Ladies and gentlemen, thank you for standing by, and welcome to the Ensign Group's Second Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your host, Chief Investment Officer and Executive Vice President, Chad Keetch.

Thank you, and welcome, everybody. We appreciate you joining us today. And as always, before we begin, I have just a few housekeeping matters. We filed our earnings press release and 10-Q yesterday. This announcement is available 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, September 4, 2020. We want to remind anyone that may be listening to a replay of this call that all statements are made as of today, August 6, 2020, 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. All of our operating subsidiaries, including 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 Ensign or the consolidated company and its assets and activities as well as the use of 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 in our 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?

Good morning, everyone. We want to begin today's call by thanking our operational leaders and their frontline teams for their inspirational efforts that require more than most could ever imagine. As they care for our country's most fragile and vulnerable in the most intimate of health care settings, they continue to show up to work each day, dawning an uncomfortable mask, gown, eye protection and other personal protective equipment to do some of the most challenging but important work during one of the most difficult times in our industry's history. We thank each of them from the bottom of our hearts for doing so with the utmost professionalism and selfless dedication. Our local leaders, caregivers and other frontline staff are deserving of all the praise that we can muster. Appropriately, we often devote a lot of energy into acknowledging the first responders and hospital workers for heroic work amidst life-threatening circumstances. Our sincere hope is that we, as a nation, begin to similarly recognize workers in the post-acute setting with that same accord. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant. But because of the unselfish dedication of our talented leaders and the heroes serving alongside them, we are optimistic that we can continue to thrive through this uncertainty. Their heroism and dedication over the last several months has been truly inspiring. We're pleased to report that in spite of continued unique challenges presented during the current global pandemic, the operational momentum we experienced in the first quarter continued into the second quarter where we again achieved record-breaking results. For the second quarter in a row, we achieved our highest adjusted earnings per share in our history of $0.78, an increase of 100% over the prior year quarter and slightly above a record-setting…

Thank you, Barry. The company paid a quarterly cash dividend of $0.05 per share of Ensign common stock. Due to our strong liquidity, we are pleased to continue our long-standing practice of paying a dividend to our shareholders. As a reminder, Ensign has been a dividend-paying company since 2002 and have increased the dividend each year since 2002, and there are currently no plans to suspend future dividends. Just a few days ago, we announced the acquisition of the real estate and operations of a post-acute care retirement campus located in Tempe, Arizona, which includes the Tempe Post Acute, a 62-bed skilled nursing facility, Desert Marigold Senior Living of Tempe, a senior living center with both - with 72 assisted living beds and 90 independent living units. This was one of the several acquisitions that we had in the works when COVID appeared on the scene and is the first closing we have had since the pandemic started. Our transition process was a little different this time, but we are confident in our customizable clinical and operational plan that will allow us to selectively acquire in the current environment. With this addition, our growing portfolio is now comprised of 226 skilled nursing operations, 24 of which also include senior living operations and other ancillary businesses across 14 states. Ensign now owns 93 real estate assets, 63 of which we operate. This portfolio of owned assets took less than 5 years to acquire as compared to the 15 years that took us to acquire the 94 assets we spun out to CTRE in 2014. I also wanted to give a brief update on our growth prospects. As we indicated last quarter, we had several deals in the pipeline that we halted temporarily as we responded to the COVID threat. A handful…

Thanks, Chad. We're very pleased to report that we are seeing some very promising outcomes across the organization as we have seen improved clinical results amongst our patients, the vast majority of which are able to recover and return to home, while simultaneously limiting the spread of the virus, reducing the pressure on local hospitals and doing so in a cost-effective manner to further benefit the overall cost to Medicare and Medicaid programs. While this is a dangerous virus, we have toiled day and night to continue to develop effective care plans that have resulted in above-average outcomes, which is only added to the confidence of our local health care community. To help illustrate these results, we would like to offer a few examples. As the COVID-19 outbreak began in suburban Washington State, we had an early view from our operations into how to defend against COVID entering our facilities, prevent its spread and in cases of outbreaks, initiate clinical practices to improve outcomes. Our model facilitated the sharing of best practices among operators, clinicians and medical directors. One excellent example of this is Sunview Respiratory and Rehab in Youngtown, Arizona. During the early weeks of the pandemic, CEO, Sean Hill; and COO, Marla Sanchez, together with the Arizona resource teams tirelessly prepared for the eventuality of COVID in their facility. They participated in COVID education, rigorously applied CDC guidance and CMS regulations and obtain masks, gowns and other recommended PPE. Under the direction of their Medical Director, Dr. Omair Hasan, they also developed a COVID-19-focused clinical program and provided proactive training to the nursing staff and care staff. Unfortunately, in June, COVID entered Sunview and when universal testing was conducted, many residents and numerous staff were quickly identified as COVID positive. The Sunview team was prepared and immediately went…

