Good day, and thank you for standing by. Welcome to The Ensign Group Inc. Fourth Quarter Fiscal Year 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Chad Keetch. Please go ahead.

Thank you. 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 March 4, 2022. We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, February 10, 2022 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…

Thanks, Chad. And again thank you for joining us today. We are pleased to announce yesterday another record quarter. These results demonstrate yet again that our local leaders and their teams continue to be the examples of post-acute excellence as they wade through the evolving landscape in each of their markets. As they've done so, we have again achieved record results in spite of the continued challenges related to the pandemic and the accompanying disruption in their labor markets. Remarkably, despite the impact of the Delta surge in the early part of the quarter and Omicron in the late part of the quarter, we saw continued improvement in occupancy, skilled revenue and managed care revenues. We were particularly pleased that we achieved sequential growth in our overall occupancy for the fourth consecutive quarter and managed care census has grown sequentially six quarters in a row. We were amazed by the commitment of our caregivers and their continued endurance and strength. As evidence of the medical community's confidence in our local operators' clinical capabilities, we saw marked improvement in patient volumes, especially, with higher acuity patients, as we saw another sequential increase in Medicare and managed care census of 5.5% and 4.7% in our same-store and transitioning portfolios, respectively. This continued improvement in our admissions trend not only gives us great confidence that we can continue to perform well as the pandemic stubbornly persists in many of our largest markets, but it also shows that we are in an excellent position to see occupancies continue to normalize to pre-pandemic levels over time even while the pandemic continues to impact our operations, our staff and our patients. In spite of the unprecedented challenges, the pandemic has forced us to become stronger and more agile, while allowing us to develop strategic local advantages…

Thank you Barry. As we announced yesterday as of January 3, 2022, we completed the formation of a new captive REIT, Standard Bearer Healthcare REIT Inc. or Standard Bearer. This new real estate company will enable us to build upon our established real estate investment platform, which is comprised of high-quality assets and very healthy operational fundamentals. We carefully selected the name Standard Bear, which in military tradition is the person that has the honor of carrying the colors. As you all know Ensign means a standard or a flag. Ensign's mission is to raise a flag or to be a symbol of a new higher standard in post-acute care. That mission drives each and every aspect of our organization and is something we care about deeply. Therefore, it is very important for us to ensure that everything the REIT is about is to support that mission. We understand and will always recognize that the true value in our real estate is derived by the loving service provided by our local teams in each location they serve. The real estate while, obviously, an important element of the care we provide only does well if the operations do well. And so Standard Bearer's mission will be to do its part in finding the right opportunities and acquiring those opportunities in a way that supports and sustains the hundreds of Ensign affiliates and other like-minded operators as they seek to provide exceptional post-acute care into the markets they serve. While our real estate strategy has always been an important part of our DNA, we believe this new organizational structure allows us to take the next step with our already thriving real estate business. We've already begun evaluating transactions, which include health care properties that will be operated by Ensign affiliates and other…

Thanks Chad. Next we'd like to highlight some examples of the successes our local teams have seen this quarter. While external circumstances have been difficult our partners continue to defy the odds and produce remarkable outcomes clinically, culturally and financially. Pandemic has added complexity to our operational landscape and in some ways it has also reinforced the simple fundamentals that allow operations to be successful regardless of circumstances. These fundamentals such as clinical confidence, stable and consistent leadership, and partnership with health care continuum providers have allowed many of our facilities including Legend West, a skilled nursing facility in San Antonio Texas to thrive in the midst of unprecedented clinical challenges, reimbursement changes, regulatory oversight, and staffing pressures. Despite the constant pressures throughout 2021, CEO Robert Gray and COO Monica Sanford and the team at Legend West, which has been together for many years have continued to strengthen clinical and financial results quarter-after-quarter. Because of the stability and leadership the team continued to execute a very successful managed care strategy. Working together with local managed care plans, they increase clinical capabilities through specialized trainings and streamlined processes to meet the needs of both the plans and their patients. And at the same time, the Legend West team has relentlessly improved quality metrics and maintained an overall five-star rating from CMS as well as preferred status from multiple managed care networks and the Veterans Administration. As a result, occupancy and revenues have consistently grown quarter-after-quarter and year-after-year. For example during the fourth quarter of 2021, skilled mix increased by 30% compared to the prior year quarter, while managed care patient days increased by 39% in 2021 over prior year. This has led to a 27% improvement in total managed care revenues and contributed to 2021 being the highest EBIT year ever…

