Good day, ladies and gentlemen, and welcome to The Ensign Group’s Third Quarter Fiscal Year 2018 conference call. [Operator Instructions]. As a reminder, this conference call will be recorded. I would now like to introduce your host for today’s conference, Mr. Chad Keetch. You may begin.

Thank you, Dimitrias, 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, November 30, 2018. We want to remind any listeners to a replay of this call that all statements made are as of today, November 1, 2018, 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 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 subsidiary, 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, us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of the operating subsidiaries, the Service Center and the captive, are operated by separate, wholly owned independent companies that have their own management, employees and assets. References herein to the company and its assets and activities as well as the terms we, us and 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, good morning, everyone. We’re pleased to report strong third quarter results as the improvements we experienced in the first and second quarters continued into the third quarter. We again saw significant improvement in GAAP earnings per share and consolidated GAAP net income, which increased by 40.7% and 46.8%, respectively, over the prior year quarter. Our Transitional and Skilled Services segment income increased 25.7% over the prior year quarter, driven by an increase in overall occupancy and transitioning operations of 165 basis points and 281 basis points, respectively, both over the prior year quarter. We’re happy to announce that we are increasing our already aggressive 2018 projections to $1.83 to a $1.88 per diluted share, which represents a 32.4% increase over the company’s annual earnings for 2017. And even after the impact of our 2018 tax adjustment, the midpoint of our guidance represents a 16.8% increase over 2017 results. Because we’re ahead of schedule on our results this year, and fourth quarter tends to be one of our strongest quarters, we determined the slight adjustment was necessary. We’re confident that we will continue the momentum experienced this quarter into the next quarter. In our nearly 20 years, we’ve been steadily acquiring underperforming assets and have experienced varying growth spurts. The rhythms of those periods of growth are affected by a multitude of factors, including leadership, geography, market conditions, labor markets, renovation requirements and demographics. Over the last 18 months or so, our local leaders have been sifting through dozens and dozens of acquisition opportunities. While our pipeline for additional transactions has never been healthier, and our balance sheet would allow us to do hundreds of millions more in acquisitions, our operational leaders have been extremely picky and have consummated a small fraction of the opportunities that they’ve evaluated. As…

Thank you, Christopher. In July, we announced that Pennant Healthcare, Inc., our Northwest-based portfolio subsidiary, acquired the real estate and operations of McCall Rehabilitation and Care Center, a 40-bed skilled nursing facility located in McCall, Idaho. While this is a smaller acquisition, the track record of successful acquisitions by our talented leaders in Idaho makes us very excited about potential opportunities there, both large and small. In October, we announced that Bridgestone Living, our assisted living and independent living portfolio company, acquired the real estate and operations of Villa Court Assisted Living and Memory Care, a 53-unit assisted living and 20-unit memory care facility located in Las Vegas, Nevada. We are thrilled to continue to expand our senior housing footprint in Las Vegas and expect to continue to grow in that market. Today, we announced that Gateway Healthcare, our Midwest-based portfolio subsidiary, acquired the real estate and operations of Rock Creek of Ottawa, a post-acute care retirement campus with 93 skilled nursing beds, 71 assisted living units and 24 independent living units located in Ottawa, Kansas. Rock Creek was formerly owned and operated by a not-for-profit organization and, similar to many other transactions we’ve done with nonprofit organizations, we are committed to carry their mission forward as we apply best practices in becoming the operation of choice in this community. Also earlier today, we announced that Pennant Healthcare acquired the real estate and operations of two skilled nursing facilities in Idaho, including Creekside Transitional Care and Rehabilitation, a 139-bed skilled nursing and 21-unit assisted living facility located in Meridian, Idaho; and Bennett Hills Rehabilitation and Care Center, a 44-bed skilled nursing facility, located in Gooding, Idaho. We expect each of these operations to be very strong additions to our already strong clusters in the state of Idaho. Lastly, we announced…