Thank you, Barry, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include GAAP net income was $40 million, an increase of 95% over the prior year quarter. Adjusted net income was $43 million, an increase of 99% over the prior year quarter. Consolidated GAAP revenues were $585 million, an increase of 19% over the prior year quarter. Same-store occupancy for the quarter was 73.7%, which is down 5.9% from the prior year quarter. Same-store skilled mix days was 31.4%, an increase of 100 basis points. The same-store Medicare days were up 16%. Transitioning occupancy was 76.1%, which is down 3.8% over the prior year quarter. Transitioning skilled mix days was 25.5%, an increase of 360 basis points and transitioning managed care revenue was up 12%. The company's liquidity remained strong for the 6 months ended June 30, with cash generated from operations of $174 million and free cash flow of $147 million. At July 31, we had cash and cash equivalents of approximately $100 million and $320 million of available capacity under our revolving credit facility. As Chad mentioned, we also own 93 assets, 73 of which are unlevered with significant equity value that provides us even more liquidity. In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to health care providers during the COVID-19 pandemic, including the waiver of the 3-day qualifying stay, the CARES Act, which provides, among other things, Provider Relief Funding and an accelerated Advance Payment Program for Medicare, which equates to approximately $100 million for us. More specifically, the company received directly and indirectly, approximately $110 million of the Provider Relief Funding under the CARES Act, including rounds 1,…

Thanks, Suzanne. Before we move on to questions, we just want to reiterate again that our optimism expressed today is based entirely on our confidence in our local teams and our proven model. Our success has and will always be due to their daily commitment and sacrifice, and their ownership of our culture and organizational mission. We're grateful to our shareholders for your confidence and support. We cannot adequately express our appreciation to our colleagues in the field and at the service center for making us better every single day. Thank you all. And with that, we'll now turn the time over to Q&A. Operator, can you please instruct the audience on the Q&A procedure?

[Operator Instructions]. Our first question comes from the line of Frank Morgan of RBC Capital Markets.

I guess with the guidance updates you've provided today, it looks like sort of the implied guidance for the second - back half of the year could be as much as $1.54 in the second half of the year. Is there anything we should be thinking about in terms of the cadence there between the third and fourth quarter? I know there's sort of a normal seasonal pattern from 2Q to Q3, but anything that we should be mindful of when we think about just sort of the cadence in the second half?

Yes. I'll let Suzanne fill in the gaps here, Frank. Look, I think we expect kind of the general path that we've seen over the last few months to continue through the third quarter. And our hope is that we start to see a recovery in the fourth quarter in terms of overall occupancy. But there are some things that will cause some fluctuation, some of which are relatively known, others of which are fairly unknown. We're receiving some temporary Medicaid rate enhancements at the moment. Some of those will burn off. There might be some offset to that from just regular state reimbursement increases. The length of the 3-day stay waiver is a fairly unknown quantity there, though we expect it to run through the end of the third quarter and hopefully into the fourth. So those are some things that are impacting it. Suzanne, can you think of others that are?

No, I think you covered them really well, Barry. And I think that, as we've been talking about, the end of this - the state of emergency is declared through the - basically, end of October. And with that, follows a lot of those FMAP additional state funding continues. So there's some relief there for additional COVID expenses that we expect to incur during Q3 to actually be offset by those Medicaid funding, the additional Medicaid funding. And then we did get our overall rate increase for Medicare. That's our standard one that will kick in, in Q4. And then all the state standard increases kind of filter in at the end of Q3 and then fully in force in Q4. And so you've got that. And then just the skilled in place, and we do know that's going to be - it looks like to be in place all of Q3, but that might burn up in Q4, depending upon the declaration of the state of emergency.

Yes. Let me just add to that, too, this is Chad. I mean obviously, with occupancies, as we described in the prepared portion of our remarks, the COVID - the prevalence of COVID in the communities we're in is also something to watch, and that impacts both occupancies and mix, as Barry described. And so that clearly could impact things as well.

So it almost sounds like 3Q might be better than 4Q. I mean it sounds like with a lot of the continuation of these programs. Is that a fair way to think about it? Or do you think it could be fairly equally weighted between them?

Yes. I don't think we expect it to be better, Frank. If anything, it might be the same or slightly down from Q2. But now with...

But Q4 being strong - definitely Q4 being stronger.

Yes. We're trying to give clarity, though, through the whole remainder of the year. It's really difficult to do quarter-by-quarter.

Yes, I understand. So net-net, a lot of the programs that may run through the third quarter, as those wind down the rate increases that we normally occur for Medicare in the fourth quarter and maybe higher occupancies would make - will keep it slightly better, potentially, theoretically, a little bit better. In terms of the states that have these special funding, I know you talked about a number of states that have actually passed through the FMAP increase. Are these big important states to you? Like how would you rate the magnitude or the benefit you're getting through the temporary FMAP increase?

