The Ensign Group, Inc. (ENSG) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. And welcome to The Ensign Group, Inc. Second Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. Now it's my pleasure to turn the floor over to Greg Stapley, Executive Vice President. Sir, the floor is yours.

Thanks, Julio. And welcome, everyone, and thank you for joining us on the call today. Our 10-Q and our press release highlighting key financial results and other developments for the quarter are both available on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available there until 5:00 p.m. Pacific time on Friday, August 24, 2012. 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 result 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 securities 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, changing circumstances or for any other reason. In addition, any Ensign facility or business we may mention today is operated by a separate, 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 the terms 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 operations, its 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. Before we get into operations, we customarily take a moment, at this point, to update you on the DOJ civil investigation that has been ongoing since 2006. Last quarter, we reported that the government had asked for, and we had delivered, additional information for their review. We are informed that their review and analysis continues, and in the meantime, counsel for our Special Committee and counsel for the government are also attempting to develop a process to resolve, in advance of any formal litigation, any civil claims the government may believe it has after concluding its investigation. As we have historically done, the company continues working to make improvements to its compliance programs and systems. At present, we cannot predict or provide any assurance as to the possible outcome of the remaining investigation, the likelihood or possible results of any resolution process or the possible outcome of any litigation that might follow. But, we look hopefully toward the prospect of additional meaningful progress on this front in the months ahead. With that, I'll introduce Christopher Christensen, our President and CEO, who will get the call started. Christopher?

Thanks, Greg. And good morning, everyone. The second quarter saw our performance running ahead of schedule in nearly every corner of the organization. Skilled nursing, assisted living, hospice and even our relatively young home health companies all gained strength as many operations achieved mitigation milestones early and outran even our fairly aggressive projections. If you haven't seen them already, just a few highlights. Our adjusted net income climbed 9.8% to $14.6 million, while adjusted earnings had a record $0.67 per share. Same-store occupancy grew by 114 basis points to 83.1%, with same-store Medicare days increasing by 3.9% over the second quarter of 2011. And same-store skilled mixed days had a record 30%, with same-store skilled revenue reaching 55%, which is approaching the all-time high set in the second quarter of last year when Medicare rates were about 13% higher, overall, for us. These same-store numbers are more representative of our operational performance. Remember, the consolidated metrics are pulled downward by the still maturing operations in the transitioning and recently acquired buckets, which account for approximately 40% of our total portfolio. We extend our heartfelt thanks and give full credit to our local operators and clinical leaders, most of whom have performed spectacularly well in a very rough operating environment. The most successful of these are the ones who have built very solid clinical programs, who delivered the highest quality care and who do it all in the spirit of close cooperation with local physicians, hospitals and other participants in their local medical community. That said, most of our operations are still climbing their way back from the effects of last October's unprecedented Medicare cuts and therapy rule changes. And they still have work to do and room to grow. Even with these pleasantly surprising results, we know that we did not, by any means, achieve our full potential in any single area, and we still see tremendous organic upside across the portfolio and throughout all of our operating business lines. In fact, we feel so confident about the near-term that we are increasing our annual earnings guidance today, but I'll let Suzanne talk about that in a minute. First, I'd like to ask, Greg, to briefly discuss our recent growth and the acquisition landscape. Greg?

