Good day, ladies and gentlemen, and welcome to the Ensign Group’s Third Quarter Fiscal Year 2017 Conference Call. At this time all, participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I’d now like to turn the call over to Chad Keetch. You may begin.

Thank you, Michelle, and welcome, everyone. We filed our earnings press release yesterday and it can be found on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, December 1, 2017. We want to remind any listeners to a replay of this call that all statements made or as of today November 9, 2017, and these statements have not been nor will be updated subsequent to today’s call. Also any forward-looking statements made today are based on management’s current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly-owned captive insurance company, which we refer to as the captive, provides certain claims-made coverage to our operating subsidiaries for general and professional liability as well as for workers’ compensation insurance liabilities. The words Ensign, company, we, our and us refer to the Ensign Group and its consolidated subsidiaries. All our operating subsidiaries, the Service Center and the captive are owned by separate, wholly-owned independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities, as well as the terms we, us, our and similar terms used today, are not meant to imply, nor should it be construed as meaning that The Ensign Group Inc. has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available on our Form 10-Q. And with that, I’ll turn the call over to Christopher Christensen, our President and CEO. Christopher?

Thanks, Chad, and good morning, everyone. Thanks for joining us today. Our organization has been through a lot since last quarter as we’ve experienced the hurricane, tropical storms and wildfires in Northern California. I’ll share a little bit more at the end of our call about some of the amazing stories of selfless service and sacrifice that spread across our organization during this time. But before I say anything else today, I just want to acknowledge the amazing individuals within our organization and their families for all that they did during these tragedies to put our patients and residents first sometimes before their own loved ones. We know that their dedication and sacrifice is not unusual, they live this way every day. But while we would never walk on these kinds of disasters, it shines a light on the amazing people they are and how important this work is to so many. We’re pleased to report that we experienced significant operational improvements across the organization. We’re seeing a positive shift in momentum in our core skilled nursing business and we’re now seeing the ramp in our performance that we’ve been expecting. During the quarter, we experienced positive trends in the Transitional and Skilled Services segment with an increase of 26.2% in segment income over the prior year quarter, and an increase of 16.3% sequentially over the second quarter. Our GAAP earnings per share for the quarter was up 28.6% over the prior year quarter to $0.27 and adjusted earnings per share was up 12.5% to a record $0.36. Over the years, we’ve often discussed the organic growth potential within our portfolio. Based on feedback we’ve received, we wanted to take this opportunity to explain what we mean when we describe organic growth. Throughout our history, we’ve primarily focused on acquisitions…

Thank you, Christopher. During the quarter, we paid a cash dividend of $0.0425 per share of common stock. Ensign has been a dividend-paying company since 2002 and has increased its dividend every year for 15 years. Also during the quarter and since, the company’s subsidiaries made the following acquisitions. On July 1 2017, The Villas at Sunny Acres, a post-acute care and retirement community with 134 skilled nursing beds, 35 assisted living units and 198 independent living units set on 64 acres in Thornton, Colorado, and Medallion Post Acute Rehabilitation, a 60-bed skilled nursing operation and Medallion Villas, a 44 unit assisted living and 64 unit independent living operation, both set on a single healthcare campus in Colorado Springs Colorado. On August 1, 2017, Parkside Senior Living, a 20-unit assisted living facility in Neenah, Wisconsin; on August 16 2017, a subsidiary of Cornerstone Healthcare our home health and hospice subsidiary acquired Island Home Health, a home health agency serving Northern Washington. On September 1, Desert Blossom Health and Rehabilitation Center, an 88-bed skilled nursing facility located in Mesa, Arizona and Pueblo Springs Rehabilitation Center, a 115-bed skilled nursing facility located in Tucson, Arizona. Also on September 1 Cornerstone acquired Comfort Hospice Care a hospice provider serving Las Vegas and surrounding communities in Southern Nevada. On October 19, Pointe Meadows Health and Rehabilitation, a newly constructed 99-bed skilled nursing facility located in Lehigh Utah and which is the last outstanding new build commitment for the time being. And on November 1, Cornerstone acquired the assets of Excell Home Care and Hospice and Excell Private Care Services in Oklahoma City Oklahoma. This brings Ensign’s growing portfolio to 230 healthcare operations, 22 hospice agencies, 20 home health agencies and four home care businesses across 15 states. As Christopher mentioned earlier, we now own…