Yes. That's a great question, Frank. When we kind of think about what states actually have the FMAP program in place, it's like California has a very strong program in place. Texas has a very strong program in place. And Arizona has had - they're a little bit different on the program they have. They have a strong program, but it's more of a full - a whole dollar program versus California and Texas have a daily rate program in place. And so all of our larger states have these programs in place. And so California and Texas specifically have their programs in place at the end of their emergency based upon how they've laid everything out. They still have to go through - at least we expect them to go through the end of their emergency based on everything we've been told.

Got you. And then interesting on the commentary about the M&A and then also the financing - the HUD financing on some of your unencumbered assets. Any kind of early read on like how much equity you could pull out of those buildings and maybe how we're going to extrapolate across the rest of your unencumbered portfolio?

Yes. It's a great question, Frank. We've been consistent in trying to point out that we have a lot of untapped value in those owned real estate assets. The one thing I'll just point out is as we talked about, those 93 owned assets have been acquired in the last 5 years. So a good portion of those are newer assets, at least to Ensign. And a lot of them are going through that transition phase that we talk about as a key part of our model. So a lot of those are, I would say, are not kind of at full value, so to speak. But that said - and I can give you some sense on the HUD loan is one tool that we have to basically take some of that equity off the table and use it to fund future growth. We're looking at under 10 assets. HUD programs are pretty specific in how they're structured. But if you're looking at a 70% to 75% loan-to-value on those assets, it represents around $120 million in loan proceeds. So you could maybe look to that as a way to say what - again, 8 or 9 of those assets would be worth. So that gives you some sense. But you can't necessarily extrapolate that across all those owned assets because, again, so many of those are still in the transition phase as newly acquired or transitioning assets. But it's definitely a great question and something we look at and talk about all the time. And we're also still evaluating ways that we can illustrate and show that value to our investors because it is a significant source of liquidity as both Suzanne and I mentioned, and it's really nice to have.

Sure. And I'm assuming those 10 assets that you own in financing, those would be some of the more mature of those assets that are closer to the sort of equilibrium steady-state performance than those that are in ramp-up. I would assume that. Is that the case?

Yes, that's right. That's exactly right.

Okay. And then - so now that you've got this money in the M&A opportunities that you see out there. I'm just curious, I mean, you talked about the revamp of the interest of doing things now. Like the opportunities you're seeing today, are these mostly turnaround assets? Or would these be assets where people are just don't want to deal with COVID, don't want to deal with the - where we're in today? Or any way you could characterize the opportunities that you're seeing now?

Yes, that's a good question. I would say we have some of our typical sellers that are just for one reason or another, they're just looking to exit the building, exit the industry. Maybe it's a family-owned business and the next generation doesn't want to continue. Or there's - maybe if there's some private equity investors that are looking to liquidate their interests and things like that. So we have sort of the kind of standard non-pandemic related sellers that are out there. But that said, I think there's definitely a group of sellers that because of COVID and even just sort of PDPM, which is not something that we've talked a whole lot about, but just the continued regulation and everything that it takes to run a skilled nursing facility. We're seeing a lot of those folks that are getting through it right now because of some of the CARES Act funding that's helped immensely. But as that burns off, we'll be very interested in selling. So we're seeing a little bit of both. But in both categories, it does represent a very healthy pipeline for 2021.

[Operator Instructions]. Next question comes from the line of Scott Fidel of Stephens Inc.

First question, just interested in terms of what you're seeing more recently around occupancy rates from some of the lower acuity patient cohorts. And then what type of - what external or engagement activities you might be undertaking to reramp up occupancy around some of the lower acuity individuals?

So maybe just on the occupancy, I think we quoted some numbers. As Barry went through it looking kind of mid-May to mid-July, we were down 1.5% but our skilled mix was up 6.9%. I mean I think what we have seen when we analyze our numbers is as COVID comes into a specific area that we actually see that occupancy go down and - the overall occupancy go down. And so really, it's those lower skilled patients that we're actually seeing that occupancy, both private and Medicaid, the occupancy go down. And as we have come into that area, then we actually see the skilled mix go up. And so because we're skilling in place or passing or going over the 3-day qualifying waiver for the stay of the hospital, we're actually seeing an increase and we're helping relieve the overall system in that area and taking those higher acuity skilled patients. And so it's kind of really equal to how heavy COVID is impacting that specific area of how we're seeing this. It's a very building-by-building specific. And I don't know if I answered your question, but it's a very hard thing to say at it.

