The Ensign Group, Inc. (ENSG) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Ensign Group, Incorporated Fourth Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. And now I'll turn the call over to Executive Vice President of The Ensign Group, Greg Stapley. Sir, the floor is yours.

Thanks, Huey. Welcome everyone, and thank you for joining us today. Our 10-K and press release for the quarter are both available on the Investor Relations section of our website at www.ensigngroup.net, and a replay of this call will also be available then until 5:00 p.m. Pacific on Friday March 2, 2012. Just to open, 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 the call. Participants 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 security laws, Ensign does not undertake to publicly update or revise any forward-looking statements, where changes arise as a result of new information, future events, change in circumstances or for any other reason. In addition, any Ensign facility or business we may mention today is operated by a separate, wholly-owned, independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities, as well as the use of terms like we, us, our and similar verbiage is not meant to imply that The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the facilities, the Service Center, the Home Health and Hospice businesses, the Urgent Care business or Captive Insurance Subsidiary are operated by the same entity. Finally, we supplement our GAAP reporting with non-GAAP metrics such as EBITDA, EBITDAR, adjusted net income and so forth. These measures reflect additional ways of looking at our operations, which, when viewed together with our GAAP results, provide a more complete understanding of our business. They should not be relied upon to the exclusion of GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP is available in yesterday's press release. Now before we get into operations, at this point in the call, we usually take a moment to update you on the DOJ investigation that's been going on since 2006. Normally, we don't have much to tell but this time we do. Today, we're pleased to report that while the investigation is not yet over, the DOJ has informed our special counsel that the government has closed its criminal investigation. In addition, they have formally requested additional information from us and our auditors, which the information, we hope, will be useful for them in advancing the civil investigation toward resolution. We are well along in the process of gathering the records requested of us and discussions between government representatives and our counsel are ongoing. We intend to continue cooperating with the government's representatives to move the matter along. In addition, we continue to make improvements to our compliance programs and systems. We cannot predict or provide any assurance as of the possible outcome of the remaining investigation or as of the possible outcome of any litigation that might yet follow. But we're encouraged to have the questions about possible criminal conduct and penalties behind us and look, hopefully, towards the possibility of additional meaningful progress in the months ahead. That sums up the material information that we have about the matter for now. But we would be remiss if we did not take a moment to thank everyone who stuck with us over the years, in spite of the overhang represented by the criminal investigation. We can't tell you how important your confidence and support had been to all of us here at Ensign. And with that, Christopher Christensen, our President and CEO, will get the call started. Christopher?