Thanks, Chad. Before we turn over the call to Suzanne to provide more information on the quarterly results, let me just share a few examples of individual operations that help explain our recent performance. Carrollton Health & Rehab Center is an operation consisting of 120 beds located in Carrollton, Texas and led by Executive Director Skyler Peterson and Director of Nursing Monica Johnson-White. Carrollton has consistently produced outstanding clinical results year-after-year, making this operation a bedrock in the local health care community. When Monica assumed her leadership position several years ago, she quickly enhanced clinical systems to improve quality care outcomes, which led to a strong clinical reputation and a four-star CMS star rating. The Carrollton team has also implemented a robust long-term Part B program, increased acuity and provided creative incentives to encourage efficiencies across all departments. These efforts have resulted in an increase in skilled mix of 20% over the prior year quarter. Since last year, revenues and EBIT have increased by an impressive 31% and 377%, respectively, over prior year quarter. As excited as we are about the growth at Carrollton, this operation still has significant opportunity to improve occupancies closer to our same-store average. Led by Executive Director Tom Gleason and Clinical Director Teresa Whitebear, Custom Care Hospice in Dallas, Texas achieved significant clinical and financial success in the third quarter of 2018. Custom Care has built a strong clinical team capable of delivering exceptional care and resolving the complex and difficult issues that referral sources face with excellent communication and responsiveness. In so doing, Custom Care has established itself as a hospice solution for key hospital, physician and facility referral relationships, including with Ensign affiliated skilled nursing and assisted living operations. As its reputation for quality clinical outcomes and patient satisfaction has grown, Custom Care’s…

Thanks, Christopher, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release. Highlights for the quarter and quarter-over-quarter comparisons included GAAP earnings per diluted share was up 40.7% to $0.38, and adjusted earnings per share was up 27.8% to a record $0.46. Consolidated GAAP net income was up 20.9% – excuse me, was $20.9 million, an increase of 46.8% and consolidated adjusted net income was $25 million, an increase of 32.6%. Total Transitional and Skilled Services segment income was $46.4 million, an increase of 25.7% and an increase of 7.3% sequentially. Overall, skilled occupancy was 77.3%, an increase of 165 basis points and transitioning skilled occupancy was 75%, an increase of 281 basis points. Total Assisted Living segment revenue was up 7.3% to $38.1 million and segment income was up 9% to $4.7 million. And Total Home Health and Hospice Services segment revenue was up 23.1% to $44.3 million and segment income was up 55.4% to $7.3 million. Other key metrics as of September 30 include cash and cash equivalents of $45.7 million and approximately $295 million availability on our revolving line of credit, which was undrawn at quarter-end. As we expect, our net debt-to-EBITDAR ratio has continued to decrease and now sits at 3.8 times, down from 4.4 times last quarter and down from 4.24 times at the end of the third quarter of 2017. Also, our free cash flow for the quarter was $42.7 million. These improvements are attributable to the growth in our EBITDAR from transitioning and newly acquired operations and enhanced cash collections. This number could obviously be impacted by the pace and magnitude of future acquisitions, but we are pleased with the health of our balance sheet. As we continue to prepare for implementing CMS newest payment reform…

Thanks, Suzanne. Before we end the call, I just want to briefly mention the questions we often get from investors about how to unlock the inherent value on our real estate assets, assisted living, home health, hospice businesses and other incubator businesses that we have. As a reminder, four years ago we were often faced with similar questions about our plans with our then-owned real estate. As we evaluated our options, we met with dozens of experts on how to structure a transaction. While many encouraged us to do what others have done, we never wavered in our balanced approach, and as a result, both companies were set up to achieve long-term success. Just over four years later, we now have two healthy public companies that are both growing. This remarkable outcome is, of course, the result of many, many individuals, most notably, the blood, sweat and tears of our local operators across the organization. But the structure of the spin-off transaction was a critical element in allowing their greatness to shine through. We’re making progress towards taking a very similar long-term strategic approach to any transactions involving our new venture businesses. Just as with our real estate transaction in 2014, our goal has been, and will be, to ensure that these businesses will benefit our shareholders over the long term. We again want to thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We’re also appreciative to our colleagues in the field and the Service Center for making us better every day. We’ll now turn the question-and-answer portion of our call over to Dimitrias, and if you can please instruct us on how to proceed.