Thanks, Chad, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release. Highlights for the quarter include GAAP earnings per share were up 28.6% over the prior year to $0.37 per diluted share, and adjusted earnings per share were up 12.5% to a record $0.36. Consolidated GAAP net income was $14.2 million, an increase of 27% over the prior year, and consolidated adjusted net income was $18.8 million, an increase of 13.8% over the prior year. Transitional and skilled services segment income was $36.9 million, an increase of 26.2% over the prior year and an increase of 16.3% sequentially over the second quarter. Same-store skilled nursing revenue grew by 4.5% over the prior year quarter to $238 million, and same-store managed care revenue grew by 9.7% over the prior year quarter to $40 million. And same – assisted living and independent living service segment revenue and income were up 13.5% to $35.5 million, and as well as 67% to $4.3 million, respectively, over the prior year quarter. Other key metrics as of September 30 included cash and cash equivalents of $40.1 million and $135 million as availability on our $300 million revolving line of credit. Our lease-adjusted net-debt-to-EBITDAR ratio increased to 4.24 times due to the anticipated – due to the acquisition of additional real estate asset – assets during the quarter. As Christopher mentioned, we have invested $361.6 million in real estate assets since June of 2014 and this has naturally led to an increase in our debt levels. However, we expect a net debt adjusted to EBITDAR ratios to return to historical levels over time as the – as transitioning and newly acquired operations add EBITDAR to consolidated operating results. For 2017, we’re projecting revenues of $1.76 billion to $1.8 billion…

Thanks, Suzanne. I just want to clarify that our revenue guidance for 2018 is between $2 billion and $2.06 billion. As those of you who have been listening our calls for years know, we’ve often pointed a specific examples of operations that are making the biggest impact on our organization and the communities they are in. This quarter, we’re going to change it just a little bit. Because of the unusual circumstances of the last quarter, there are plenty of stories we could share maybe in that same line of thinking. But we had some very unusual experiences in Texas and California over the last quarter and at the risk of singling out just a few acts of selflessness among so many. We wanted to take a few moments to share some of their inspiring acts of service in the face of disaster and tragedy. And I want to remind you that, as they dealt with all this, they still had extraordinary results in the midst of this. When hurricane Harvey and the resilient tropical storm hit Texas, it impacted many of our Texas operations and our people there, especially in the Houston area. Prior to the storm, we took the preventative steps to evacuate our residents from one of our operations that was in the immediate path of the hurricane to assist a facility in the San Antonio area. Repairs have been made and most of the residents have now returned as things are slowly returning to normal. While we were certainly grateful that our patients in buildings were all kept safe suffering minimal damage, many of our team members lost all of their possessions. Under these incredible circumstances, our amazing administrators, nurses, therapist, and other team members demonstrated that this is more than a job. It’s a calling that they take very personally and they treat their patients like they were their own family. For instance, in Southland Rehab and Healthcare Center in Lufkin, Texas led by Executive Director, Becky Jerke; and Director of Nursing, Jacqueline Teal, became a place of refuge for residents of a skilled nursing facility in Port Arthur, Texas. At 2:00 in the morning, during the second landfall of the hurricane, 31 patients arrived at their door. They’d been rescued from their facility by the – oh my goodness, by these – sorry?

By the Navy.

By the Navy. Thank you, by boat after floodwaters rose to dangerous levels. And they were transported by a flatbed trailer to a helicopter and then later to a bus. The residents described what they had been – that they’ve been in waist deep water for over 24 hours with only crackers to eat. Upon arrival, most patients were wet and cold with no accompanying medical records. When team Southland became aware of these displaced patients, they immediately began preparations and were waiting for their early morning arrival Becky and Jackie rallied their staff together and the building rolled out the welcome mat to make the transition as smooth as it could possibly be given. Within a couple of hours, all of the patients had hot showers. They were served a hot meal and were resting quietly in their beds. They were so happy to be finally off the bus. And the Southland team did such an amazing job in making this happen. Several of the patients cried with relief that they were finally safe and had people caring, rushing to meet their needs. Family members of our staff even pitched in and were helping to bring the patients in from the bus and get them settled. One patient explained, I had a hot shower, hot food and a warm bed waiting, this is like heaven. With tears rolling down his face, one patient was devastated to find that she and her husband have been separated during the rescue. However, Jackie our nursing leader jumped right in and promised her that she would locate her husband. By noon that same morning she found him and made arrangements for their reunion. We’re all so grateful to the Southland team for how they were willing to give so selflessly in such a…

Sure. [Operator Instructions] Our first question comes from Chad Vanacore of Stifel. Your line is open.