Thanks, Christopher. Q2 was relatively quiet on the acquisition front, but we picked up some high-quality assets with great upside that we're pretty excited about. All were purchased at prices that we believe provide us with a competitive advantage in each target facilities marketplace, For example, in Utah, we purchased Zion's Way Home Health & Hospice, a thriving home care provider with multiple agencies in Southern Utah and Page, Arizona, both great markets. Our home health business has been a real bright spot this quarter as our earliest acquisitions from 2010 are starting to show early signs of maturation. In fact, since our acquisition just 2 years ago, our first home health, which was Horizon home health in the greater Boise market, that company has increased its revenues by almost 50% and it's net income by 115%. Remember that the growth strategy on the home health and hospice side is very similar to the pattern we followed in building our skilled nursing business, where we buy beaten-down assets and operations for a fraction of what performing assets would cost and then build value mostly organically. While this growth strategy will always drag down our overall occupancy skilled mix revenues, skilled mix days, and other consolidated metrics, on a quarter-over-quarter basis, this is what provides us with that tremendous built-in organic upside that we exploit to create significant value over time. Applying that model to home health, because we develop the skill sets to build almost from scratch internally, our home health operators have been able to purchase underutilized licenses very inexpensively, keeping their overhead low and allowing them to expand their geographies and build profitability much more quickly, and frankly with much greater margin for error if they need it, than we see others doing in this same home health and hospice arena. We're gratified to see this strategy working so well for our home care leaders after only 26 months of operation, and we still see lots of upside ahead in our existing home health and hospice businesses. Continuing with other acquisitions. In Idaho, we acquired yesterday a 49-bed skilled nursing facility located just outside Boise, as well as its sister facility, a 45-bed skilled nursing and 24 unit assisted-living campus in Salmon, Idaho. Both nursing facilities are solid performers that have great upside as they transition from a more traditional convalescent care model to a higher acuity skilled format. We also continued trying to reduce our real estate costs wherever possible by purchasing our leased properties. And this not only has an immediately beneficial impact on EBIT, it also eliminates future rent installations and fixes our real estate overhead going forward. We announced yesterday that we successfully exercised a purchase option to acquire the underlying real estate for a 74-bed Southern California skilled nursing facility, which we have operated under a lease since 2003. We also expect to close one additional option exercises in the near-term. Together, these transactions brought our total portfolio to 107 facilities, 6 home health and 4 hospice companies, all in 11 states with 10,291 skilled beds, 1,799 assisted independent and living units and over 2,100 home health hospice and private duty patients being served. Of the 107 facilities we operate, 83 are Ensign-owned and 62 of those owned facilities are owned free of any mortgage debt. We continue to seek compelling opportunities to spread the Ensign operating philosophy across the country, and we have additional acquisition, growth and diversification prospects in the pipeline. In fact, we are currently considering pursuing a couple of larger portfolios, which we would plan to take down in stages if we get them. Although it is far too early to tell if our efforts will bear fruit, we could be very busy in Q4 and into the early parts of 2013, if any of those efforts are successful. We'll keep you posted on meaningful developments on that front as they occur. And just by way of update on the urgent care business, as mentioned on prior calls, we will be opening our first company-owned and operated Urgent Care locations in the Northwest toward the end of the third quarter. While we expect them to dilute our earnings this year, we anticipate that these locations would be accretive doing the course of 2013. And with that, I'll hand it back to Christopher.