Thanks, Greg, and good morning, everyone. We know that after the enormous changes wrought by the October 1 Medicare cuts and therapy rule changes, you've been anxious to see how Ensign would perform under the pressure. We're pleased to report that, overall, our facilities and their leadership teams performed well, doing so in the face of the most drastic and disorienting tilt in the skilled-nursing playing field since 1999. We say this knowing that we were far from where we know we could have been and yet can be. The fourth quarter marked the most daunting challenge to Ensign's facility-centric leadership structure and operating model to date. And perhaps the best test of our flexibility, responsiveness and resilience that we will ever experience. Although there was some temporary pockets of weakness, overall, the strength inherent in our business model shone through as our facility leaders and their teams tackled the changes ahead -- or changes head-on. The Medicare cuts disproportionately targeted high acuity residents, whom we serve in larger percentages in our most mature facilities and our same-store average daily Medicare rate decreased in those facilities by more than 14%. In addition, we were simultaneously hit with major changes in therapy regulation, which increased our therapy costs. Despite these changes, most of our outstanding leadership teams were able to make critical adjustments in real time across a variety of revenue and expense variables in their individual markets and operations. As a result of 1,000 little things that they collectively did, even with the rate cuts, our overall skilled revenue was only off 4.4% on a same-store basis. And net income only declined by 11.3% overall for the quarter. Other headwinds in the quarter included an 82 basis point drop in same-store occupancy. We believe that this decline was consistent with unusually mild weather across the part of the United States where we are this winter, as well as reported declines in hospital occupancy nationwide. But again, our mature facilities successfully mitigated the revenue impact of the census decline with a 564 basis point increase in same-store Medicare occupancy, which also helped to neutralize much of the approximate $90 per day drop in our average daily Medicare rate produced by the October 1 changes. Consolidated EBITDAR for the year climbed by 19.6% and for the quarter only declined by 184 basis points in spite of the cuts. Consolidated EBITDA for the year climbed by 23.5% and for the quarter declined by only 89 basis points, also despite the Medicare cuts and therapy cost increases. We had a 75 basis point increase in the percentage of same-store skilled mix days and much higher increases in our recently acquired and transitioning buckets. We also began to see a significant benefit in our small but growing subacute segment, which is still very much in the embryonic stage but showing great promise. And of course, we continued our expansion, adding additional upside potential to the portfolio. All of these and more were helpful, not only in producing the 3.6% increase in consolidated skilled revenue in the quarter but also in limiting the decline in net earnings. These remarkable results are just the beginning of the story as our leaders continue in the first quarter and beyond to execute and thrive in the new reality of our marketplace. We believe that this quarter, more than any other, illustrates the strength inherent in our unique facility-centric operating model. And although we have made significant progress in managing through the current headwinds and planning for others that may come, we see additional opportunities to mitigate in the months ahead. With perhaps our toughest quarter ever behind us and with much of the adjustment and improvement made in response to the changes so far coming relatively late in the quarter, we have published revenue and earnings guidance for 2012 that are both well above what the quarter alone might indicate. We're projecting $830 million to $846 million in revenues with $2.36 to $2.42 in earnings per share for 2012. And I'll talk more about that in a moment but first, I'd like to have Greg briefly discuss our recent growth as an organization. Greg?

Thanks, Christopher. Briefly, the fourth quarter brought significant operating challenges and distractions that were unusual even for the normally challenging and distracting skilled-nursing industry. Nevertheless, we continue to seek, find and close on quality acquisitions that have attractive prices and enhance our growing portfolio. We've added 2 new skilled facilities, 2 assisted livings and 2 home health businesses since October 1. We also bought the underlying real estate at 2 of our existing lease facilities in the quarter. These transactions brought our total portfolio to 103 facilities, 5 home healths and 3 hospice businesses in 11 states with 9,952 skilled beds, 1,810 assisted and independent-living units and over 1,000 home health and hospice patients being served. Of the 103 facilities we operate, 78 are Ensign-owned and 59 of those are owned free of mortgage debt. We believe that these kinds of acquisitions are key part of the response to the financial challenges that surround us, as the upside of what they bring with them is part of what allows Ensign to continue its upward trajectory as we strive to transform the embattled skilled-nursing industry one facility at a time. We continue to seek compelling opportunities to spread the Ensign operating philosophy across the country, and we remain busy with additional acquisition growth and diversification prospects in the pipeline. Speaking of the diversification, we continue to like the Home Health and Hospice business but are only proceeding cautiously acquiring small agencies, which can be purchased cheaply and grown organically. We do not expect this business to grow faster than our core skilled business has, at least until we get more visibility into both the proficiency of our operational platform and the changes effecting that industry. Also in January, we announced the new joint venture to establish a chain of urgent care locations to be known as Immediate Clinic. Immediate Clinic's state-of-the-art, walk-in clinics will offer daily access to healthcare for minor injuries and illnesses including x-ray and lab services, all from convenient neighborhood locations and with no appointment. Design and construction planning for several new locations is currently underway and Immediate Clinic is also seeking opportunities to acquire existing urgent care operations across the United States. To date, Ensign has committed $4 million to the joint venture, and I expect Immediate Clinic to open its first facilities within the second quarter of 2012. Although it will start small and mostly grow organically just as Ensign has, we're excited about this new venture and Christopher is going to talk more about it in just a minute. I will conclude my portion of the call by mentioning that capital for growth remains readily available. We have almost $30 million in cash on hand at year end. Over $55 million of our revolving credit facility remains at our disposal, and our net debt-to-EBITDAR ratio still remains at right around 2.1x. In addition, we have borrowing capacity to raise additional funds for growth should we wish to, all without over-leveraging the balance sheet. All of these resources can be used to drive additional growth and continue our upward climb. And with that, I'll hand it back to you, Christopher.

