Ladies and gentlemen, thank you for standing by and welcome to The Ensign Group, Inc. Third Quarter FY 2021 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Mr. Keetch.

Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, November 26, 2021. We also want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, October 28, 2021, 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 and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our 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 consolidated company and its assets and activities as well as the use of words we, us, our and similar terms 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 Form 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?

We are pleased to announce another record quarter in spite of the continued challenges related to the pandemic and the disruption in the labor markets. With the COVID-19 Delta variant hitting its peak, our local teams have again demonstrated incredible agility and responsiveness to the evolving landscape. Remarkably, during the quarter, we saw year-over-year improvement in occupancy as well as continued sequential improvement for the fourth consecutive quarter. To put this in context, from the low point of our pandemic period census, which we hit in December of 2020, our same-store and transitioning operations have already improved census by over 51%. In addition, our managed care census for our same-store and transitioning portfolio improved by 26% from the prior year quarter, and we saw sequential growth for the fifth consecutive quarter in a row. Our record results in the quarter came from our leaders' relentless focus on market-specific occupancy growth strategies along with a persistent effort around operational fundamentals. We also continue to benefit from sequestration suspension and improved Medicaid funding in certain states. We are grateful that the federal government has extended the state of emergency to January 2022, which keeps in place many of the regulatory and other forms of assistance helpful to patient care. Like with most businesses right now, staffing continues to be a challenge. Our teams have been proactive in using locally driven strategies to help recruit and retain the best and the brightest. We are pleased that our turnover has remained stable at a rate far below industry averages. And even though recruiting has generally been tougher, we are starting to see local hiring strategies bear fruit. In addition, we continue to believe these particular staffing challenges have some unique transitory factors that we do not anticipate to persist, such as temporary unemployment benefits…

Thank you, Barry. As Barry mentioned, we announced yesterday that on October 21, 2021, our Board of Directors approved the formation of a new captive REIT. We couldn't be more excited to finally announce the creation of this new REIT strategy and to build upon our thriving real estate investment platform and our proven track record for growth. After considering many different structures and alternatives, forming and growing our own REIT was by far the best solution to help us realize our goals in post-acute care while allowing us to build upon our established real estate investment platform with high-quality assets. Through the years, Ensign's entrepreneurial culture has generated enormous value for our stakeholders. While our real estate strategy has always been an important part of our DNA, we believe that this new organizational structure allows us to take the next step with our already thriving real estate business, opening up opportunities for growth that we have not previously pursued. There are many benefits to our stakeholders in this new organizational structure when compared to a sale leaseback or even a full spin-off. First, a captive REIT provides us with a new pathway to growth that didn't exist before, giving us more flexibility in the use and access of capital and enables our collective acquisition team, which consists of hundreds of CEO-caliber operational leaders in the field, to strategically focus on value creation through real estate investing. As many sellers that have worked with us in the past could attest, as an operations-focused organization, we occasionally miss out on really good real estate opportunities. Sometimes deals we see are not a fit geographically, operationally or culturally. This new approach will allow us to consider larger deals that we can then break up into smaller deals, keeping the operations that fit…

Thanks, Chad. We're very excited about the many new opportunities that this captive REIT will create for us. We're also very pleased to be able to introduce this from a position of great strength. Our Service Center team has already put a lot of work into the creation of this structure, but we are pleased that it does not cause any distraction to our operational performance, which speaks to the wisdom of our locally driven approach. Next, we'd like to highlight an example of the successes our local teams have had this quarter. While external circumstances have been difficult, our affiliated operations continue to defy the odds and produce remarkable outcomes clinically, culturally and financially. Somerset Subacute and Care, a 5-star facility located in the highly competitive El Cajon area of San Diego, California is an excellent example. When the facility was acquired in 2015, it suffered from a poor reputation and struggled to maintain occupancy. After establishing strong clinical systems, CEO Matt Oldroyd and COO [ Christina Bilon ], met with providers and physicians and came to a consensus that Somerset could be the best in the market, providing subacute care to the community's most fragile and acute long-term residents. The team has never wavered in their vision and systematically built relationships with key acute and pulmonology partners and added clinical enhancements such as 24-hour physician staffing and an on-site pharmacy. As their clinical results improved, so did the demand for their services. In 2019, the facility began the process of converting to 100% sub-acute beds. The results have been exceptional. Despite caring for a highly acute population, Somerset is one of the few skilled nursing facilities in the entire nation to experience 0 COVID outbreaks and 0 COVID-related deaths. Like many of our affiliated facilities, Somerset embraced the…