Thanks, Greg. We get regular questions about what we're doing to produce results like this quarter's when average -- when our average daily Medicare rates are still 13% lower now than they were a year ago. While some things are universal like growing census, or increasing acuity across the facilities' patient base, how that census has grown and how that acuity has increased varies widely from market to market, facility to facility and leader to leader. That's why Ensign's facility-centric leadership model is so critical in times like these. One of the best things our operators have done this year to grow census and skilled mix is to reconnect with their hospitals, their local physicians and other stakeholders in their local medical communities. In our Shoreline facility in Long Beach, California, for example, Executive Director Aman Dhingra and his Director of Nursing Elsie had made huge strides inside the medical community. Aman, who is a licensed physician in India and parts of Europe, has rapidly build positive relationships with other physicians in Long Beach with surprising results. Arman and Elsie are visibly helping the local physicians to provide outstanding quality to their patients. Shoreline, which already enjoyed occupancy an excess of 95%, has nevertheless increased its skilled mix revenue to 62%, resulting in a 139% increase in EBIT since this time last year. And we believe that Shoreline's operations, which are included in our same-store bucket are still not fully mature. Another thing our operators are doing is retailoring their service offerings to meet specialized needs in their individual communities. In quarters past, we've shared with you the great work being done by some of our operators to add subacute ventilator units and respiratory therapy programs to their existing skilled nursing service offerings, where those needs are dictated by their local markets. At the different end of the spectrum, our Park Avenue facility in Tucson, Arizona, once a Special Focus facility, and one of the least desirable convalescent homes in its market has recently opened a new secured behavior wing that was almost immediately full. In addition, CEO Ellen Cote and COO Sheila Summey have consistently, inch by inch and month by month -- sorry, and month by -- by some times grueling month made the incremental changes necessary to resurrect the facility's reputation and stand in the community to the point where today it's one of the finest and most desirable skilled nursing facilities in the market. As a result, Ellen's skilled mix revenue is now well over 50% and her EBIT has climbed to 137% since last year. With occupancy still at only 64%, and that has increased a lot from where it was when she got there, you can see that Park Avenue still has huge potential upside, and they're clearly on a path towards achieving that built-in upside. Another way our local leaders are making a difference, especially in recent acquisitions, is by really taking ownership of their facility and operations and simply applying the Ensign culture and philosophy. On the assisted living side, for example, Executive Director Eric Terrill at our Lexington assisted living facility in Ventura, California, is setting records. Eric is not only a great operator but a great marketer. And since he took over the Lexington when we acquired it from an a national assisted-living operator in March of last year, Eric and his team have increased occupancy to over 95%, increased their EBITDAR margins to over 36%, and increased their EBIT by 107%. On the skilled nursing side, at Hurricane Health and Rehabilitation in tiny Hurricane, Utah, CEO Tyler Hoopes and his Director of Nursing Jeremy Wood have taken a small facility that was already operating fairly well, when we acquired it 1 year ago yesterday, and built its reputation as an outstanding high-acuity skilled nursing facility and more importantly a great and comfortable place to recover quickly from strokes, surgeries, falls, and the other kind's of life events that place our patients in nursing care. Today, 1 year after this experience, the Ensign leadership team took over that facility and its market, Hurricane's revenues have almost doubled, occupancy has increased to more than 83%, and EBIT is up 521%. And as a recent acquisition, Hurricane's skilled mix revenue of 38% is still a long way from our current same-store average of 55%. So you can see that Tyler and his team still have plenty of room to run in their market. And yes, it is called Hurricane, and not hurricane. It has not been easy to mitigate or neutralize the approximately $80-per-day drop in our average daily same-store Medicare rate, initially produced by the October 1 changes. In fact, we really still haven't done so as our Medicare daily rate this quarter was still exactly $79.55 a day below last year. But these wonderful stories and many others like them illustrate plainly that great leaders who take true ownership of their operations and markets and participate meaningfully in their clinical and operational performance can still post incredible quality and financial results without worrying about what is going to happen with reimbursement rates every year. There are dozens more stories like these, and I cannot stress enough the importance of having a highly competent and motivated and empowered local leaders at the helm of every single operation. But perhaps our results will convince you that this factor alone makes Ensign very different from traditional nursing home operators. Moreover, as wonderful as these examples are, in each case we would emphasize that these operations are far from mature and significant organic upside exists not only in our recently acquired and transitioning facilities but also in our more mature facilities, most of which continue to grow and perform and outperform, month after month and year after year. I really could go on all day. But 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 up for questions. Suzanne?