Yes. And Scott, I think one thing to maybe remember is some of the reductions you see in occupancy are somewhat deliberate, both on the part of the kind of the hospital system, but also just, again, elective cases being shut down. And so those things are naturally temporary phenomenon. I can tell you also that as we look at kind of the world of outbreak buildings that we've experienced so far, at where - which we have quite a bit of experience across a wide range of geographies. As you look at those and you see kind of the path that they went down, when COVID enters, you see a pretty sharp reduction in occupancy. You see COVID kind of work its way through things and then resolve. And then you see a natural path back upwards to kind of more stable occupancy. And again, as we look back at our own experience in our outbreak buildings, that path is clear in every single building. They're all happening at different times across the entire portfolio, and you have new outbreaks happening and new challenges emerging. But as we study those trends across our portfolio, it gives us a pretty high degree of confidence that as things begin to normalize, which they most invariably will in terms of volume through the health care system, we feel like the portfolio overall will kind of follow a similar path that we saw all of our individual buildings go through on a building-by-building and a market-by-market basis.

I think that's kind of reemphasized by like how the - if you look and see what the managed care are seeing for utilization right now, they're projecting that. In the second half of 2020, they're projecting an increase in their utilization. And so I think to Barry's point, that's really how we're mirroring their throughput increases and their utilization increases and so does ours. And so really looking at that as a kind of consistent pathway and pattern that we're seeing.

Yes. Understood. And maybe take the other side of the patient mix and clearly, the strong acuity shows through in the second quarter, and we certainly see that in significant increases in your average daily rates and then in your margins as well. I'm interested just to the extent you can parse for us. Even before the COVID crisis had begun, you had already been showing that increase in acuity and which has been translating into some of the stronger pricing stats as well. Clearly, you've had this bolus of COVID patients coming in that also impact that too in the second quarter. Is there any way that you could sort of give us some more insights into sort of drilling down between, let's call it the non COVID, higher acuity patient mix in terms of how the trends may have been impacted there? And then, obviously, we know that and you've seen the new COVID patients as well driving up the acuity.

So I think, Scott, one of the easiest ways to see this pattern and pathway is looking at a small little area that we have been breaking out for the last couple of years of the other skilled. We talked about that being our subacute and/or higher acute. And really what that group of payers boils down to is it's a really high acute clinical patient. And really, that's where the testing ground of all of some of the complex clinical stuff started. And now over the last year, in the preparation for PDPM, we were talking, and you've heard us talk about this expansion of these highly complex clinical care pathways that we're developing and putting in place. And so I think what you see was the last kind of quarters through Q4, Q1 and then Q2 is that continued expansion of those clinical care pathways, which then has resulted in higher complex clinical management and higher complex medical management, which is one of the key conditions that as you look through PDPM, that nursing focus, the nursing delivery has really been something that we've been able to execute on. And so I think it's that continuation of that growth. And what COVID does is it actually pairs and partners right into those higher clinical care skill sets that we've been developing for the last 1.5 years, 2 years.

Okay. And then just one last one for me. Just interested in your thoughts on the final Medicare SNF rates and policy changes for 2021, came in at 2.2%, not that far off the last couple of years. Just in terms of the rate itself and then some of the policy changes that CMS included in there. How you're thinking about those relative to what you're expecting to see?

Great question. It comes in at 2.2%, consistent with what we were expecting, the proposal is at 2.3% really diving in and looking through some of the changes that are encompassed in there, not a significant amount of changes that really impact how we pull this role through, if anything, some slight positives for us that allow us to capture some of the things that we're already doing, allow the right now really captures those additional clinical procedures that we already had in place. And so if at all, somewhat positive to some of those additional things that we were doing are caught up in the rate, but really, really pleased with the rule and pleased with the relatively light number of changes that are outside the rate itself, but the fees that are in there are positive for us.

We have a question from the line of Frank Morgan, RBC Capital Markets.

You actually almost answered it in that last comment. I was wondering the PDPM update. I think you hit on most of that. But yes, it's particularly in light of COVID, but any other thoughts, that's fine, if not, I'm good.

Yes. Look, I can just - just to clarify a little further and add a little more color. Prior to COVID, we saw a pretty even split between kind of what I would call a rehab-type patient and a medical management type patient, which is more of a COVID-related diagnosis, more nursing heavy. And during the pandemic, we've seen that shift to more - where you've only got less than 20% of a rehab-focused patient and somewhere around 60% to 70% on this medical management kind of high complexity-type patient profile. So I mean that's what the shift has looked like as far as our patient profile. And as far as PDPM performance goes, we continue to cater towards that more complex patient type. We have spent a lot of time not just learning the PDPM system, but continuing to do what we've done for the last, I would say, 10 years, which is to be the type of facility that can take the higher acuity patients and drive the kind of outcomes that you would expect. And so for us, that continued transition continues to go well for us.

At this time, I'd like to turn the call back over to CEO, Barry Port, for closing remarks. Sir?

Thank you, Latif, and thank you, everyone, for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.