Good day, ladies and gentlemen, and welcome to The Ensign Group, Inc. Second Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Greg Stapley, Executive Vice President. Sir, you may begin.

Thank you, Mary. And welcome, everyone, and thank you for joining us today. We filed our 10-Q and accompanying press release yesterday. Both are available on the Investor Relations section of our website at www.ensigngroup.net. And a replay of this call will also be available there until 5:00 p.m. Pacific on Friday, August 23, 2013. As you know, we always open with a few housekeeping matters. First, 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. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign does not undertake to publicly update or revise any forward-looking statements for changes that arise as a result of new information, future events, changing circumstances or for any other reason. In addition, any Ensign business we may mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to consolidated company and its assets and activities, as well as the use of terms, such as we, us, our and similar verbiage are not meant to imply that The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the various operations at the service center or the captive insurance subsidiaries are operated by the same entity. Also we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our…

Thanks, Greg. Good morning, everyone. As longtime followers of the company will recall that in every earnings call to date, we've reminded our listeners that our business can be a bit unpredictable, we use the word lumpy, from quarter-to-quarter. The second quarter was just such a quarter and highlights why it is so difficult for us and those who follow us to predict the short-term results at any given point in time. However, Ensign's long-term business has been highly predictable over our 6.5 year history as a public company and even well before that. We've been able to consistently achieve our annual goals, even in the face of reimbursement cuts, program changes and other near-term hurdles for us and the industry. Even though the second quarter was among the most challenging we've had in a long time, we are optimistic that we can reassure our shareholders and friends that Ensign remains on track to achieve our previously announced annual guidance. We expect to see the lion's share of that remaining performance in the fourth quarter. This fourth quarter surge is typical for us as we almost always see our best occupancy and skilled mix increases, as well as the effective rate increases, which will be unusually beneficial this year, in the last 3 months of the year. As most of you know, our consistent success is seldom the product of any one thing, but rather reflects the aggregate effect of dozens of small victories across the organization. Likewise, our earnings decline this quarter has resulted from a number of small deficiencies rather than any one big downturn or headwind. We believe these challenges are mostly manageable over time and our outstanding field leaders are fully engaged on all fronts to identify and overcome weakness wherever it occurs. Because of them,…

Thanks, Christopher. It was an unusually busy quarter on the acquisition front with 9 new facilities added to the portfolio since -- in Q2 and since. We also finalized the disposition of our Doctors Express franchise business early in the quarter. The 9 facilities we've acquired include 6 skilled nursing facilities in Texas, Nebraska and Washington and 3 assisted living properties in Utah, California and Washington. We're excited about the prospects for these facilities. But like most of our acquisitions, some of them will require some time and energy before they move into the black. While we expect most of them to be mildly accretive for the year, we recognize that doing this many opportunistic acquisitions all at once will be always have a negative impact in the short term. This is true, not just because the acquired operations themselves take some time to turn around but also because the acquisition process usually take something of a toll on our existing operations, as leaders across our organization are temporarily recast to help initiate and shorten those turnarounds. But as we've proven time and again, it is worth the sacrifice in the short run in order to acquire the tremendous long-term organic upside that these acquisitions represent to make those sacrifices. This new growth has brought our total senior housing and inpatient care portfolio to 119 facilities in 11 states with 11,137 skilled beds, 1,603 assisted living units and 477 independent living units all in operation. Of the 119 properties we operate, 96 of them are Ensign-owned and 75 of those are owned free of mortgage debt. On other fronts, our home health and hospice operators took a much-needed breather from their recent acquisition pace during the quarter, as we indicated they would last quarter. That break will likely continue for…