Thank you. [Operator Instructions]. And our first question comes from Chad Vanacore with Stifel. You may proceed.

Hey, good morning all.

Good morning.

Good morning.

All right. So of the three acquisitions announced today, one of those is mixed care, the other is mostly memory care and then the last is more traditional skilled nursing. Are these all value-add opportunities you’re going to stabilize? And then could you give us some more detail how you’re evaluating each of those businesses and opportunities differently?

Look, these three are value-add over a period of time. They’re not all stabilized. They are better assets, especially for the price that we paid, but we don’t acquire too many assets that are what we would call stabilized. But they are – these also are not like complete turnarounds that are in a disastrous state from a regulatory and census and physical plant perspective. So these are better than our very difficult turnarounds, but they’re not – these are not like high-performing assets that we pay top dollar for.

Chad, I’d just add to that. In terms of kind of the mix of assets, as we’ve kind of said before, we’re just very opportunistic about how we look at each of those business opportunities, and it really is just about the things I mentioned in my portion of the script, which was it’s based on leadership and it’s based on geography, the strength of the clusters that those operations sit in and then the pathway that we see within each of those operations to grow. So we don’t kind of strategically say well, we’re going to do x number of assisted living deals and x number of home health deals. We’re just going to take the best ones that come and remain opportunistic about it.

All right. And then just one other thing, you mentioned PDPM going into effect next year. Have you had a chance to better quantify how that might impact your stabilized business?

Yes, I mean, I think we’ve mentioned, Chad, before that we probably expect some impact on the top line of revenue, but we also expect that – meaning that revenue won’t – maybe decline a little bit as a result of the impact. But we also would expect to have some cost savings associated with that. As you know, it’s a pretty big change for the industry as a whole and so we’re continuing to go through it. We have teams of people, clinicians and others working on just every aspect of the ruling just to make sure that our implementation is seamless and smooth. And as we continue to go in and dive into each one of those details, work plans and work programs, I’m sure we’ll have additional information to share in the upcoming quarters.

All right. You don’t have any preview of any factors that you think are maybe the top factors that would affect the performance there?

I mean, there is tons of top factors. I mean, I think you’ve got the ICD-10 coding. You’ve got the capturing of nursing documentation. You have things like what we have been doing for the last couple of years that – seeing that our other skilled mix continues to shift up, which is capturing additional clinical services. And when you start to look and to unwind what PDPM does, it is actually looking at more and more clinical services. And so if you kind of look what we’ve been transitioning over the last couple of years having higher and higher clinical services by trachs and vents and other things, you see that we’ve already made some of those shifts in the last couple years. And so I think as we go through it and we highlight that and capture more of those services that we’re already providing, we’ll have additional clarity to share. But those will be some of the top highlights.

All right. I’ll follow-up in the coming months. Thanks.

Thanks Chad.

And our next question comes from Frank Morgan with RBC Capital Markets. You may proceed.

Good morning.

Good morning.

I just want to ask about your appetite for future deal volume, but it sounds like you’re still very, very interested. But could you talk about just the sort of on the deals that were announced today sort of what the collective aggregate value of spend was for all those transactions? And then what are you thinking in terms of just that number for, say, next year, what would that look like?

Sorry, Frank, I’m not sure I understood that. The collective aggregate value of what?

Of all the deals you announced today. I don’t think, as I was kind of scanning through, I didn’t see really how much they were costing, so just in terms of how much you’re spending for these acquisitions.

We don’t usually give that. But we can tell you that our average price per bed on those deals was about $40,000. So you can actually do the math.

Okay. No, no, that’s helpful. And then just in terms of, I think you were talking about skilled mix and the ability to drive that. I’m just curious could you kind of walk us back through some of the dynamics that make those numbers shift around the timing of acquisitions, in the acquisition bucket versus the transitioning bucket in terms of just what’s going on with the mix there. So you’ve had some success in growing occupancy, but it looks like you’ve also had a little bit of the expense of mix. So could you just kind of give us a little color there about how that might play out over time?