Thank you, Christopher. And good morning, everyone. As our mitigation efforts continue to be rolled out, we are pleased to be reporting record adjusted non-GAAP earnings of $0.67 compared to $0.61 per share in the second quarter of 2011. Fully diluted GAAP earnings per share were $0.57 for the quarter. GAAP earnings include unique and unpredictable items that are not representative of our long-term operational performance. Accordingly, we provide you with non-GAAP numbers in order to highlight our operational performance quarter-over-quarter and more importantly year-over-year. For example, this quarter we believe that investors get a clearer picture by our inclusion of adjustments for expenses associated with response to the ongoing DOJ matter, the tentative settlement of a staff class action lawsuit in California, as well as normalized rent costs recorded in connection with one operating facility for a lease that is not yet open and operating, but for which GAAP requires us to record a lease expense. We also exclude a net benefit of a lower than normal consolidated tax rate, which we normalize by increasing it to approximately 39%. And as always, we exclude acquisition-related costs and amortization costs related to intangible assets acquired. In reviewing the strength of our financial position for the 6 months ended June 30, cash and cash equivalents at the quarter end were $32.8 million, and the company generated net cash from operations of $25.1 million. Free cash flow for the 12 months ended June 30 was $31.8 million. This number was impacted by aggressive CapEx and renovation projects to update our real estate portfolio, implementation of new technologies and of course the associated depreciation that is now starting to show up in the delta between our EBITDA and net income. Overall, we are pleased with how our operations have performed, thus far, under the new Medicare rates and therapy rules. Under our current plan, mitigation efforts will continue to be implemented through the third and fourth quarters, with some seasonality anticipated in the third quarter. And we note that as in the case of every quarter, during and after periods of robust acquisition activity that these consolidated results were achieved despite the downward pull of still maturing operations in transitioning and recently acquired buckets, which account for more than 40% of our portfolio. As we look forward to the second half, we would remind you that Q3 is historically our softest and least predicable quarter, but, more often than not, tracking behind Q2 sequentially. We have often had significant adjustments in the insurance front, as well as seasonal drops in census and overall performance declines during the third quarter, among other challenges. In addition, you may recall that last August we indicated that the collective impact of the October 1, 2011 change, will be approximately $32 million on an annual basis, of which $28 million would be loss revenue, approximately $4 million will be increased therapy cost. We also estimated that our unique financial and operating structure only approximately 15% to 25% of those cuts and cost increases would actually drop to the bottom line. This initially proves true with the results hit net income in Q4 being about 16%. Part of the reason we were impacted less than our peers is due to the design of our incentive compensation system for facility leaders. We participate in the performance of their operations and accordingly experience fairly severe personal compensation impact as the cuts took their toll last October. Now that mitigation efforts are gaining traction, the same principle will hold true. We expect incentive compensation for those operators who are leading the way to rebound somewhat faster than revenue or earnings. The overall impact of our efforts to net income will be positive, will again be somewhat muted due to the unique system. We believe these systems and the incentives they create at a facility level are a key contributor to our current success. We are pleased to be able to share the fruits of that success with those who are giving their all to make it happen. With operating results, year-to-date, running ahead of schedule, improving Medicaid reimbursements taking effect later this year in key states, the recent announcement of the 1.8% SNF Medicare market basket update, which will go into effect October 1, we are raising our previously announced annual guidance. Revised earning projection for 2012 are $2.48 to $2.56 per diluted share on $830 million to $846 million in projected revenue. We anticipate that most of the increase will come in the fourth quarter. These projections are based on: diluted weighted average common shares outstanding of approximately $22.1 million; no additional acquisitions or disposals beyond those made to date; the exclusion of the acquisition-related costs and amortization costs that's related to intangible assets acquired; exclusion of normalized rent expense at the unopened facility; exclusion of expenses related to the DOJ matter; tax rate at a historical average of approximately 39%; the effects of the announced Medicare market basket update; anticipated increases in overall Medicaid reimbursement rate; and the exclusion of the costs associated with the settlement of the California class action. In giving 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 rates; delays and changes in state budgets; seasonality and occupancy and scope mix; the influence of the general economy on our census and staffing; the short-term impact of our acquisition activities and other factors. Full financial statements were included in the Q and the press release. I will be happy to answer any specific questions you might have later in the call. I'll now turn it back to Christopher to wrap up. Christopher?