Thanks, Greg. As I mentioned earlier, the quarter's challenges did not stem from any one thing. Including in our adjusted quarterly results are the following: our health care costs spiked quite significantly in the quarter, more than $1.1 million over our projected costs. That spike was not expected, and we are pleased to report that those costs are not continuing at the same elevated levels as they have already dropped back to normal levels in June and July. The next thing is sequestration reduced revenue by nearly $1.8 million. But that was expected and it will be offset to a large degree in the fourth quarter by the October 1 Medicare increase that was announced last month. Some significant cost associated with the acquisition and transition of the home health and hospice business, approximately $1 million in the quarter, were also unexpected. But those costs have been absorbed and are not expected to recur. In addition, we, like the rest of the industry, saw some March softness in occupancy and especially skilled mix in our same store, which was only partially offset by a nice tick upward in managed care days. But we are happy to note that both occupancy and skilled mix trended up in July. And of course, our compliance cost increased, but those increases were planned and expected and will continue to increase throughout the remainder of the year. All of these things and others combined to impact the quarter. But with the exception of the compliance program cost, they appear to be one-time expenses and we are expecting meaningful Medicaid increases in addition to the Medicare increase before the end of the year with the bulk of the benefits coming in the fourth quarter. Also as Greg mentioned, we had an enormous quarter on the acquisition…

Thanks, Christopher, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. We are pleased to report that after completing one of the most aggressive quarters of acquisitions in our history and after accounting for the $48 million settlement payment we expect to deliver to the government later in Q2, we believe that Ensign still has the cleanest balance sheet in the industry. If that payment were made today, our net debt-to-EBITDAR ratio would stand at 2.39x, which was inadvertently reported as 2.85x in yesterday's press release. And if you remember our history, growth pattern and business model, we typically see spikes in the ratio immediately following acquisitions and then see that ratio float down over time as the new acquisitions add more and more EBITDAR to our operating results. As Christopher noted, operating results in the quarter were impacted by a number of one-time factors that we actually included in our adjusted results, including a spike in health care cost, difficulties in fast-growing home health and hospice services and, of course, a drop in occupancy and skilled mix, all of which we already see turning around in July. We believe that a part of the decline in the skilled mix tracks back to the increase by some hospitals in their use of observation stays rather than qualifying inpatient stays, which prevents patients from coming back to the hospital with Medicare eligibility. We are pleased to see CMS recognize that observation stays can be overused and apparently taking positive steps to address the problem. For our part, we are educating our local leaders and their care and billing personnel so that they can verify payor sources more closely, even if the patient has already been in the facility. As for another…

Thanks, Suzanne, and thanks to everyone who's been on the call. We hope this discussion has been helpful. As always, I want to conclude by thanking our outstanding partners in the field, at the service center and across the organization for their continued efforts to make Ensign the best company in the health care industry. We'd also like to thank our shareholders again for your support and your confidence. Mary, can you please instruct everyone on the call on the Q&A procedure?

[Operator Instructions] We have a question from Rob Mains from Stifel. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: I just want to clarify one comment about expectation for the remainder of the year. On Medicaid, Christopher, you had said that Medicaid would be down through the first 3 quarters of the year. That's on a quarter -- that's on a sequential basis, right, because it's up year-over-year?

Yes, I know it looks like that. One of the reasons I wish I had time to explain was the net Medicaid rate because the gross Medicaid rate looks like it's up, but there's an accompanying -- it's called many different things, quality fee, bed tax, lots of things that takes a positive rate adjustment on the revenue front but makes it a net negative after you add in the expenses on a different line. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay, right. So like -- so what you were referring to is like a net of provider tax?

That's correct. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Got it. Okay. And then I had question about M&A since it was a real busy quarter. Are you seeing more or less competition for deals? It seemed that since the last time you report a quarter, we've seen capital costs go up. The REITs are talking about, say, private REITs that are becoming -- or nonpublic REITs have been much more active in pursuing deals. But I don't know whether they're pursuing the ones that you would necessarily pursue. So just kind of a sense of the competitive market for deals.

Well, Rob, this is Greg. I think your sense is good that, indeed, we do see more competition. Even though some of the big, big REITs announced that they're stepping away from the skilled nursing space, there are others who are backfilling and providing liquidity to smaller companies that want to do some of those performing asset deals. So at the higher end of the market, the more performing end of the market, we are seeing a little more competition for those assets. But those are not the assets that we typically look for. About 80% to 90% of our deals are the distressed asset deals. And we don't see a lot of variability in either demand or pricing for those kind of assets. The pipeline for those is fairly steady and we're -- as you can see, we're getting deals done. Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then last question for me for now. You gave the numbers that are helpful on how much of the portfolio you own. What's your view of lease assumption as a way to grow the asset base?