Thank you, Barry. Good morning everyone. Detailed financials for the year are contained in our 10-K and press release filed yesterday. Some additional highlights include the following for the year. GAAP diluted earnings per share was $3.42, representing a 12% increase. And adjusted diluted earnings per share was $3.64, an increase of 16%. Consolidated GAAP and adjusted revenues were both $2.6 billion an increase of 10%. For the quarter, GAAP diluted earnings per share was $0.86, representing a 5% increase and adjusted diluted earnings per share was $0.97, an increase of 21%. Transitioning in same-store occupancy increased by 6.8% and 3% respectively. In addition sequential transitioning and same-store occupancy increased by 1.7% and 40 basis points respectively. Other key metrics as of December 31st include cash and cash equivalents of $262 million, cash flow from operations of $276 million, and $343 million of availability on a revolving line of credit. We continue to de-lever our portfolio achieving a lease-adjusted net debt-to-EBITDA ratio of 2.13 times, a decrease of 0.29 times from last year. We also own 101 assets, 77 of which are unlevered with significant equity value that provide us with even more liquidity. As of the year ended December 31st, 2021 and since, we repurchased 265,000 shares of common stock for $20 million, completing our October 2021 stock repurchase program. We also announced yesterday that the Board approved a new stock repurchase program for 2022 in the amount of $20 million. Given the stock's recent performance, our liquidity, and confidence in near and long-term results, we believe this additional 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. In mid-January, the public health emergency was extended…

Thanks Suzanne. We want to again thank you for joining us today and express our appreciation to our stakeholders for their confidence and support. We know that this year will not be without some unique challenges. However, we are encouraged by our operational strength in our core business. But also this new growth lever that we have in the Standard Bearer to help accelerate our mission to change post-acute care. With Ensign operations, as its primary tenant, it's a perfect launching pad to create significant real estate value as we follow our proven model while aligning with others in our industry. As Chad pointed out earlier, we believe that little to no value is being assigned to our real estate by our investors when in fact the value is approximately $1 billion. We're going to grow that value and take advantage of opportunities that we previously would have passed on and leverage our best-in-class field leadership team to help attract and partner with other great providers in our space. Speaking of our talented field leaders, we recognize them for their heroic efforts along with those of our nurses, therapists, and other frontline care providers, who continue to provide an industry-leading example of life-enriching service to our residents, coworkers and communities. We're also appreciative to our colleagues here at the service center who are working tirelessly to support our operations enabling us to succeed in spite of the challenges we faced. Thank you for making us better every day. With that, we'll turn the time over the Q&A portion of our call. Gigi, can you instruct the audience on the Q&A procedure?

[Operator Instructions] Our first question comes from the line of Tao Qiu from Stifel. Your line is now open.

Hey. Good morning. Could you help me understand the building blocks of the 12.5% revenue guidance for 2022 at the midpoint in terms of occupancy outlook rate and skilled mix on the existing portfolio the contribution from recent acquisitions? And in terms of state support, I think you have recognized $75 million of the FMAP funding in 2021. And based on your comments, do you expect half of that level for 2022? Thanks.