Thanks, Suzanne. And thanks to everyone who's been on the call. We hope this discussion is somewhat helpful. In fact we sure hope that you have some questions today, because we'd love to talk more about this quarter. As always I want to conclude by thanking our outstanding partners for their continued efforts to make Ensign the best company in the healthcare industry. More importantly, I want to acknowledge again their dedication to our residents and their families. I also like to thank our dedicated service center team who work tirelessly as well to support the field and help Ensign force ahead. We also like to thank our shareholders, again, for your support and for your confidence. Julio, if you can instruct everyone on the Q&A procedure, please.

[Operator Instructions] And our first questioner on the phone queue comes from Kevin Campbell with Avondale.

Wanted to start just on your comment about looking at larger deals and really your balance sheet and where you are now in the balance sheet? Your leverage ratio, where you are now, where you would go at its, sort of, maximum where you feel comfortable going to taking on additional debt? How you might potentially finance any deals? Any comments you can make on that end would be great.

Thanks, Kevin, and thanks for the nice compliment. Listen -- and also just for everyone's benefit, Christopher has got a terrible cold today, so if he sounds a little less than enthusiastic, it's not about the numbers, it's about how he feels. Your question about our ability to take on more acquisitions, I'll just start to answer then I would like Christopher to finish. But as you look at some of the portfolios and things that are out there, what we're seeing is that there's a number of things that can be acquired for relatively little money up front, some of them are lease deals and there's a wide variety of financing available out there, at pretty attractive rates right now, particularly for somebody who's got a balance sheet like ours. In terms of how high -- where we'd be comfortable leveraging those, every deal kind of stands on its own. And some that are more compelling might just by a little higher leverage, while others we remain very, very conservative on that front and would probably not jump too far outside the strike zone to go after one of those. We've always said that we were comfortable pushing somewhere into the low 3s on a leverage multiple. And Christopher, anything you want to add to that?

No. Honestly, Kevin, I'm glad you asked that question. I think we would -- we'd do so for short periods of time for the right deal. We've also been pleased, and I think Greg mentioned this earlier, but I've been pleased that we've had some potential sellers, now the deals are obviously done. But we have some potential sellers that are willing to allow us to take these in tranches, and so that we can give each operation the attention that it needs and that would also help us with the health of our balance sheet. So I and Greg, we talk about this a lot. We would feel comfortable going into the low 3x maybe even mid for brief periods of time and only for a very, very compelling deal that where we could still follow the principles we believe in. My fear in expressing that we were looking at some of these deals was that people might think that we've changed the way we're doing deals, and we're not changing that at all.

And remember this too, when you do the kind of deals that we do, when you're picking up stuff for cents on the dollar and then working over really over a fairly short period of time, those things start to produce bigger EBITDAR, the ratio comes back down fairly quickly as you do that. So when Christopher says we'd look at doing it for a fairly short time, what that implies is that we would -- we might be willing to stretch for something that we thought we could turn pretty fast and pretty well so that the number would come back down pretty quickly.

I think at context we're currently at 2.1x.

Could you maybe give us a little bit more clarity on the incentive comments that you made, Suzanne, and just maybe give us some details as to exactly how you structure that comp so we can better understand that as well?

Yes. And that's a good question. Some of that we won't talk about because it is -- it's really for internal use only. But it's really just a matter of bringing in folks that are extraordinary leaders, that understand how to build an organization. And as they add value, they participate in some of the value that they add. It's that simple.

And just so that you know, the metrics that they use to calculate their incentive, which is largely very objectively calculated, not only include the financial metrics but also clinical milestones that they have to meet, so that they're providing great quality care all the time in their facilities. It's very important to us that the facilities perform because we believe, and have learned, time again over time, that good quality care always precedes great financial performance.

Let me ask you this. You've commented positively on Medicaid pricing for the first time in a while, just talking about expecting improvements there. So could you maybe give us a little bit more color as to which states you're expecting the improvements? Is it broad-based? Why are you expecting improvements given that budgets -- obviously we know budgets are passed, but state budgets are still tough in the economy, it's obviously very tough. So any color you can give on Medicaid pricing would be helpful.

