ENSIGN GROUP, INC Q3 FY2024 earnings call

• The company reported a record quarter with same-store occupancies at 81.7%, a new high. Skilled days and revenue grew for same-store operations. Managed care census also saw growth.
• 46% of the quarter's increased revenue was from organic growth. Even during acquisition activity, revenue and EBITDA showed steady growth.
• Recently added 53 new operations across several markets, with 12 new operations and 3 real estate assets added during the quarter and since, bringing the year's acquisitions to 27.
• Highlighted transformations of acquired facilities like Rehab and Nursing Center of the Rockies (RNCR) in Colorado, which saw occupancy rise from 63% to 90% and managed care census increase by over 600%, and Peoria Post-Acute & Rehabilitation in Arizona, which grew revenues by 20% and EBIT by 29% y/y with high occupancy and demand.
• Focus on local leadership and a scalable, decentralized growth model driven by local leaders and supported by a resource team.

During the quarter, same-store occupancies grew to 81.7%, a 2.8% increase over the prior year quarter. Skilled days increased across all skilled payer sources in same-store operations by 6.1% y/y, translating to 7.3% revenue growth for same-store operations. Managed care census grew by 9.1% for same-store operations and 23.2% for transitioning operations compared to the prior year quarter. Standard Bearer Healthcare REIT generated rental revenue of $24.4 million for the quarter, with $20.2 million derived from Ensign affiliated operations. Newly acquired facilities now account for over 14.4% of total service revenue, up from 8.6% a year ago.

• Raised 2024 earnings guidance to between $5.46 to $5.52 per diluted share, up from $5.38 to $5.50 per diluted share. The new midpoint represents a 15.1% increase over 2023 results and 32.6% higher than 2022.
• Increased annual revenue guidance to between $4.25 billion and $4.26 billion, up from $4.22 billion to account for current quarter growth and anticipated year-end acquisitions.
• Achieved a record low lease adjusted net debt-to-EBITDA ratio of 1.88x and has over $572 million of availability under its line of credit.

• Variations in reimbursement systems.
• Delays and changes in state budgets.
• Seasonality in occupancy and skilled mix.
• Influence of the general economy and census/staffing.
• Short-term impact of acquisition activities.
• Variations in insurance accruals.

Q: So, the same-store occupancy is already above pre-pandemic levels. I think historically, the high point in terms of same-store occupancy was about 84%. Would you be able to, number one, give us an idea of the distribution and occupancy across same-store portfolio? And second, could you quantify for us the potential upside from here given the strong demographic trend, your initiative to increase high acuity patient base and the managed care momentum you alluded to earlier?

A: Yes. I think our high watermark pre-COVID was 80.1%. So yes, we are above that. As far as limits, it's why we are so excited about where our occupancy is today, albeit higher than where we've been. We know that there is so much potential for growth. As we look in our same-store portfolio and look at even more mature operations in that bucket, you have operations that are well into the 90% range, and that's happened over the course of many, many, many years and quarters, and there's continued improvement even amongst our most mature operations, which is why we try to point out some of those stories in our examples in the script. To speak to the skilled mix potential, Tao, yes, there's great opportunity for us to continue to drive acuity frankly, is the basis of our model, which is to continue to deliver what our acute partners need, which is a sicker-and-sicker patient that needs care, and we're seeing that play out as time goes on, and we've broken past the kind of post-COVID norms into what is kind of a steady state of just ever-increasing acuity. Our local leaders are tied in with our hospital partners and our managed care partners. They're in touch with what the needs are. And as Spencer pointed out in the example of Peoria, they continue to adapt by adding things like subacute services and bedside dialysis and other service lines to meet those ever-changing needs. And so that's what they'll continue to do as we stay aligned. And what you can see over -- again, the course of many quarters since COVID, is that our skilled mix does continue to gradually move higher and higher.

Q: A couple of M&A-related questions. It seems like the pace of tuck-ins has kind of picked up a little bit. First, I just wanted to know if there's anything kind of structurally that's kind of driving the acceleration? Is there a change in among sentiment, among sellers? Is there something -- anything structurally -- whether it be minimum staffing or anything that's got -- is incenting more transaction fluidity in the market? Any comments you have there?

A: I mean, yes, to all of that. This is Chad. I think all those things are true. I mean -- I think it's -- especially for smaller operators, it's much harder to keep up with all the constant changes. And that's the one thing that for sure we will have in this industry is constant change. And minimum staffing, we feel pretty confident that's not going to happen. But nonetheless, we definitely hear sentiment from sellers of just like just kind of exhaustion with some of that stuff that's always out there. So that's part of it. I'd say there's also maybe sort of post-COVID, I think a lot of folks feeling like maybe we got through that and now is a time where conditions are a little more stable and maybe it's a good time. Maybe they were looking to sell before then COVID came and they kind of had it pushed through it and now they're at a spot where they feel stable enough to see what they can get for their businesses. So, we're seeing a lot of that. But it's always true too, Ben, that because of overaggressive real estate deals, there's definitely a large amount of distressed opportunities for us where someone overpaid and they're not paying the ren. The rent payments aren't coming through now, right, and they're distressed and looking to find a replacement. And so, lots of those two. So, it's kind of a lot of all those factors. And we're just -- in terms of our pace of acquisitions, because we have this local approach and lean heavily on our local teams and we now have 30 markets across the 14 states we're in. We can grow very comfortably leaning on those local teams as they transition these operations. And as we grow, right, our capacity to grow also grows with it, right? So, in terms of a percentage of growth, we've actually stayed pretty steady. But I do expect that as we get bigger that our capacity to grow, will grow with it.

