Ladies and gentlemen, thank you for standing by, and welcome to The Ensign Group, Inc. Q3 2020 Earnings Conference Call. [Operator Instructions] I would now like turn the conference over to your host, Mr. Keetch. Sir, you may begin.

Welcome, everyone, and thank you for joining us today. 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, December 4, 2020. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, October 29, 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 are the consolidated company and its assets and activities as well as the use of 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 Enzyme 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 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?

Good morning, everyone. We're pleased to announce another record quarter despite the continued challenges arising from the global pandemic. With the surge of COVID-19 that occurred during the third quarter in some of our largest states, including Texas, Arizona and California, our local teams were faced with an unprecedented challenge and have again demonstrated incredible agility and responsiveness to the evolving landscape. True to form, they remain as committed as ever to the cause of quality outcomes in excellent patient care. They come to work each day in the most difficult circumstances to serve our nation's most vulnerable on the true front lines of this worldwide trial. They deserve all the praise that we could possibly provide them for their courageous and selfless service. As a result of their heroic efforts, our local operators and caregivers have translated their passion into record-breaking results. For the third quarter in a row, we achieved record earnings, which came in at $0.78 per share, an increase of 95% over the prior year quarter. We also reported a 95% increase in our adjusted net income of $44 million. The strong results came from quarter-over-quarter improvements and skilled mix across the portfolio, improved admission trends, availability of more frequent and broader COVID testing, increased managed care revenues, cost-saving initiatives, improved collections sequestration suspension and improved Medicaid rates. Our local leadership teams continue to make clinical and operational improvements that are tailored to conditions they face in their local market. Our operations have continued to see an increase in the number of higher acuity patients, including some COVID-19-positive patients and an increasing number of managed care patients. With the surge in COVID-19 patients in many of the surrounding communities we serve, we continue to see state and county health leaders and local hospital systems turned to…

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 shareholders. Ensign has been a dividend-paying company since 2002, and we look forward to continuing this practice as one of many, many ways we can provide a return to our shareholders. We had a relatively quiet quarter on the acquisition front as all operators were focused on dealing with the summer surge. However, in August, we announced the acquisition of the real estate and operations of a post-acute care retirement campus located in Tempe, Arizona, which included 10 peoples acute, a 62-bed skilled nursing facility and Desert Marigold Senior Living and Tempe, a senior living center with 72 assisted living beds and 90 independent living units. This was one of several acquisitions that we had in the works when COVID appeared on the scene and is the first closing we've had since the pandemic started. Our transition process was a little different to time, but we are confident that our one-at-a-time clinical and operational plan will allow us to selectively acquire in this current environment. With this addition, our growing portfolio is now comprised of 226 operations, 24 of which include senior living operations and other ancillary businesses across 14 states. Ensign now owns 94 real estate assets, 64 of which we operate. This portfolio of owned assets took less than five years to acquire as compared to the 15 years it took us to acquire the 94 assets, we spun out to CCRE in 2014. 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 of those operations…

Thanks, Chad. We're very pleased to report that we continue to see some very encouraging clinical outcomes across the organization while simultaneously limiting the spread of the virus, reducing pressure on local hospitals and doing so, in a cost-effective manner to further benefit the overall expense to Medicare and Medicaid programs. While this continues to be a dangerous virus, our caregivers have worked tirelessly to provide excellent care to their patients, adopting the latest advances in intervention and treatment to maximize patient outcomes, which is only added to the confidence of their local healthcare communities. By applying the best practices across several geographies and by providing the local leadership with tools and resources rather than directives, not only are we accomplishing high-quality outcomes but our operations have been able to build census among all payer types, including with managed care patients. To help illustrate this, let us offer an example. One of our Subacute facilities located in Upland, California, Upland Rehabilitation and Care Center, led by CEO Kit McMillan and COO, Ria Genting, have been laser-focused on driving market-leading metrics like low return to acute percentages, compressed lengths of stay and improved responsiveness during pandemic conditions. They have leveraged these outcomes through consistent and transparent data sharing and regularly scheduled joint review meetings with all the prominent local managed care providers. This has not only strengthened existing partnerships but has also led to new relationships as has happened with Kaiser earlier this year. As a result, their managed care ADC has grown by 54% and along with overall occupancy growth of 280 basis points, both compared to third quarter of 2019. This has contributed to earnings growth of 172% year-over-year during an unprecedented time in the market. We've also seen impressive overall census recovery in many of our key markets.…

Thanks, 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 $43.1 million, an increase of 94% over the prior year quarter. Adjusted net income was $43.7 million, an increase of 95% over the prior year quarter. Same-store skilled revenue increased by 19% over the prior year quarter and by 8% sequentially, fueled by an increase in Medicare days of 34% and 10%, respectively. Transitioning skilled revenue improved by 27% over the prior year quarter with a 20% increase in managed care revenue and a 27% increase in Medicare revenue. The company's liquidity remained strong for the nine months ended September 30, with cash generated from operations of $282 million and free cash flow of $244 million. As of September 30, we had cash and cash equivalents of approximately $175 million and $342 million of available capacity under the revolving credit facility. As Chad mentioned, we also owned 94 assets, 74 of which are unlevered with significant equity value that provided us with even more liquidity. In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to healthcare providers during the COVID-19 pandemic, including a waiver of the three-day qualifying stay, CARES Act funding, which provides, among other things, direct relief funds and an advanced payment program for Medicare, which for us totaled approximately $104 million. As Barry mentioned, we have a plan to return all provider release funds under the CARES Act. More specifically, in addition to the approximately $109 million received as part of rounds one, two and three, the company recently received an additional $23 million in round four. As with the first three rounds, we have determined…

Before we move on to questions, we want to thank our operational leaders and their frontline teams for their inspirational efforts that require more than most ever really imagine. As they care for our country's most fragile and vulnerable in the most intimate healthcare settings, they continue to show up to work each day, dining an uncomfortable mass gown, eye protection and other protective equipment to do some of the most challenging but important work during the most difficult time in our industry's history. We want to thank each of them from the bottom of our hearts for doing so with the utmost professionalism and selfless dedication. Our leaders, caregivers and other frontline staff are deserving of all the praise we can muster. We're also grateful to our shareholders for your confidence and support. We cannot adequately express our appreciation to our colleagues in the field and the service center for making us better every single day. So thank you all. And with that, we'll turn it over to the Q&A portion of our call. I'd also like to introduce Spencer Burton, our COO, who will join us for Q&A. Sri, can you please instruct the audience on the Q&A procedure?