Yes. Another great question. I -- We -- remember, I'm not sure we've shared this openly, but I'm sure you've heard it from others, we've been beaten up for 3 years really in terms of Medicaid reimbursement. And when that happens, many of the, I'll use the term loosely, but many of the marginal operators have some real struggles, and there are often many of them. And in order to help them so that they can continue to stay in business, the states have to, at some point, raise reimbursement when they've gone too far in the reductions or where we have stayed very level for an extended period of time. And we've been in a reducing reimbursement environment really on the state level for about 2.5, 3 years. So in the states where we're going to receive some pluses, those are small compared to the negative that we receive but they're large for us because we've been so used to having the reductions over time. But to give you some specifics, we are already starting to see some increases in the state of Utah, which is our third-largest state. And also in Arizona, which is also tied with Utah as our third-largest state. So that's the third and fourth, they're about the same in terms of number of beds. And that we won't see until the fourth quarter. But again, we saw some very large decreases over the last 2 years in Arizona, and so we're getting some of that back. In most states that we're in, we're seeing a minor increase or level, which is better than we've seen in the past that actually almost counts as an increase compared to what we've dealing with, again, in '09 and 2010 and '11. And that's what we see in most of the other states. We will see -- we've already seen an increase in the state of Idaho. And some of the states that we're in, it feels like I'm dancing around this, some of the states that we're in are really cost based that -- they're based on a cost report that we fill out, sometimes it's on a quarterly basis, sometimes it's on an annual basis. So we don't really know where we'll be until that's prepared and each quarter, each year. And it frankly fluctuates in the states where it varies quarter-by-quarter. But again, a decent positive in Arizona, a decent positive in Idaho and Utah, slight positive in a few other states and flat in all the other states that we operate in. That's a big step forward for us after what we've dealt with the last 2 years.

Absolutely. Two quick questions on guidance. Do you assume anything in the back half of the year related to the business interruption insurance? And then secondly, can you give us some color on the rent expense that's going away from the one that you've purchased already, and then potentially the annual impact of those that you said you expect to do in the near term?

So on the first question you asked, I think a simple answer is yes, we did build that in. We expect to get that insurance before the end of the year. The second question, I'll ask Suzanne to answer because I'm not sure I can read her notes.

The one that we purchased is about $90,000, net savings because you take the rent out but you have to add that depreciation in, so that's about $90,000.

Was that an annual number or quarterly?

No. For the remainder of 2012.

Okay. And the other one that you have that you said you might exercise in the near term, maybe what's an annual number associated with those? And is that in guidance?

Yes, it is included in the guidance, and it's the combined number, netting the rent and the depreciation is about $275,000.

Annually?

That's for the remaining period after we actually exercise them.

Right. For the estimated time that we will exercise this option.

Okay. And do you have an annual number associated with those, just those were looking out into next year?

About $650,000.

Our next questioner in queue is Rob Mains with Stifel, Nicolaus.

On the continued topic of Medicaid. Could you describe, sort of, your DSO experience outside of California which is kind of dragging the numbers up?

Yes. Our DSO, really, on a same-store basis is not going up. Any time we have a large number of new acquisitions relative to our size, you will see our DSO begin to inch up, and that started in late 2010 and has continued as our stream of acquisitions seems to have gained momentum. But you will actually see that begin to fall again unless we happen to acquire a large number of facilities again, because our same-store has moved by about 1.5 days total over the past 4 years. So it's -- in terms of state-by-state, we do -- it's no secret in our industry that's a little bit more difficult in states where we have a large Managed Care contingency that's substituting for Medicaid or that's contracted with Medicaid to handle Medicaid for the state. And so in states like Arizona, we do have a little bit higher DSO, I guess, on a percentage basis I'd say it's a lot higher DSO. But it's -- where we average across the board about a DSO of about 40. Arizona would be more like 46, 47. But most of our states, with the exception of Washington where our DSO is much better and Colorado where our DSO is much better, averaged between 34 and 44 DSO.