Great questions. Tao, we'll -- I'll let Suzanne get into the kind of the revenue piece of your question. As far as state support goes through the FMAP program our assumptions is -- and we don't have a crystal ball on this but sometime in the second half of 2022, we expect that that support from the federal government through the states will likely end. And again, our best guess is somewhere in the middle of the second half of the year. And that's based on the state of emergency potentially subsiding. Obviously what could change that is if we -- COVID continues to have different variants and outbreaks that support might continue. But we're taking a guess that it will likely end sometime this year. As for occupancy and skilled mix, again, what we've typically seen is that as we have surges in the community that we kind of take a step sideways or backwards in overall occupancy and our skilled mix increases as we see sicker patients. But what we have seen in spite of those surges both with Delta and Omicron is that our pace overall over especially over the long-term when you look at the course of 2021, is that there's kind of a steady return to our pre-COVID occupancy numbers and we expect that to continue through 2022. Suzanne, anything to add to that?

Yes. I would just say on that obviously, we don't have a crystal ball, but what we did do and have done kind of similar to last year really modeling that census and skilled mix growth two ways. One way of looking at it with regards to -- gosh maybe a little bit lighter COVID impact year with heavier census overall growth and a strong skilled mix, but not as strong as we've seen over the last year. And then when we kind of go to the other part of it, and we look at what the overall – gosh, if we had a lot of COVID and had a high skilled mix, but maybe not as much census growth, so we've modeled it both ways and get to the overall number of both ways. Looking kind of acquisition versus overall organic growth, the vast majority of the growth is focused on the organic growth. Kind of historically looked at the bucket from our skilled nursing at the same-store transition and recently acquired, and have really taken a look back and had the opportunity to grow each one of those buckets in the same-store really in that mid single-digit to high single-digit growth transitioning in the mid- to high single-digit growth and then the acquisitions at a double-digit growth. And so with that huge portion of our revenue coming from that same-store bucket, which is very large we expect that to continue to enhance and grow.

Yes. That's very helpful. Just looking at the 2021 experience COVID certainly had an expected impact on the revenue side relative to the initial guidance, while you guys were able to pull ahead on the earnings side. In that context, how should we think about the 2022 guidance? Any lingering impact you are building into the guidance? And what's the level of conservatism in particular in the 2021 experience?

Yes. I mean, I think what you saw and we had this happen in Q4 where we had a really heavy COVID at the very beginning and at the very end you did see the overall revenue come down, but the margins stay up. And I think that that's kind of what we would anticipate. Again, we're really looking to not just focus on that revenue growth. But really overall we're concentrating on how we're earning, how we're creating overall earnings and the bottom line. And so I think that's when you think back about our model and look at how we project really that is our focus is how we actually continue to grow. We're not going to just try to make that revenue number and that revenue target, but really look at the overall. And so I think if we had a lot of surges again of COVID maybe we wouldn't get to the revenue number per sequential, but we would have higher acuity higher skilled mix, which would result in a stronger earnings margin.

Got you. And one more question on the captive side if I may. I think in 10-Q, you guys called out the Ensign's rental revenue at $54 million plus the $60 million. That's $70 million in terms of year one rental revenue. Does that include a straight-line rent as well?

Yes. So yes, it's not a straight line per se because all of our rents are CPI-based. And with the CPI-based rent, you actually don't straight line that amount. And so we would continue to project that CPI increase if you're looking at how to look at that on a go-forward basis had that CPI actually built up in there.

CPI would cap, they typically have a cap on the 2.5% to 3% typically.

Got you. So it's the same as cash right now. So, just curious on the debt balance, right? On day one, I think the debt to assets is about 25%. Any plan to lever it up as you ramp up investments?

I think your question is on the captive REIT. Would we lever up the captive REIT over time?

That's right.

Yes, absolutely. I mean, as we're looking at acquisitions, you would actually increase that leverage on it. Obviously, you're going to get additional rent stream, but as you do an acquisition through the REIT then you would have additional leverage that would occur.

Yes. We always talk about sort of our net debt to EBITDA ratio. And we're obviously very cognizant of making sure we stay very healthy and have a lot of room there. And like I said in my -- in the prepared remarks we have eager capital partners that are excited and anxious to help us do that.

Got you. Thank you guys for taking my questions.

Thank you.

Thanks, Tao.