Hey, good afternoon.

Hi, Chad.

Hey, Chad, what’s up?

All right. So I was just thinking about, you had mentioned cost of service had been a drag and you point your spike in healthcare costs, in particular, and it created short-term drag. The same thing has been going on for the last couple of quarter. So what’s weighted in benefit inflation then in the skilled nursing business recently? And where do you think it should be?

Yes, asset again, Chad. I heard all the preface. But your specific question is, what weighted down?

No, no, what’s inflation on the skilled nursing wage side?

That’s a good question. I don’t know that I know the exact percentage, but there definitely is, because the economy obviously is super healthy in every market that we’re in and probably in most markets across the country. We’re not familiar with all the markets. But I think if I were to guess, we have traditionally experienced a 2% to 3% increase. And I think that over the last year-and-a-half or so, maybe two years, we’ve probably been more in the 4% to 5% range.

Okay. And then just thinking about your 2018 guidance, which you took down 2017, you introduced 2018 guidance, that implies around a 15% EPS growth. So what kind of growth assumptions are there for that – the same-store bucket versus the newly acquired versus the transitional?

Well, as you might imagine, the same-store bucket will experience a smaller single-digit growth as it has recently, as we’ve gotten healthier and healthier. So if I were to sign this and obviously, this is a range. But I would say, the same-store is going to grow at a rate of 3% to 5% and the transitioning is going to grow at a higher single-digit pace, and the new acquisitions will be a very strong double-digit pace that will be sort of in line with that one section we talked about on –earlier on the earnings call. And then you also have some other additions that have kind of been in the adjusted number or been excluded, I guess, from the adjusted number you have, the new builds that will be added to that, most of the new builds, except the brand-new new builds that we just completed a few weeks ago. But – and so that will add to that number as well. But that’s where most of the growth, I guess, I shouldn’t say most, because obviously, the biggest bucket is the same-store. So in terms of dollar amounts, same-store will still have a very significant impact. But in terms of percentage growth, it will be a – it will have a smaller impact.

All right. And then what do you make as far as assumptions in out years or in 2018 as far as occupancies, skilled mix, wage inflation? Do these things get better? Are we assuming we bottom in 2017 and should improve in 2018, or is it more the same?

Yes, I think, if you look at us and I can only comment us, but we – I think, you’ll see that we sort of bottomed between the latter part of last year and the first-half of this year. And we think that there will be good progress not as good as it should be, because we still see that there are better years to come after 2019 in terms of occupancy. But in our model, which I think you’re asking about, we anticipate between – in same-store, we anticipate between a 1 and 1.5 percentage point improvement in our overall occupancy. We expect it to be a little bigger than that in the other two buckets. But I think, overall, it’s less than 2%.

Okay. And there’s one last question. Just thinking about – you brought down 2017 guidance. What was the main drag there? Was it the healthcare costs, or what are you thinking as far as fourth quarter and the rest of 2017?

Yes, I think the healthcare costs were a burdensome. But I think, I would be – I wouldn’t be totally forthright if I didn’t share with you of the things we shared earlier in the year. We made some mistakes in some acquisitions we did in the timing and the location of those acquisitions. We made some mistakes entering a few too many states, I think, at the same time, where we weren’t as prepared as we should have been, and those certainly contributed to it. But I think one of the things we’re trying to point out, we weren’t trying to absolve ourselves of responsibility. We’re simply trying to say, we would have hit our guidance anyway if these healthcare costs hadn’t been so unexpectedly high, and we’re working on that, too. But there were some, as I think, we said earlier in the year, we did make some mistakes that were corrected, and it’s been a good learning experience for us. And we feel confident that we can correct our course and that they’re not mistakes that are going to haunt us forever.

All right. Thanks for taking the questions.

Thank you.

Our next question comes from Dana Hambly of Stephens. Your line is open.

Thanks for taking my questions. Chris, on the – there’s a fair amount of noise in the industry on utilization pressures and then what is it doing to the margins. I know your EBITDAR consolidated margins year-to-date are down about 80 basis points, I think, it was less in this quarter, but still a pretty good amount. Would you be able to talk to kind of your same-store margins, or why your margins are down this year? Is it more of a mix of the business, or are you seeing deterioration across the buckets?