Okay. I might have misunderstood the kind of holdback going on in California, that's not adversely affecting DSOs?

Yes. It is adversely affecting DSOs.

But it just started.

Because only -- we've only had about 1.2 million held back to date, because it didn't start when they said it was going to start, it actually started in April instead of last year.

Got it. Okay.

So remember we're only reporting as of June 30, of course, and so the impact will be felt more in the third quarter than it was in the second quarter.

Right. Okay. And then on the topic of acquisition. You talked about potentially some larger deals in your pipeline. Just kind of curious as to what your sense is of the motivation of sellers? Is this just kind of a normal course of business? Is there something going on that's getting more people to kind of seek an exit?

They're kind of all over the map. I mean, we've looked at some stuff lately that -- I'll give you 3 examples. In one case, we looked at a portfolio where the private equity firm that's been involved with the company that was for sale, has just been there for far too long and needs an exit strategy. It's time for them to go. In another case, you have a large national chain. We've decided that they are going to reposition their business and their assets and that they are going to non-renew a group of leases that will now come back to the marketplace. In other case, and this is fairly typical for a lot of the smaller operators who've been around for a long time, in another case we have a couple of operators who are retiring or have already retired or semiretired, they were kind of staring at the prospect of higher capital gains rates in 2013 and saying maybe now is a good time to get out. So it kind of runs the gamut and it's nothing you wouldn't expect. But there does seem to be a lot of potential deal volume out there right now with pricing frankly all over the map and some rationale and some not.

Okay. And in the case of lease non renewals, you would just assume the lease?

We would step into a new lease of those facilities if we did those deals.

Okay. And then the last question I had. You talked about -- well it's obvious, the strength that you had in the quarter. There's been an undercurrent in the industry that the second quarter is kind of weak and maybe because of hospital admissions were off and therefore they weren't referring a lot of people to SNFs and you saw a good increase. And my question is, is that in your view part and parcel of what you're doing in turning around underperforming facilities? Or do you think that beyond that, in some of your stable facilities that you're taking share as well?

I think it has everything to do with the sort of operators that we have and the level of ownership that they have and the reaction they have to changes in the marketplace. It's much easier for them to change when they see things happening versus waiting for a direction. And I know that sounds like we keep beating the same drum, but to say anything else would be to lessen the dramatic impact they've had on the organization.

Our same-store census is up over last year. And so we don't know if we're taking market share. But we have not seen the effects of lower census in our hospitals across the board, maybe in a pocket or 2 here and there we've heard anecdotally, but overall we're doing fine.

Next questioner in queue is Peter Sicher with Sidoti & Company.

I just had a quick question. Could you provide any additional color on the AOIO business? Because by my count, you guys have added 177 beds, I think, since the end of last year, and that total unit count is starting to get up near 15% of your overall units. So any additional color there would be really helpful.

Yes. It's -- we probably don't talk about it as much though, even though it is going quite rapidly on a percentage basis, because it still represents a very small percentage of our overall revenues. I would guess that it represents about 4.5% of our overall revenues. And so that's probably why we don't talk about it. But we did talk about the Lexington and Ventura. We are following the same path on the assisted living front that we do in independent living front that we do on the skilled nursing front where we're looking for those C and D properties, and putting a significant amount of money into them and turning them into B+ properties in terms of physical plant, but A+ properties in terms of their operations and the service level. Our census has actually grown over the last 1.5 years on a same-store basis by a significant amount. And I guess I'm going to turn it to Suzanne if we didn't provide that and ask her what that growth is.

That growth was -- it's 85 basis points, actually.

And when you're talking about, sort of, the C and D properties and turning them into B properties, when you guys are looking at AL, potential AL facilities, are there a sort of minimum size? Is there an ideal size you guys are looking for? In terms of bed counts, something too small if it has 35, 40 beds.