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 when compared to the prior quarter include: GAAP diluted earnings per share was $0.83, representing an increase of 8%; adjusted diluted earnings per share was $0.91, an increase of 17%; consolidated GAAP revenue and adjusted revenues were both $668.5 million, both increasing 12%; total skilled services segment income increased 11.4% to $94.4 million; FFO for the real estate segment was $13.8 million, which represents an increase of 6.5%; GAAP net income was $47.3 million, an increase of 10%; and adjusted net income was $51.8 million, an increase of 19%. Other key metrics as of September 30 include: cash and cash equivalents of $304.6 million; cash flow from operations of $204.5 million; and $344 million of availability on our revolving line of credit. We continue to delever our portfolio, achieving a lease-adjusted net debt-to-EBITDA ratio of 2.03x. We also own 95 assets, 72 of which are unlevered with significant equity value that provides us with even more liquidity. Also in our 10-Q, we announced that we have established a share buyback program with a maximum repurchase amount of $20 million. Given the stock's recent performance, our liquidity and our confidence in near- and long-term results, we believe this modest share buyback to be a very wise use of our capital. As we've said before, share buybacks are one of the many levers we have to deploy capital to benefit our shareholders. Last week, the public health emergency was extended for another 90 days to January 16, 2022. With this extension, the federal government will continue to provide various waivers and FMAP funding. However, Medicaid reimbursement and the timing of payments vary substantially by…

Thanks, Suzanne. We want again to thank you for joining us today and, again, express our appreciation to our shareholders for their confidence and support. And most importantly, we recognize the heroic efforts of our nurses and therapists and other frontline care providers who have courageously faced this pandemic and provided life-enriching care to our residents and their family. And we're also appreciative to our colleagues here at the Service Center who are working tirelessly to support our operations and enabling us to succeed in spite of the great challenges that we faced. So thank you for making us better every day. And with that, we'll turn it over to the Q&A portion of our call. Can you please instruct the audience on the Q&A procedure, Kevin?

[Operator Instructions] Our first question comes from Scott Fidel of Stephens.

I wanted to start just with a question on some of the more recent occupancy trends that you've been seeing and, in particular, since the Delta impact started to peak out really in sort of early to mid-September. In our own SNF tracker that we have, we did see Ensign's occupancy starting to -- the growth started to reaccelerate in the back half of September. So just interested if you can talk to that and possibly give us an update on what you've been seeing on occupancy trends so far during October.

Yes. That's right. I mean, I think at the height of the Delta peak, we -- certainly, we saw occupancy slow a bit early in the quarter. But our experience is consistent with what you're tracking, Scott. And frankly, if it weren't for some staffing challenges that we're facing, our pace would be even quicker right now because the demand is certainly there.

Okay. Got it. And just on the staffing side, I have one question there. Interested if you can maybe give us an update just on what you've been experiencing in some of your markets just as the vaccine mandates have been going into effect. Some of your large states already did implement the vaccine mandate. So I think you've got some probably good sort of real-time information on that. And then maybe how you're expecting the mandates to continue to impact staffing in some of the markets that have not -- are still moving towards implementation of the mandates.

Yes. We have 3 states, Scott, that have implemented vaccine mandates so far, California, Colorado and Washington, ahead of this federal mandate. That's still not quite finalized. And we're really excited to report that we've seen about -- only about 0.5% of our employees that we've had to part ways with, which is a really small handful of people. And so, look, certainly, we don't expect that to be the case in every single state because there are some states that are more vaccine-hesitant for sure. But I think it speaks to our culture and the care that our leadership team and the field has for the staff and their ability to help those folks reason through and see the importance of getting that done. We've seen massive progress across our footprint with our employees in terms of our overall vaccination rate, and that continues to rise by the week. And so we feel poised and pretty confident that we'll manage through this pretty well. And we -- certainly, I think we were a little more fearful in the beginning that it might have a bigger impact. But our experience so far indicates to us that we feel like we can mitigate that, some of the fear and concern that comes with it.

Okay. Maybe I'll ask one more and then get in the queue. Just wanted to ask about the FMAP funding that you've been able to recognize year-to-date in 2021 and how you're thinking about those funding streams continuing into FY 2022, just given, obviously, the PHCs have been getting extended. But interested also in just any conversations that you or your trade group may have with policymakers around discussing further extensions of those type of supplemental Medicaid rates also just given the backdrop here around wage inflation in the industry and some of the headwinds the industry has been dealing with around that.