Thanks, Greg. Let me say at the outset that while we're modestly pleased with our overall fourth quarter performance, we don't feel that it accurately portrays what our performance will be going forward, especially in late 2012 and beyond. As you know, when CMS announced its unprecedented 11% rate cut on July 29, a number of wheels were set in motion across our organization. These moves were not initiated by anyone on this call, rather the leadership teams at each of our individual facilities immediately began evaluating the projected impact of these cuts on their respective operations and taking steps to close the gaps. Some of those steps were immediate and others will be executed over time. But as we've told you before, this is exactly the kind of dynamic challenging environment that Ensign was built for, and we believe that a cursory comparison of our results for Q4 to what might have been, although we could have done better, tells that story. I'm also pleased to report the direct patient care has not been cut. Our facility teams know their quality is their competitive edge in their individual markets, and they would never risk their reputations by cutting corners on care. Quality produces referrals and our increase in same-store Medicare days in the midst of Q4's declining overall census is the finest endorsement the medical community could give to the quality of our facility -- that our facilities provide. We repeatedly asked about what exactly was done in each case to mitigate the combined impact of the cuts and cost increases at our facilities. While no 2 facilities are ever exactly alike in our system, there are a couple of stories that illustrate the kinds of things that happen in our more successful operations. For example, at Catalina Care Center in Tucson, Arizona, CEO, Rob Eagar, and his team changed their focus, taking the extraordinary step of closing a longstanding secure behavioral unit that they have operated since we acquired the facility 9 years ago. They then re-purposed the behavioral beds to skilled care and expanded their subacute program. As a result, while Medicare rates declined by double digits across the industry, Catalina's average daily Medicare rate declined by only 0.2%. And in the quarter, Catalina's EBITDAR was up 96%. At Silver Springs Rehabilitation and Care Center in Houston, Texas, Executive Director, Guillermo [ph] Rojas [ph] and his team continue to shift their acuity mix and increase their collective skill set to focus on providing higher quality care to higher acuity patients. The medical community has responded positively helping Silver Springs increase skilled mix by over 12%. As a result, Silver Springs' average daily Medicare rate only dropped by 4% on the cuts and their EBITDAR rose by 43%. Finally, at Mission Care Center in Rosemead, California, Jason Postl, the Executive Director, and his team experienced the nearly 11% decline in their average daily Medicare rate. But worked very hard with their community to offset the hit with a substantial increase in skilled occupancy. As a result, skilled mix went from 49% to 66% in the quarter, revenue grew by over 20% and EBITDAR increased by more than 65%. These great leaders did not allow our reimbursement headwind to set them back, and Ensign is built and carried on the shoulders of numerous great leaders like these. That's why we performed as well as we did in spite of the challenges of Q4. And while we believe we can perform and even grow going forward, not every operational leader did this well. But we believe that as best practices and field-driven accountability continue to spread, everyone can make their own significant improvement as additional operational adjustment continue in other operations through the second and third quarter. I would also like to elaborate very briefly on what Greg said about our new Immediate Clinic venture. With Dr. John Shufeldt, one of the most well-respected leaders in the urgent care industry already on board, we have a seasoned leader in place to make sure it's done correctly. We believe that, over time, synergies between Immediate Clinic and our core businesses can enhance Ensign's relationships with hospital systems, physician groups, managed care organizations, accountable care organizations and other providers and payers and also provide our employees with better access to quicker, lower costs and higher-quality healthcare for themselves and their families with a corresponding benefit to us in our employee healthcare costs. With the guidance of long-time Ensign leader, Mike Dalton, partnering with Dr. Shufeldt, we also see an opportunity to bring Ensign's lower cost structure, decentralized operating model and focus on local control and quality to this still developing urgent care world. The Urgent Care business will need some time to prove that out, and we may not talk about it much more in the near term. But we are excited about its prospects. I'll just conclude by reminding everyone that we continue to focus squarely on our core business, where we have a tremendous amount of organic upside built into the existing portfolio. We have a very solid balance sheet, and we continue to have industry low occupancy costs, that stand as an additional hedge against the challenges facing the broader industry. Most importantly, we have a different caliber of leaders and partners, who are not only committed to, but have proven once again, that they are capable of carefully executing on our very simple business plan to meet the needs and outperform the expectations of our communities, our shareholders and especially those entrusted to our care. With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and then we'll open it up for questions. Suzanne?