Thank you. Our next question comes from the line of Scott Fidel from Stephens. Your line is now open.

Hi, everyone. Thanks. And first of all, I appreciate the additional disclosures now in the 10-K on the valuation of the real estate assets. A couple of questions for you. And first just interested, Chad, maybe if you want to talk about the conversations that are underway now around deals and sort of the tempo of that. And I know that you already highlighted that you've got at least a dozen operations that look to be in the pipeline to close relative to the near term. I'm just thinking about the bigger picture. I know you've talked about really sort of during the pandemic that a lot of the sellers have had pretty elevated valuation expectations, just given all of the additional relief funding from the pandemic. And just interested in terms of how that sentiment is evolving at this point. Are you starting to see some softening of those expectations and more attractive opportunities starting to open up, or is it still relatively consistent with what you've been telling us about over the last 12, 18 months or so?

Yes. Thanks, Scott. So it's been interesting. I think we're still seeing some folks holding on to really high expectations. But that said, I think, just the supply and the number of acquisition opportunities opening up are going to just have a natural impact on that. We've seen an uptick, just even in the last three weeks, as we've entered into this New Year. And as Barry mentioned, there's not a whole lot of visibility in terms of some of those programs that the federal government has had in place. And so, I think, there's certainly been a lot of additional deals that have been coming. And we definitely get the sense that prices have -- at least in the ones we're doing, of course, have been a lot more realistic. So we're excited about that.

Got it. And second question, just following back up on the state relief funding and I guess, how to help for us to factor that into the modeling. For last year, I think that you booked around $75 million overall in that state relief funding. And obviously, I know it's very difficult to forecast exactly what would play out for 2022. Just interested though, directionally, how you're thinking about that. Would you think about that type of revenue that you're booking to be relatively consistent in 2022. Or do you think that there will probably be a material -- relatively material drop-off in that, obviously, with what's left a bit more weighted to the first half.

Great question. I think maybe just as a reminder of how we actually even look at those dollars coming in, we really do reflect the every FMAP dollar against a COVID related expense. And so, obviously, the heavier the COVID is in a particular quarter, even with the funding, you're probably going to get a little bit heavier COVID revenue or if COVID experience in a particular quarter is lighter than that COVID revenue, would trim down. So just remembering that the revenue isn't recognized until we have a COVID expense. And then when we kind of look through the year, we know it's all the way through April, like we said in the prepared remarks, and what we are hearing and fill, and have built into the guidance is that, definitely we go through July based upon everything that's out there. And then kind of teetering off towards the second half of 2022. So they're not as strong, because as we've seen every state has their own way of dealing with FMAP dollars. So it's not this consistent amount that we're getting from every state. But as every state goes through the analysis, they're actually putting money out there, maybe, on a daily basis or putting money out there in lumpsum and so, kind of, teetering out through that second half of 2022.

Yes. I mean, Scott, to Suzanne's point, I mean, we utilized the COVID-related FMAP funding heaviest in Q4 of this last year. We had two surges COVID and Delta -- or sorry, Omicron and Delta in one quarter. And so naturally those expenses are going to be higher. So -- and we see Omicron starting to taper. We see that in our numbers, both in staff cases and resident cases. And so, our expectation is, we're still going to have some higher expenses in the first quarter. But again, we're hopeful and optimistic that things will start to taper throughout the year. And as they do, not only will FMAP eventually go away, which it's bound to and it should, but hopefully our dependence on that for COVID-related expenses will also taper.

Understood. That's helpful. Yeah, because I think there's a perception amongst some investors, I think out there that those FMAP funds the enhanced funds have been bolstering margins. And if those go away you could see some compression in margin. I think it sounds like the point that you're trying to make is that that's more margin neutral because you're booking costs against those revenues. But maybe I just want to give you a chance to address that directly in terms of how those FMAP funds flow through margins and whether there would be any compression or not if those funds were to go away?