Yes. That's a great question. We -- I'll tackle the second part of that question first, and I'll let Suzanne comment on the first part. We are working very closely with our health care association in Washington, D.C. and their team of lobbyists and feel like we're making really good progress in helping both the folks at CMS and then policymakers in Congress understand both the impact of COVID and how it's ongoing and then also how that relates to the additional challenge with staffing that not just our industry but every industry is dealing with right now. And thankfully, I think there's a solid recognition by policymakers in D.C. and lawmakers on this front, and there are ongoing talks. I think seeing the extension of the public health emergency is a function of those ongoing discussions. We certainly don't rely on and are trying to make sure that as an organization, we're in a position where we're financially independent from additional help from the government. As you know, we returned all of the CARES Act funds that have been provided to us. We do only lean on those state FMAP funds to the extent that they apply to actual COVID-related expense. And the reality is, is we still experience a lot of COVID-related expenses, both in supplies and labor. And so we certainly feel like it's appropriate for the government to continue those state-based programs through FMAP. And we feel pretty confident that there's a solid reception to that. But whether they're maintained or not, it's either going to have some short-term pressure or -- but it will create a tremendous buying opportunity for us because we know most of our competitors really can't sustain without some ongoing help, even not -- beyond FMAP, but anyway, I'll let Suzanne talk about what we've recognized so far.

Yes, and we've disclosed that. As Barry mentioned, it's really what we're doing is we're matching those expenses and the revenue together. So for a COVID-related expense, if the state does have FMAP revenues and funding, we're going to go ahead and recognize that. And so it's been about 16.5%. And in this most recent quarter, a little bit higher than that, so about 19% for this most recent quarter, but on average between 16.5% and 19% a quarter. And we'd expect that to continue into Q4. And then like we mentioned in the remarks, we have 2 states, Texas and California, our 2 largest states that have been very, very active and very, very supportive of ensuring that those FMAP dollars flow through to us. And so those 2 states, we definitely feel more confident about them continuing. And then we have some other states that have -- Arizona being one where it's a little bit more all-in one month sum that they do the funding, but they've also been very supportive in ensuring that a portion of the funding does come to us. And so -- and those are on some of our largest states, and we feel really good by our discussions with them that they're supportive to the extent that they have the funding, that we're going to continue to see some of that come down to us.

And that spike is obviously, even this last quarter's, corresponds with that -- really the peak in Delta. I mean it had a real impact on expenses in spite of not having as strong of an impact on census as we would have maybe expected it to have. We had more expenses related to the actual. And also, that just kind of speaks to the nature of the public health emergency. I mean it hit a peak in this very recent quarter and we're not through it yet. So we expect some ongoing expense with COVID.

Out next question comes from Tao Qiu with Stifel.

Chad and Barry, I think you have talked about some of the additional growth opportunities that captive REIT may bring. Right now, as we look at the business, it's growing in the mid- to high single digit in terms of revenue and FFO. Now with the structure finalized, could you give us an idea of how fast you could see this business growing for the next 12 months? Should we expect it to be meaningfully faster given your comments about the larger deals you could do under this new structure?

Yes. Tao, I'll take a shot at answering. So first of all, we are very opportunistic in our approach to acquisitions. I think we've talked about that before. But a lot of it depends on what happens in the marketplace in terms of pricing and valuations. We're going to remain disciplined. And as I talked about, making sure that the operations are very healthy and that there's plenty of cash flow there to support rents and all of those things are going to be paramount. And so that's going to be the first thing that will determine how quickly we grow over the next sort of 12 months. And some of those things will be impacted, as Barry talked about, by some of this federal funding and other programs. So to the extent that there are -- some of those things come to an end, I think that will accelerate our growth opportunities. The other thing I'll just say about our growth is we don't set kind of goals or targets. We just -- we want to remain very disciplined and stick to that path. Now with all that said, we have some visibility into the next sort of quarter or 2. And we are seeing an increased number of deal opportunities. Even just in the last 8 weeks, we've seen more deals coming to our desk than previously. And so we are gearing up for what we hope to be a good growth year on the acquisition front next year. But it would be really hard to kind of give you a percentage or any sort of specific targets.

Got you. And maybe if you could talk about your real estate relationship with some of the health care REITs. Obviously, CareTrust and National Health Care Investors and Sabra, guys that you just took over, is it the intention to kind of use mostly your own internal REIT for real estate acquisitions going forward? And also maybe talk about the opportunities to kind of take on more operation from the REIT-owned properties that are may be struggling now?