Thank you, Christopher, and good morning, everyone. In 2011, Ensign produced operating results, which met management's annual revenue projections and exceeded earnings guidance, with consolidated revenue of $758.3 million, up 16.7% and adjusted earnings at $2.34 per diluted share, up 21.2%. Net income was up 17.6% to $47.7 million for the year. As you may recall, we increased guidance twice in 2011, the first increase revenue guidance at the end of Q2 after the Medicare cuts and therapy cost increases were announced, to $755 million to $770 million. And although we doubt whether anyone will have question as how we lowered our earnings guidance in the fourth quarter, when we reported Q3 results in early November, we actually increased EPS guidance for the year to $2.25 to $2.30. You may also recall us indicating in August that the collective impact of the October 1 change will be approximately $32 million, $28 million in loss revenue combined with approximately $4 million in increased therapy costs. We also estimated that our unique financial and operating structure, approximately 15% to 25% of this cost increases and cuts was actually dropped to the bottom line. We are pleased to be reporting that the actual impact to the consolidated net income for the quarter was only 11.3%, and we believe that we can mitigate that impact further as we move forward through 2012. For the quarter, consolidated revenue was $192.7 million, net income was $10.4 million and adjusted earnings per share were $0.48. By the way, you will note that in making our non-GAAP adjustments for the quarter and the year, we excluded the benefit of a lower-than-normal consolidated tax rate. Our effective tax rate dropped to a lower-than-normal 38.3% for the year and 35.3% for the quarter due to a number of factors. Accordingly, we normalized our tax rate for the year and the quarter by increasing it to 38.9%, which had the effect of reducing adjusted earnings per share. For the year and for the quarter, we also excluded expenses associated with our response to the DOJ matter. And as always, we excluded acquisition-related costs and amortization costs related to intangible assets acquired. Finally, as we reported earlier, our results for the year excluded the effect of the one-time charge associated with the pre-payment of an existing mortgage and the proceeds of a new credit facility we established last July. In other key metrics for the year and the quarter, we are pleased to be reporting consolidated EBITDAR for the year climbed by 19.6% to $127.7 million, and for the quarter, declined by only 184 basis points to $28.8 million, in spite of the 11.1% October 1 Medicare cuts and changes to therapy regulations which increased therapy costs. Consolidated EBITDA for the year climbed by 23.5% to $114 million and for the quarter, declined by only 89 basis points to $25.5 million, also despite the Medicare cuts and therapy cost increases. Net income for the year climbed 17.6% to $47.7 million despite a decline of 11.3% in the quarter due to the Medicare cuts and therapy cost increases, which decline was on the low end of the previously issued forecast. And we note, as in the case of every quarter, during and after a robust acquisition activity, that these consolidated results were achieved despite the downward pull of the still maturing facility and the transitioning and recently acquired bucket, which account for 41% of our total facility portfolio. In reviewing the strengths of our financial position for the year ended December 31, cash and cash equivalents at year end were $29.6 million. The company generated net cash from operations of $72.7 million and free cash flow was $31.9 million. This number was impacted by aggressive renovation activities in 2011, as we spent $40.8 million on CapEx and renovation project to upgrade our real estate portfolio, implement new technologies and prepare for the future. And of course, the associated depreciation is now starting to show up in the delta between our EBITDA and net income. We intend to continue to make prudent capital expenditures, consistent with our commitment to constantly upgrading our growing portfolio, but they should drop to about $30 million in 2012 with the resulting benefit to free cash flow. Overall, we are pleased with how our facilities performed in what was a seemingly a perfect storm of reimbursements, census and regulatory headwinds. And we are even more pleased when we consider that there were many things we did not do as well or as quickly as we might have, but which we have started to do in Q1. Under our current plan, mitigation efforts will continue to be implemented and ramped up through the first half of 2012, with the majority of the plan implemented by Q3. As such, we expect performance to ramp up incrementally through Q1 and Q2 with better performance to arrive in Q3 and Q4. Finally, as Christopher mentioned, we have published guidance for 2012 of $830 million to $846 million in revenue, which represented average revenue growth of almost 18% a year since 2009. We also projected $2.36 to $2.42 in diluted earnings per share, which represents an average growth rate in earnings per share of almost 16% a year since 2009. We are confident projecting that this ramp will continue and the projections are based on diluted weighted average common shares outstanding of approximately 22.1 million. No additional acquisitions or disposals beyond this made to date, exclusion of acquisition-related costs and amortization costs related to intangible assets acquired, exclusion of expenses related to the DOJ matter, tax rate at a historical average of approximately 39%, no future changes in Medicare rates in 2012 and no decline in the overall Medicaid reimbursement rate nor any increase in the related provider tax. In giving you these numbers, I'd like to remind you again that our business can be lumpy from quarter-to-quarter and year-to-year. This is largely attributable to variations in reimbursement systems, delays and changes in the state budget, seasonality in occupancy and scope mix, the influence of the general economy and our census and staffing, the short-term impact of acquisition activities and other factors. All financials were included in our K and press release. I'd be happy to answer any questions you might have later in the call. I will now turn it back to Christopher to wrap up. Christopher?