We've done that before, Rob. We don't have any problem with doing lease assumption as long as we feel like value is there, and it all makes a lot of sense. So leasing, it's just another form of financing. And we're perfectly comfortable with it if that's the opportunity before us.

[Operator Instructions] Our next question comes from Ryan Halsted from Wells Fargo.

So just sticking with the acquisition environment, I guess, just curious how you guys are viewing -- you looked like you did a decent number of deals in the assisted living space. So I'm just curious how you guys are looking at your pipeline going forward as far as those types of assets, as well as what's your views -- or what's your pipeline on the home health and hospice front as well?

The assisted living that we've acquired lately are doing fairly well. I mean, in some respect, they're harder turns than skilled nursing facilities that take a little longer to build. But we like that business and we're optimistic about it. And we've actually grown it at probably a more aggressive rate lately over the past 1.5 year, 2 years than even the skilled portfolio. So you'll see us in assisted for a long time. And that will continue to grow. The pipeline for it is pretty robust. We've got some good opportunities out there. As you know, we probably -- there's sort of different tiers in the assisted living business. There's your A facilities and then there's some B and C facilities. And similar to our opportunistic strategy on the skilled nursing side, we like to find sort of C level, beaten-down, distressed assisted living facilities, and then sort of clean them up to sort of that very nice B level, where middle, upper-middle class folks can afford to live and really receive good service.

And on the home health and hospice, the pipeline is -- our pipeline may not be enormous right now, but the pipeline available is extraordinary. But I think you'll see a slowdown a little bit as we absorb what we've already acquired. We've grown at a very rapid pace. Even though home health and hospice still represents a very small part of our overall organization, it's grown quickly. And right now, we are, as I said, absorbing all of it. We're going to take care of -- we're going to take advantage of all the organic growth opportunities that remain in the many agencies that we have. And then I think you'll see us grow -- I don't want to say a time exactly, but in another few quarters, you'll see us grow again.

Okay, great. And you commented about the lease assumptions. How about as far owning the real estate? How are you thinking about acquisitions? And are you -- do you approach that as maybe being able to expand on your own properties? And then just as far as your -- just broader -- your views on sort of the value of your own portfolio as a whole.

Yes. We really like to own properties. And most of the transactions and most of the acquisitions we do, we do own. In the early days, we didn't have the cash to do it. But since about mid-2004, we've not had to borrow money to do a transaction ever. They are cash buys and we usually have cash on hand and we can finance and reload that fund at a later date. So it removes a lot of transactional friction, allows us to do -- to buy a lot of the properties that we operate. But again, as I mentioned earlier, we're not averse to leasing if that's the opportunity before us and the numbers work.

Okay. And then lastly, I guess, cash flow was a little bit below what I was expecting. It looked like there was maybe some pressure on collections. If you could just clarify or provide any more color on that.

A little bit slower on collections. We did add one DSO this quarter, but -- and then a little bit more on -- that was the majority of it was just a little bit slower on the collections side with 1 DSO added.

Okay. So nothing -- I mean, nothing abnormal? Nothing...

Nothing abnormal at all.

Remember, Ryan, when we have a slew of acquisitions, which we've had over the first half of the year, our DSO tends to go up because we're not able to collect on a lot of these facilities for many, many months.

And the other thing to couple that with it is that the California payment. They helped the last couple of payments so that puts into the next -- into July. And I think you see some other California operators have that same thing, where we had a big payment in July instead of June. So it looks a little bit worse at end of June than it would typically.

I would like to turn the conference back to Mr. Christopher Christensen for closing remarks.

Well, thank you, Mary. I appreciate it. And again, I just want to thank all of our partners out there for the extraordinary progress we've made on the clinical front and on the qualitative front. We know that it's going to bode well for us in the future. I also want to thank everyone who's joining us today on the call. Thank you, Mary.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect at this time.