Yes. So as I said in the script portion, we value those relationships highly. And the Sabra one, as you mentioned, is a brand new one. We've actually never done a lease with them before and hope that, that deal will be the beginning of many more to come. CareTrust, obviously, we've got a long history with them. And two of the assets in this quarter were new leases with them. So I expect that relationship to continue to grow as well. Omega, NHI, LTC have all been great partners to us. And leasing will always be a part of our strategy. Sometimes leases can represent a really good way for us to finance our growth. And they have access to deals that we don't. And again, as long as the deals are in line with kind of our criteria, we'll continue to do them. But that said, I think we've always been -- and they all know this, that we'd like to own real estate, and we prefer to own it if we can. And particularly in some of the distressed assets, I think you'll see kind of a common theme there. To the extent we acquire the real estate, it's often a situation where there is no coverage. There is no EBITDA. It's sometimes even negative. And in those contexts, it's really hard to kind of structure 30-year leases. And so in those instances, it makes a lot of sense for us to buy the real estate. So we look forward to continuing to work with them, and we've done deals with all of them, where sometimes we buy a portion and lease a portion, and we think that this new REIT strategy will actually enhance our ability to work together. And so I think, again, so just to summarize, we prefer to own where we can, especially in a distressed setting. But we'll continue to lease and expect that those relationships to remain strong.

Okay. Got you. And just one last item from me. It's more of a clarification question. So on the balance sheet, I think that your long-term borrowing increased by $29 million this quarter and I noticed that cash flow was quite strong this quarter, and you had good availability on your revolver and the cash balance is high. Where do you see that additional capital being deployed? Is that going to be acquisitions?

Yes. I mean it's a great comment, and thanks for asking it. Obviously, our cash is really high, and we did close that HUD debt that we've been talking about for some time. As Chad mentioned, we have some really good opportunity for some acquisitions that we see on the immediate horizon as well as in coming quarters, and so really reloaded that out there. And then as I mentioned in the remarks that we do have our repurchase program, stock repurchase program that goes into effect. And so kind of those avenues are our real focus.

Congratulations.

Thank you.

Thanks, Tao.

Our next question comes from Frank Morgan with RBC Capital Markets.

A couple of questions here. I guess, first on the growth in the managed care business that you're seeing. I just wanted to get clarification. I'm assuming that's mostly Medicare Advantage. And is that mostly COVID-related business and therefore, part of a shorter-term strategy? Or is this something part of a longer-term program? That's my first question.

No. Yes, certainly not COVID-related. In fact, usually, when we see spikes in COVID, we wouldn't normally expect managed care growth to slow a little bit. But that -- I think it speaks to kind of our long-term relationships that are continuing to flourish. And just on programs we put in place with them and strengthening positions in different markets, and we expect that to continue.

And the vast majority is Medicare Advantage. So yes, you're right in having that assumption of where those relationships have grown through that COVID pandemic.

Got you. And then I think you mentioned in some of the prepared remarks or maybe in some of the earlier Q&A that you were limited to some degree, occupancies were limited just by availability of staff. I'm just curious, is there any way you could quantify that, like the number of your facilities where occupancy growth was capped by labor constraints?

It's a really hard thing to do, Frank. So to answer your question, no, we don't have a number. I mean we just -- you hear enough anecdotal kind of comments out there in the field about, hey, we -- gosh, we could have grown by more if we -- as we're trying to develop and find more staff, we're hoping to make sure that we don't turn down admissions in the future. But the good news on the labor front is we feel pretty strongly that our local strategies are working. And we're seeing an increase in the number of applicants, and that's kind of been a more recent phenomenon. We're also seeing a larger number of student grads in our buildings due to some of our grassroot programs that we put into place that have been yielding more folks. And so a lot of the issues we're seeing on the labor front we do feel like are transitory in nature and things that will resolve themselves over the next, hopefully, couple of quarters. But yes, in the very short term, at least in speaking about the quarter, we saw some pretty significant challenges in the early part of the quarter that now seem to be easing somewhat. And so we're excited about those recent changes.

Got you. And just one more and I'll hop. When you look at your sort of major 3 buckets of labor, RNs, LPNs and CNAs, is it more skewed toward any particular group there? And is it -- is that a -- wherever you're seeing the most pressure, is that the hard -- I mean, do you think of RNs and LPNs as more structural? But just any thoughts about how fixable the problem is if it is, in fact, 1 of these 3, for example, if it's either RNs or CNAs or whatever, is that easier or harder to fix?

It's all 3, for sure. But obviously, the bulk of our employees are CNAs, right? And those are the ones that are probably the easiest to fix because we can partner with or create our own CNA certification programs, depending on the states that we're in. And we're doing that. And those efforts are bearing fruit. We're spreading the knowledge that we're gaining in successful programs across our footprint and making meaningful gains there. A little bit harder on the licensed nurses. Those are a little bit harder because they're either a 2-year or a 4-year program. And we're competing with the hospitals and other health care providers for those folks. But even in those cases -- look, our feeling is it probably corresponds with the recent ending of, at least in most geographies, the federal unemployment, the extended federal unemployment benefits. We are seeing an increase in candidates, and we hope that trend continues.

And I'm not showing any further questions. At this time, I'd like to turn the call to Barry for any closing remarks.

Thank you, Kevin, and thanks, everyone, for joining us today.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.