Thanks, Suzanne. Well, thanks to everyone who's been on the call. We hope this discussion is somewhat helpful. We want you to know that despite the pain in the recent changes, we're pleased with the way most of our leaders are managing through them, and we all remain very optimistic that Ensign will continue to perform both clinically and financially during this time of extraordinary change and opportunity. As always, I want to conclude by thanking our outstanding co-workers for turning what could have been a very negative quarter into a very bright and positive one. More importantly, we want to acknowledge, again, the outstanding love and care they give daily to our residents. Thanks to our dedicated service center team, who work tirelessly to support the field and help Ensign forge ahead. And thank you, shareholders, again, for your support and confidence. Huey, can you instruct everyone on how we're going to handle the Q&A?

[Operator Instructions] Our first questioner in queue is Wes Huffman with Avondale Partners.

I just wanted to try and get an idea if there are any current budget proposals in the states of Texas or California that could have a material impact on skilled nursing revenues? And if so, what are they?

This is Christopher. Obviously, there are many things that are thrown around throughout the course of the year and -- but from everything we gather, it appears to us that the combination of those 2 states, which obviously impact us the most, will net into essentially a flat environment.

Okay. And if I could get your thoughts on the bad debt proposal, that's included in the [indiscernible] and whether or not that it's going to be material for you or not.

Sure. I mean, one of the biggest parts to think about on this is that for our 2 largest states, Texas and California, we're -- that's not we're really not impacted by the proposal because the costs are actually covered by the individual states and we're not being reimbursed by the federal government. So this is just for the portion related to the reimbursement by the federal government. So we think that the impact will be relatively minor, just because of our 2 main states are actually we don't have a significant portion being reimbursed by the federal government today.