So first just to clarify, the 80 basis points, is that our consolidated or is that our same-store?

No, no I’m just – your year-to-date through the first nine months EBITDAR margin versus last year?

Yes.

I think, it was down 50 basis points [Multiple Speakers] quarter-to-quarter?

Yes, I mean, obviously, that’s being dragged down by the healthcare stuff that we talked. Obviously, that has a big pull on it. When you take that into account, that’s dragging down quite substantially quarter-over-quarter, I mean, when you’re doing it sequentially, obviously, that’s taking up a little bit of the current quarter, because it improves quarter-over-quarter, but that’s definitely dragging it down year-over-year when you’re doing a comparison.

Yes. And on a consolidated basis, remember, that that $9 million is in there. We didn’t extract it. So you – if you remove that $9 million and redo the calculation, I think, you’ll see expanding margins, but your question is still good. We definitely have seen contraction in margins and as we’ve adjusted to the new world, when we’ve talked about this, we talked about it in specific markets. But across the whole organization, we see an adjustment period, where the margins do contract. And then once we get really good at it and we do the things that we ought to be doing in the ancillary world then – and in terms of our marketing strategy and in terms of aligning with the right – the – with the right healthcare systems, we see those margins begin to expand again. But we are going through this transition period. And in our healthiest markets, the markets that have always contributed the most in our history, we feel like those margins are actually expanding now, but that doesn’t mean that everybody is through that contraction or period yet.

Okay, all right. And so last year you came out, I think, midyear and gave guidance for 2017, and I think that kind of came back to bite you, as you eventually had to lower that So why give 2018 guidance now, and what gives you better confidence that the visibility is better for 2018 than it was for 2016 or 2017?

It’s funny you say that, Dana, because we were talking about this, this morning and how some years we give it in February and some years we give it in November, and we probably need to get more consistent. But I think we felt more comfortable in light of what was happening in the third quarter. We could see finally, that what we’ve been talking about is happening. And so we felt like we had a little bit better – well, if not a little bit, a lot better visibility now than we have had then we sometimes have in November. And we feel pretty confident about this trend that we see. We wanted everybody to see that we feel confident enough that what we see in the fourth quarter already obviously, we’re in November, we’re almost halfway through November. So we have pretty good insight into where we are. We think that the momentum will continue. And I think that you’ll probably see, I hate to commit absolutely, but I think, you’ll probably see us do this in the future, giving guidance for the following year in November. I don’t – it’s probably not as helpful for us when we’re already two months into the new year to give you guidance for the following year. But we’ve done this before. We just haven’t been as consistent as we probably need to be.

Okay. All right. That’s helpful. Last one for me, Christopher, the press release and in your prepared comments talked a lot about the underlined value of the home health business, the real estate, the assisted living, just why kind of introduce those comments now and you’ve gone this far? So why don’t you just tell us exactly what that stuff is all worth?

Yes. Well, because as you know, in Wall Street what that stuff is worth varies from day-to-day.

Okay.

So I think it was more – we’ve actually been sharing this Dana. We’ve been sharing the exact same thing over and over again. We just kind of feel like, it wasn’t obvious enough for people to see it. So we try to make it a little bit more obvious. But if you look backwards, you’ll see that we’ve been sharing stuff like this before. But we were a little bit more direct about it this time now.

It makes sense. As far as the real estate, remind us – CareTrust, I think, maybe the – some tax laws have changed since you did cared for us. Would you be able to spinout real estate in other tax-free manner or what are the other options there?

That probably wouldn’t even be what we would consider doing anyway. In that sort of manner, if we were to do something, and remember, I said, if we were to do something, we would do something in a way where we could still be involved and they could be involved with us and then you can’t do that in a tax-free spend. So the – it’s nice to save the taxes in a transaction like that. But it – there are some other reasons in terms of culture and in terms of continuing to impact each other that we’d like to keep if we were ever to do any – if we were able to do anything like that.

If, okay. All right. Thanks very much.

There are no further questions. I’ll turn the call back over to Christopher Christensen for any closing remarks.

Michelle, thank you. We appreciate it. We know it’s been a long time. Thanks for all your trust and your – and to all those who have joined us on this call Have a great rest of the day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.