So one of the fallacies of skilled mix in some of those buckets is that if the average occupancy of our newly acquired facilities for instance is 65%, we may grow skilled mix from 10% to 30% on – sorry, we may grow the skilled census from 10% to 30%, but if we also grow the long-term care census, I guess, though it’s not really all long-term care, but if we grow the non-skilled by, let’s say, 40 patients and outpace the growth of the other, then it drives down skilled mix even though overall skilled is higher. So when we have a building that is 60% occupied in a certain market, that may not be just all skilled. We probably won’t see skilled mix grow even though we expect to see the skilled census grow. Does that make sense?

Yes. But over time, as those facilities mature – I think kind of understand that if you had a low occupancy building, you’re probably going to be able to fill it up quicker with non-skilled patients, but over time...

Let me just correct you, Frank, because that’s not really true. So we have to do both. It’s not a laziness, it’s a – you do need a decent base of Medicaid. And frankly, as you build a relationship with a hospital, they want to feel like they have a partner that will take everyone that they need you to take given the high quality that you’re creating now. And if you’re not willing to do that, then the smart hospitals will go and find a partner that is.

Got you. But understanding that and I didn’t mean to give that impression, but yes, once these assets have matured under your ownership over several years, would it still be logical to expect that maybe the skilled mix would in fact increase, once you sort of redevelop the relationship in that market and get a more stable building and higher level of occupancy. Would you expect that just your focus would be more to drive the mix higher?

The majority of the time that’s naturally going to happen. Because of the demand – when the demand gets to the point where everyone wants to go there first, the short-term residents are the ones that cycle through more often. And so because they continue to fill a better majority of the facility, your long term – sorry, your short-term mix or your skilled mix is going to grow. It happens in almost every case with us. There are a few exceptions for various reasons, it would take too long to explain, but the vast majority has that outcome.

Got you. And just to clarify here on the guidance raise, that’s really more a function of payment updates that you’ve got coming and just the momentum in the business, is that really the effect of some of these recent acquisitions. That’s really not having an effect here in this guidance raise for the balance of the year. Is that right?

No. The newest acquisitions are not.

Okay. One final one. I know Chad asked about the reimbursement change on the SNF side. What about in your home health care business on the Patient-Driven Group Model, the PDGM model? Any kind of initial thoughts there?

Yes, I mean, it obviously came out yesterday, so we’re still in the process of going through it. I mean, at first glance, we’re a little bit disappointed that there was the behavioral modification still in there, but also excited that we actually have two rate changes and now we have more than a year to actually implement and transition and really get up to speed on all the different ways to offset those behavioral changes. I think the other positive thing that’s buried in there is the additional groupers that are out there that allow us to kind of have different distinguishments of the actual clinical care set. So overall, I think it’s consistent with what we expected and hoping to still see movement on those behavioral assumptions that are in there. And no – if not, we have other ways to work through it with our local operators.

But Frank, I think it’s some of the most positive news home health has seen for a while. So I think it’s a good sign.

Okay. Thank you very much.

And our next question comes from Eric Fleming with SunTrust. You may proceed.

Good morning. Question on the skilled nursing side, the value-based purchasing starting in this year in October, do you guys – have you done a breakdown of where your skilled nursing facilities fall in terms of receiving the bonus payments for this year?

Yes, I mean, when we look at everything, when you look at the net market basket increase offset with the value-based purchasing, our overall reimbursement rate will be up about 1.8%.

Thanks.

Thank you.

And our next question comes from Dana Hambly with Stephens. You may proceed.

Hey good morning. Couple of questions. Just following up on Frank’s line of questioning on skilled mix and occupancy, just looking at your same facility results, occupancy was up with the skilled mix by days and revenues both down year-over-year, which intuitively makes sense. And I think I understand you’re saying you’re still growing all lines of those business, but just maybe the Medicaid is growing faster than the Medicare or the short stay. Is that right?

Yes. That can happen initially in a facility that has very low occupancy.

Okay. But I mean, in the same-store results, so these are more matured facilities, are you seeing tremendous growth on the Medicaid side or slowing growth on the short stay side?