Okay. And even if it isn't material, do you oppose it due to concerns that more of your state Medicaid programs might stop reimbursing you for the bad debt?

I mean, yes, I think we would oppose it. But right now, we don't believe it's material to us.

Okay. And then just a couple of modeling questions. Given the number of acquisitions that you completed in the quarter and so far this year, can you give us sort of a good estimate as to what a D&A and rent expense should be on a quarterly basis?

So on the rent expense, nothing was actually leased so the rent will stay flat. And on the D&A, I mean it's ramping up. I'd say, it's a little -- it's going to ramp up over the year, as the percentage of revenue, which should remain pretty flat on a go-forward basis.

On that other question, I just wanted to add that is heavily impacted by your own collection efforts and your admission process and things like that, and I want to remind you that our bad debt numbers are significantly below that of our peers. So it's -- obviously, anything impacts us, but the impact would be much smaller.

Okay. And finally, on another modeling question. Targeted CapEx for 2012, do you have something there for us?

It's -- so that's $30 million and that includes renovations, additions, things like that.

Our next questioner in queue is Daniel Bernstein with Stifel, Nicolaus.

I guess you made a comment earlier about taking this cautiously on the home health and hospice, I guess, expansions or acquisitions and maybe you can go a little bit further into that. Is there something particular in the reimbursement environment that is making you cautious? Or -- just trying to get your sense of why you're taking it cautious versus ramping it up more rapidly?

Right and you probably know a little bit of the answer to that. It's -- yes. No, look, we were cautious anyway. But unless we're paying a price that takes into account some of the worst-case scenarios that are being thrown out there, we're probably going to pass. So in saying we're going to be cautious, it isn't that we're not going to grow. It's just that we're going to grow based on, again, worst-case reimbursement scenario because of the environment that we're in right now.

So are operators of home health -- are they asking for high prices? Are you seeing their prices just not where you want it to be because they see the SNF operators and senior housing operators starting to roll up that industry?

Well, I think we've definitely seen the supply and demand balance changing dramatically. So because there is -- the supply has increased in a tremendous way, the prices are coming down in a fairly significant way.

Okay. And then the other question I had is you talked about the mitigation ramping up in Q1 and Q2. Would it be correct to say that's going to be more on the mix side than the revenue side? And then a lot of the expense mitigation is done. Or would that be incorrect?

That's a good question. I think that a lot of what is left to come is on the revenue side. But there were certainly some cost mitigation efforts that took place in most of the company but not across the entire entity. And so because of that, I can't say it's all on the revenue front. But certainly, the majority of it is even though there is still cost mitigation effort left to come in the second and third quarter. I know I didn't give you any numbers or percentages there but I hope that answered your question.

No, it did. I just want to try to get a sense of the balance. And then one last question is, the acquisitions that you made in the quarter, that's going to have very similar metrics to the acquisition numbers that you have in your press release for acquisitions you made since January 1, 2010. Would that be correct as well when we're thinking about modeling? And it's going to be something that you're going to turn around. Or were those assets more stable?

Oh, it's a good question. You're just talking about the ones we took in the first quarter.

Maybe the ones in the fourth quarter and I guess, the ones that you're buying here in the first quarter, too.

Yes. I mean, I think that there were a couple of acquisitions in there that are doing better out of the gate than we generally do. But most of them were similar to the acquisitions we've taken in the past, where it will take us a few quarters to see anything accretive out of them.

[Operator Instructions] Our next questioner in queue is James Bellessa with D.A. Davidson.

The comment you made about home health agencies, can you describe the values that you're seeing or the asking prices for skilled-nursing facilities and assisted-living facilities?

Wow. That's a really good question, Jim, but the answer is so broad. It's probably not as broad on the home health side as it is on the skilled nursing and assisted living side. So I guess, I'd say that we have seen the prices of home health companies come down significantly. I'm hesitant to give you a number because it depends a lot on the balance between home health and hospice. It depends on the balance between skilled and unskilled. It depends on the condition of the accounts receivable, which varies widely in that particular sector. But we have seen deals, where they were going from 1 and 1.25x revenue. We see them as low as 0.3 -- 0.35. And we're not -- we don't really look at anything that's much above 0.5 or 0.6.