Q: A couple of questions. Just want to follow up on Ben's question a little deeper on M&A. And just ask with regards to Colorado specifically, obviously, a fair amount of activity there. Is there anything specific to the state that you guys would call out? Or is that just kind of how those fell? And then, I guess to follow up on the last answer that you gave, could you just provide an update on kind of Tennessee and how that's been going? Just any high-level thoughts there?

A: Yes. So, as I said, our priority is always to grow in markets we know and that we know well, and we have a really strong track record, and Colorado is a perfect example of that. And so, it's a state that we've just been in for a while and have just an amazing team of leaders, both clinical and otherwise. We've recently kind of -- as we've grown, we've divided it into two markets. So, and by that, that sort of gives our leadership more bandwidth. And that's been an important sort of structural thing we've done there to prepare for some of that growth. And that's typical of how we've grown in California, in Texas and Arizona and other places, too. And so, it's kind of combining the strength of our team, the strength of our reputation there with deal opportunities that just come up, right, opportunistically, we were just prepared to take some larger, I guess, acquisitions in Colorado. So, there's really nothing super unique about Colorado other than it's a state we love, and there happened to be some great deals that have come up and that we are prepared to take. So, in terms of Tennessee, obviously, we're still new to the state. We have three buildings there, continuing to prepare for future growth in that state. And that's definitely one of the states I was alluding to earlier as one that we plan to grow in, in the near future. But we haven't gotten to a point to announce anything there yet, but you'll see something soon on that front. But really excited about the momentum we have in Tennessee. Our leadership team there, again, is just first class. And having three buildings is obviously just a start. And as we continue to grow there, that will allow us to build extra resources and extra strength in that market and also South Carolina and other parts of that part of the country that we're really excited about as well.

Q: First question, just as we sort of round out the rest of the year. Just interested on any call-outs you want to make just around from modeling considerations for the fourth quarter, either from the P&L perspective, obviously, you updated the new Medicare rate coming in for FY '25, but any other callouts? And then also from the cash flow perspective, any seasonal dynamics that you just want to highlight what model cash flows?

A: Yes. Great question, Scott. As you mentioned, we had that Medicare rate come in October 1, we will be slightly above what the net market basket rate increases due to the states that we're in. When we kind of look at the Medicaid rates, I think that we're pretty in a pretty steady state there based upon where we ended up with the Q3 rate going into Q4 just because not a lot of changes happening in Q4 and some of the supplementals that I talked to a little bit of supplemental payments, the ebbs and flows are about even between Q3 and Q4. So that's a pretty steady state there. With regards to kind of margins and other things, we're looking really consistent as we model into Q4 as well. Obviously, we have a little bit seasonality coming into it with higher skilled mix usually and continued growth in occupancy is usually in there as well. And then just running out the quarter, we had a lot of acquisitions at the end of Q3. So those 12 acquisitions coming in for a full quarter in Q4. And then flipping to the cash flow, just a reminder that we do have a large payment going out for the settlement that we did earlier in the year. We anticipate that going out towards the beginning of Q4. And then everything else is pretty steady state.

Q: Interested if you wanted to provide your thoughts on some of the discussion that's out in the marketplace just around the trends around levels of insurer claims denials, both in sort of commercial managed care and in Medicare Advantage? Most of the commentary has been from the acute hospital side and then the managed care companies have sort of been trading some barbs against the hospitals. So definitely would be interested just from your perspective, more on the post-acute and the skill nursing side, how those trends have been in terms of engaging with the health insurers and sort of what you've been seeing in terms of prior authorization and claims denial type of interactions with them?

A: Yes. Look, I think the commentary you're hearing and the congressional reporting on this topic is fairly indicative of what the provider community at large, generally deals with in that relationship and not to say it's all entirely negative. There's a healthy back and forth when you're working with managed care providers on coding and length of stay and rate levels and authorizations. And really, frankly, that -- there's nothing new there, at least as far as how we work with our managed care partners. Our approach really has been to have a healthy embrace of that process and to make sure that we try to seek to understand what it is that they're looking for and how we kind of work within that structure and build trust so that when we are seeking changes to authorizations and levels and things like that, there's a trust that's built mostly with a foundation based in outcomes. And look, I will tell you, sometimes it's really difficult to have those discussions because what they want and what we want for the patient are sometimes conflicting. But that said, I think the spotlight that's kind of put on this lately is probably healthy. There probably isn't quite as much accountability for the managed care providers as there are for us as providers. It tends to be somewhat one-sided conversation sometimes and that shouldn't always be the case. So, I think, look, the dialogue around this is healthy and helpful. I think there should be some checks and balances to how some of those inner workings play out in terms of the impact on the patient and the providers that are hands on with the care. So, look, at the end of the day, there's probably no meaningful impact to us because we feel confident about our relationships with managed care providers, but I think accountability in the space is always healthy and helpful.