Yes, I mean, I think it’s a little bit of – we have a little bit of a shift to the demand care days from the Medicare days. I think what has happened there that what we’ve seen is the other skilled mix grow at the same time. And when you start to look at what’s happening in that other skilled mix component, they are not that shifting into other skilled mix, has a higher daily rate and a higher margin. And so even if we’re shifting days a little bit from one bucket to – one skilled component to another skilled component, overall our margins are actually just as good or in better shape just because we’re actually getting away from that rehab patient. And like I kind of mentioned on my response with Chad, is that shifting into that more clinically complex patient in trachs and vents. And so when we’re doing that, even if we lose some skilled days through that transition, we’re actually in a better shape overall on the total margins. And then we have also at the same time, as Christopher mentioned, grown that Medicaid day mix. So as we’ve grown that Medicaid day mix, we’re building that base of occupancy up higher and so more is dropping to the bottom line. So again making our margins look better even if we have a slight decline in those days on the net managed care or Medicaid front for a particular facility.

And Dana, it’s a good question, I mean, it is – there are things that we need to do better. But remember, we still only have an average occupancy of, what, about 79% in our same store. And so there is substantial opportunity in that same-store bucket to improve that. There will be times where it makes sense for us to grow both sides because of the lower occupancy. Now in our higher occupancy facilities, we generally – I mean, the hospitals demand, frankly, that "hey, we need those beds so – for short-term stay residents" and it’s a great marketing tool for us because they’re the ones that go back out in the community. So we do focus on them. But we still have a large contingency of same-store facilities that require substantial turnaround. Remember, they go into the same-store bucket after three years and – so anything between three and six years is still sort of in what we call the turnaround phase and that’s where you’re probably going to see a little bit of a drag. Everything Suzanne said is true, but you’re still going to see a little bit of a drag on that skilled mix climb in that bucket that is not separated out. I didn’t want to add like five or six buckets and I’m sure you don’t want to, either.

No. And that’s why it’s not necessarily a bad thing because you’re having the occupancy growth at the same time.

That’s right. Okay. All right. That’s helpful. And then on the PDPM, one of the, I think, and correct me if I’m wrong, one of the real positives is going to 25% group therapy. And I think you mentioned on the last call that in your Medicare population, you’re more at like 2% group therapy right now. So a couple of questions. One, just how quickly would you be able to move from kind of a 2% to a 25% once that system is implemented? And not asking for guidance or anything, but just some sort of framework for how investors would think about the financial impact of that type of move?

Well, I mean, that won’t be really our focus to move from 2% to 25%, but it’s a good question because there are cases where our therapy experts believe it would be better. They’re not all cases. But there are cases where it would be better for them to get therapy in a group setting with certain types of residents, with certain types of conditions. And in those cases, it will be easy at the local level to make that move quickly. I don’t know that it becomes 25%. Again, it won’t be a target for us. But it definitely goes beyond 2%. There are more than 2% of our patients that right now there is a strong belief not to do group therapy, strong push not to do group therapy. In certain – most cases, we can’t do group therapy. And – but when that door is opened, for those that will benefit more, we will move. Our therapy directors and our therapists will move rapidly towards that end if it’s best for the resident. I know that I didn’t give you a number, but that’s not really how we work because we think it’s best to follow whatever our local clinicians think or is best to follow as long as it’s according to regulatory guidelines. But based on what I know and what we know about a lot of our operations, that number will grow quite substantially because again, I know I’m getting into more detail than you want, but we have a lot of very social residents that would prefer to have somebody alongside them cheering them on. And obviously, the chemistry has to be right between them. And there are a lot of different factors that go into this decision. But it will move upwards for sure as that opportunity opens.

And therapy isn’t the only opportunity for savings, I would say, I mean don’t forget about the MDS side of the house on the nursing side, where we’re actually reducing the number of assessments. So there is a couple of different ways on the cost save side that we’ll be able to have some savings just based upon how the rule is written.

Okay. All right. Good luck for all of that.

Thank you. Ladies and gentlemen, this now concludes our Q&A portion of the conference. I would now like to turn the call back over to Mr. Christopher Christensen for closing remarks.

Thanks, Dimitrias, and thanks, everyone, for joining us and giving us your time. We appreciate it.

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