That generally would be too small unless it's on the same campus as a skilled nursing facility that we might have, or in the same campus as an independent living facility. But really it isn't really about the size, it's about how the particular campus fits with the community that it's in. And obviously the amount of money we have to pay given the condition of the operations and the facility. And then the third thing, obviously, is whether we have a leader that's ready to go in and if the facility is underperforming. We just, sort of, feel like that we're appealing to the masses, that most people have a very difficult time affording a $6,000 or $7,000 A month price tag every month for assisted living care. And -- but there are -- I think there are people that can afford 1/3 of that or 1/2 of that much easier, and we feel like the model is working. Now having said that, the model hasn't proven itself out yet because the fact is 1/2 of our assisted living facilities are still in the infancy stage. I mean, they've only been part of us for less than 18 months. We feel like after we have them for 2.5, 3 years, you'll see an even more dramatic improvement. Greg and Suzanne mentioned the 85-basis point improvement, but if you were to take that over the last 18 to 24 months, you would see something more in the lines of 100 basis points improvement on the same store properties that we have. And we expect that to be duplicated in the stuff that we've acquired over the last 18 months.

Our next questioner in queue is from James Bellessa with D.A. Davidson & Co.

Now I heard something there that the -- when I was listening the vibrations and the quiver of the voice went up when you were talking about something that's happening at the end of this year and that we were supposed to stay tuned. But I missed what the subject was.

I'm not sure what were you referring to, I wasn't paying attention, I'm not the psychologist that you are.

Well you'd said something about some type of activity or acquisitions or buildout or something that is happening. And the...

Was it the discussion about how much money we're going to save by exercising some of our lease options?

What kind of options did you say?

Yes. Some lease options left to exercise this year.

I see, maybe that was it. And we're supposed to stay tuned for that?

That might've been part of it. I think maybe if it was my voice, clearly, because I have a sore throat, but it might have also been some of the acquisitions that we're taking a look at right now as the landscape is very good right now.

Good. The damage from the storms wasn't as great as you had previously thought. How much was it or magnitude of size and maybe EPS or dollars or whatever you can give it out as?

Well it was less expensive. It didn't impact as many operations as we've thought it. It did impact one of our operations in a, kind of -- in a significant way and still is. But I think on an EPS -- remember that we're expecting to get this back, but I think on an EPS basis, the one facility that was impacted probably turned out to be about $0.02.

Okay. And most of that should come back less the $100,000 deductible for each or for just one facility now?

We deduct the $100,000 deductible in the quarter already.

You took that, that added to the most recent quarter?

Because I think we were talking over. You didn't might -- so that -- we've taken a $100,000 deductible at 2 of our operations in the second quarter. So everything we get back from that will be a positive.

Okay. And then you were talking earlier about the leverage, this ratio called, I believe net debt-to-EBITDAR ratio, and that's on a trailing 12-month basis. Historically, in my model, I think I was replicating what you were using when you first went public with a cap ratio of 12%. With the lower interest rate environment that we're in now, is it appropriate to continue to use 12% or should it be some lower ratio, which, of course, pushes us up the net debt-to-EBITDAR calculation?

I think that the 12% seems like a good number for us right now where we're at. And as we lowered a number of leases, that's going to impact us less and less. But because we are continuing to purchase a lot of those lease assets, the impact of that will be less.

And I heard that the figure was roughly 2.1 it wasn't called out in the press release. My calculation was 2.16, does that sound like it's in the ballpark?

That sounds like it's in the ballpark, 2.1, 2.16.

[Operator Instructions] Presenters, at this time, I'm showing no additional questioners on the phone lines. I'd like to turn the program back over to Christopher Christensen for any closing remarks.

Thank you, Julio. I don't have any closing remarks. I just want to thank everyone for joining us today, and thanks for your help, Julio, we appreciate it.

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