And that's a great point Scott and that's precisely why we're pointing out that we're using the funds only to the extent that we have COVID-related expenses. And so again, our assumption is that as a lot of these expenses go away, the need for FMAP will also go away. And so, we're predicting that the pandemic will evolve this year, but again it's really hard to say. Certainly, if it doesn't our expectation is that the government program will continue, because I think the intent of the program is to help offset the higher COVID-related expenses. But certainly, we expect to reduce our dependency regardless of whether or not the pandemic persists. Our focus this year is on really kind of returning to fundamentals after having so much time and focus and energy on the kind of the pandemic-related issues that come up both with regulatory and staffing and all the other challenges that come. Our focus is making sure that we really kind of return to our efficient operating model and have some of the kind of the COVID-related distractions subside.

Understood. And then just one last one for me. If you could talk about what type of wage inflation you're building into the 2022 budget, and how that compared to 2021? And that's it for me. Thanks.

So we're not necessarily prepared with exact numbers on how much wages have gone up. We've indicated in the past that we certainly saw an acceleration of the need for some structural wage increases towards the second half of last year and we expect those to remain in place. Certainly, you can look at kind of our run rate from third and fourth quarter. But even there, our expectation is that we're going to be better at managing our overall labor in spite of higher wages that we see in place. We're seeing some success with that as we again like I mentioned return to a focus on fundamentals.

Yeah. And I would just remind you like there's some natural offsets that we have with regards to wage inflation. So I think we -- I think we've said it's higher than it historically has been. Usually, we're in the very low 2% to 3% and we're at mid single-digits on that for this year on the wage inflation, but there are offsets and those other offsets include just our overall incentive plans that are tied to the overall profitability of each operation as well as from all the markets. As well as one of the biggest factors that we have out there is agency and that the agency amount that was the highest we've ever experienced in Q4. And so we've got a continued push and focus with regards to, getting that agency amount down. And when you don't have huge surges of COVID, we believe that's possible because of all the additional programs that we've introduced over the last year including CNA schools and other things that we've talked to you guys about.

And look we point out agency is a big issue for us. And certainly, we know compared to a lot of our peers, because we're open about this we talk about it we're talking about agency usage that represents maybe 5% of our overall nursing expense, which we know is much lower than most of our competitors. But that said it's still -- it's a big expense even though it's only maybe a small percentage of your overall labor costs. It's still significant for us and one that we're focused on reducing, because it not only improves patient care it's a burdensome expense that we don't expect will continue. And the evidence of that is seen in our acceleration and our ability to hire. We've seen a massive increase in our hires over the past two quarters. And we're seeing more evidence of that into the first quarter, which is a really good lead indicator that we're starting to see light at the end of the staffing tunnel. Q – Scott Fidel: Okay. Great. Very helpful. Thanks

Thank you. Our next question comes from the line of Ben Hendrix from RBC Capital Markets. Your line is now open.

Hi, Thanks, guys. Just a real quick one for me. Anything when you're talking about the waiver programs and Medicaid. Is there anything that we need to -- that you can call out regarding your assumptions around the Texas Medicaid waiver and the DSRIP program?

Yes. I mean there's nothing unique that we haven't guided in there, with regard to that program. I think just for us we've really taken Texas, since that it's going to continue to have the supplemental program that exists there for 2022 in a form that's similar to how it exists today.

Okay. Are you -- we've noticed a lot of providers kind of taking it out of first quarter guidance but then including it in the latter three. Is that, the right way to think about it, or do you guys just have it in there continuing just throughout the whole year?

I think when you're -- I think the program that you're talking about it doesn't impact us as much. The program that impacts us the most is the QIPP program. So I think that that's the one where really that has the biggest impact on us, and that we've really kept that flat year-over-year based upon what's going on in that program as a supplemental provider.

Okay. Thank you very much.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bob Port, for closing remarks.

Thanks, Gigi. And we'll go ahead and wrap up our Q&A, and I would like to thank everyone for joining us today.

This concludes today's conference call. Thank you for participating. You may now disconnect.