeah.
Thank you.
Yeah.
Okay.
Yeah.
Chad Keetch: There really is because it's so White House and Union driven, there's far too much support for that to essentially be a real possibility. So, our goal and our focus is to shape it and make it something that really that we can all live with and make some sense, and then potentially set that up for a legal challenge down the road. And, you know, again, that's something you deal with after the fact. But, you know, again, our focus is on shaping it rather than trying to do anything less productive. Thanks. Appreciate those comments.
Okay.
Okay.
Scott Segel: If I could just look one more question and two for you.
Scott Segel: Just I know there's a Medicaid rebasing process that's underway. I think in California.
Chad Keetch: Would appreciate maybe if you could just bring this up to speed on on sort of what exactly is going on there and sort of what what you'd be looking for. Or, you know, out of that process underway. Thanks a lot. Yeah. Great question, Scott. Definitely a lot of things happening in California with regards to the Medicaid rate. We're very, very, very active with both our associations, lobbyists in California and the department in shaping what that will ultimately look like.
Chad Keetch: And so we continue to be very active in that in the part of the discussion. And as far as the, you know, any rebasing, I don't, I don't, I don't, we really don't feel like there's any overarching threat to, you know, the, you know, the population that we serve, it's more community-based Medicaid patients that are being re-determined and, you know, I know there's some questions about the re-determination process on Medicaid and some states.
Chad Keetch: And, and you best about that before too, which is separate from what you asked Suzanne about that that that that piece too is something that, you know, I, it is really not much of a threat to, to what we're seeing in our facilities as far as our patient, patient population. And other than it's just creating a slowdown in terms in terms of getting Medicaid patients approved.
Bailey: Okay, great. Thank you. There are no further questions at this time. Mr. Port, I will turn the call back over to you. Okay. Thanks, Bailey. And thanks everyone for joining us today.
Barry Port: We appreciate obviously your support and look forward to a strong finish to the year. This concludes today's conference call.
Bailey: You may now...