Well, that's helpful. You made, by my count, 20 acquisitions of SNF and ALF during the past year. Is that an extraordinary period of acquisitions? Do you think you'll be slowing down in 2012? Or is this the pace that you'd like to maintain?

This is Greg, Jim. That's a pretty good year for us. And remember that one of those -- that 9 of those came in one transaction. So -- and it was not on a bed count but on a facility count, probably the biggest transaction we've ever done and it was in 2 new states. So it was a fairly extraordinary year for us. We could do another one this year. My crystal ball is probably only good about 4 to 6 months out right now. And we do have some stuff in the pipeline right now that we hope to close in the near term. But that might -- 20 might be a little aggressive for this year. We just don't know. We haven't quite seen how things are going to shake out yet.

In the press release and in the formal remarks, there was an expression about the tax rate in the most recent quarter and the year being lower than normal. What caused it to be lower on the most recent quarter?

Jim, it's Suzanne. We had the opportunity to some realize tax credit, that we had not previously taken advantage of them. So we had the opportunity to realize those for a period of time and got all the paperwork in so that we could actually realize those. And then we have another portion of it related to a portion that -- I mean, the state tax rate and how much we were because of our revenue coming from lower income tax base would actually drove our rate down. So a little bit of it will continue and you can see that, that we've dropped going forward from 40 to 39. But there is a big chunk of it that will not continue on a go-forward basis or that we expect to continue at the same level as Q4.

And in the small footnote, it says the GAAP -- the non-GAAP adjustment normalizes the tax rate to 38.9%. Is that the bogey that we should use or a little bit higher?

Yes. It's -- I mean, between 38.9% and 39%. That's the right kind of range. It's going to vary a little bit, but right in that range.

[Operator Instructions] We do have a follow-up question from Daniel Bernstein with Stifel, Nicolaus.

You did particularly well in this quarter but I'm sure you have some skilled nursing operator peers on the private side perhaps that may not do as well or operate as well as you. Do you think you're going to get a lot more in terms of acquisition opportunities? I know you talked a little bit about acquisition opportunities before, but do you think you're going to get a little bit more opportunities on the distressed side in 2012?

Well, we -- that's a great question and a difficult thing to predict. We definitely hear that there are some bigger challenges out there, and so I would expect that some of them would come to the forefront. It's probably going to depend, as you might expect, on the balance sheet. Those that have an okay balance sheet and struggle with this will probably hang in for the long haul. And those that have been operating on the edge -- I think, that we'll -- I think we'll continue to see a lot of opportunities. We -- as we said before, we pass on many, many opportunities that come our way, we have recently. But we don't see any slowdown in opportunities that are coming our way, although we may be a bit pickier than we've been in the past. Did that answer your question?

Yes. And I guess, would you be any more -- I guess would you be inclined to also consider assuming leases? Or you're just looking to go ahead and buy on balance sheet?

We've always been willing to assume leases and do leases. We view that as just another form of financing. And if the deal is right and the facility is one we want, we're happy to do it at the right price.

As you might imagine, there are more people participating in the auction for lease opportunities because it doesn't require the same kind of balance sheet as participating in an auction for a -- and I'm using auction loosely. But participating in an auction for an owned property.

And of course, our ability to acquire real estate for cash has always given us a major transactional advantage that we've used pretty well. And we're now, I guess, about 80% or close to 80% owned in the real estate portfolio. So we expect to see a lot more of that. But if the lease comes along that we like, we'll chase it as hard as anything else.

[Operator Instructions] Presenters, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Christopher Christensen for any closing remarks.

Well, thank you, Huey, I appreciate it. And I appreciate everybody for joining us, and again, we appreciate your confidence. Have a great day.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.