[Operator Instructions] We do have a question from Frank Morgan with RBC Capital Markets. Please go ahead.

Thank you. I guess I would love to go to the commentary about the skill mix and the growth in the managed care census. Is that - when you think about that census, is it mainly COVID? Or is it just business that might otherwise have been treated in the hospital, any kind of color about what's the driver behind the managed care growth?

It's not just COVID, Frank. It's really a mix. What we believe we're seeing is that managed care had some pent-up demand and a lot of those patients are now going through the healthcare system more normally. And so to us, it represents the start of a normalization and then an adaptation to kind of the new environment.

Yeah. And then when we drill down kind of looking at our diagnosis saves and other things, we can see that really what the patient's characteristics are not associated in some of the growth is not associated with COVID. Some of the growth is associated with other characteristics that are non-COVID related.

Got you and if you think about this phenomenon and assuming we have - obviously, there seems to be a rise in COVID again going on right now in certain parts of the country, at least. Is there anything you've learned from the kind of, I'll call it, the first two waves, depending on how you count them. But anything different that you see you'll be doing for this wave, if what we have right now turns into be another big way, anything different that you'll be doing or any learnings from your prior days or from the prior surge?

Yeah. So I think that's a great question. There's a couple of things. Obviously, if we don't learn from our experience, we're not managing correctly, and we've learned a whole lot. We also have a number of tools at our disposal that we didn't have early in the pandemic. We're seeing less pressure on things like our PPE. We have much more availability of testing, including rapid testing that allows us to get diagnosis of COVID quickly for staff and also for residents, even new admissions that in the past, we had to wait longer to know their COVID status. So all those tools, having those arrows in our quiver, so to speak, really give us an advantage. We are seeing significant surges in the communities and research suggests that skilled nursing prevalence of COVID is very tied to community prevalence. But I do think that we're encouraged that with these additional tools, we're not only able to prevent its spread through infection and control techniques we've developed over the past six months. But also, we're able to catch things quickly, isolate more accurately and quickly and keep the spread more limited when it does happen, so encouraged that we have more availability to fight it spread.

Also encouraged Frank, that our admissions trends in spite of kind of the uptick in cases very recently has continued to be positive, which is another indicator that there's an adjustment in the healthcare environment to work with select partners and ensure that there's continued patient flow and treatment outside the acute setting.

And any particular areas, I mean, is this more of a West Coast phenomenon or is this Texas? Or is this just across the board where you're seeing this increase in managed care?

The increase in COVID or the increase in managed care?

Just the increase in overall volumes of managed care. I'm sorry.

It's across the board, and I would say that's the same thing with the census. When we're looking at overall admissions, we're seeing a nice overall increase across the board on our skilled mix admissions.

Got you and then I guess on the rate side, obviously, the benefits of the relief from sequestration. And I do think there were some states that we're having - adding incremental payments during the COVID period. Could you maybe give us an update on how long that runs? Is that through year-end? Or does it carry over the next year or any prospects that some of those payments would be extended further.

Absolutely, so the sequestration, obviously, right now is approved for the end of the year, December 31st, moving on to the states for FMAP. You've got a couple of different things going on. Some states have been more of a what I would call a daily rate payment in all of those states, including some of our larger states like California, Texas, Washington, all of those will go to the end of the emergency right now on which is slated in the middle of January. And then states like Arizona as more of a lump sum payment. And so that - the next lump sum payment is scheduled for Q4. And then other - some other states just haven't done programs are just on CARES related programs. So we haven't participated in some of those other states.

Got you one more and I'll hop back in the queue. Looking at the cash flow from Ops, I think the number may be worked out to about $110 million in the third quarter. I'm just curious, how much of a, how much of a benefit were some of the either advances or some of the other parts of the CARES Act to that number? And then when we think about - obviously, you've given us some guidance for next year in terms of revenues and earnings. But any special considerations or call-outs we should think about on how cash flow from Ops might look next year? Thank you.

Yeah, great question, Frank. With regards to kind of some of the help that continues, and one of the things that we do have is, deferred payroll taxes of about $33 million year-to-date helping that out. That's the number that's growing. We did have some offsetting things in the current quarter actually though. We had to repay our overall federal tax payment. And so that actually pretty much offset that additional benefit we got from the deferred payroll tax. So that nets out basically to 0. We continue to have the accelerated payments of about $100 million that we won't have to repay back until April of next year. And so overall, some really good things that are in there. But I would highlight one of the biggest things that we have going for ours is just an improved collection in our AR front. And that is something that is sustainable beyond some of the helps that we're getting from the outside. And so that is a huge benefit that we continue to see coming through in the cash flow. And with regards to revenue and earnings for next year, I think obviously, it's the continuation of the same thing and themes that you've seen us do in the past, really executing on that local operator model.

Okay. Thank you.

Thank you. And speakers, I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. Barry Port for any further remarks.

Thanks, Sri and thank you all for joining us today.

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