Good day, and thank you for standing by. Welcome to the Ensign Group, Inc. First Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chad Keetch, Chief Investment Officer. Please go ahead.

Thank you, operator. 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. on Friday, May 27, 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, April 29, 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, including our captive real estate investment trust, Standard Bearer, which owns and manages our real estate business. In addition, our wholly owned captive insurance subsidiary, which provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as worker’s 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, Standard Bearer and our captive insurance subsidiary, 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 terms we, us, our, and similar terms used today are not meant to imply nor should it meet 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 in our Form 10-Q. And with that, I’ll turn the call back over to Barry, our CEO. Barry?

Thanks, Chad, and thank you all for joining us today. Our local leaders and their teams continue to be the examples of excellence in health care services as they navigate through the constant changes in each of their markets. The record results they achieved this quarter are particularly impressive given the continued disruption in the labor markets and the impact of Omicron early in the quarter. Despite all of that, our locally driven strategy led to continued improvement in occupancies, skilled revenue and managed care revenue. We were particularly pleased that our operational leaders achieved sequential growth in overall occupancy for the fifth consecutive quarter, and managed care census has now grown sequentially 7 quarters in a row. We are inspired by the commitment of our caregivers and their continued endurance and strength. During the quarter, our operators drove impressive growth in skilled mix. With same-store and transitioning operations, combining for a skilled mix of 34.3% and same-store reaching a skilled mix of 35.2%. We also saw continued momentum in occupancy during the quarter with same-store and transitioning occupancy increasing by 2.9% and 6.2%, respectively, over the prior year quarter. This growth in occupancy is particularly impressive given it occurred in the face of a surge of the Omicron variant, which typically results in lower patient volumes. This simultaneous progress in skilled mix and occupancy gives us tremendous confidence that we’re in an excellent position to continue to return to pre-pandemic levels over time. As we get closer to what we hope will soon be the end of the pandemic, our leaders’ focus has shifted to sound operating fundamentals. Each operation is looking ahead and developing comprehensive strategies to thrive in spite of an evolving reimbursement environment, staffing challenges and inflationary pressures. As general economic conditions have continued to put…

Thank you, Barry. To start, I wanted to provide a brief update on Standard Bearer, our captive REIT. As we’ve discussed before, this new real estate company will enable us to build upon our established real estate investment platform of high-quality assets. We couldn’t be more excited about this new organizational structure, which allows us to take the next step with our already thriving real estate business, which generated $11.9 million in FFO during the quarter, and sits in an EBITDAR to rent coverage ratio of 2.31x as of the end of the quarter. We were also pleased to add 2 assets to our -- to the portfolio during the quarter, both of which are operated by Ensign affiliates, bringing the asset value of our portfolio of 95 assets to approximately $1.02 billion. We have already begun evaluating several transactions, which include health care properties that will be operated by Ensign affiliates and other third-party operators. We have also had very productive strategy sessions with several like-minded operators and look forward to establishing new partnerships with them. As we’ve always said, we will remain disciplined and will not compromise the health of an operation in order to win a deal. We have already passed on several opportunities where the pricing became unrealistic. However, we are finding plenty of deals to execute on and are excited about the additions to our real estate portfolio during the quarter and the many more additions that we expect to add this spring and summer. As we said last quarter, Standard Bearer adds an additional pathway to growth and does not alter our proven method of acquiring both struggling and strong-performing skilled nursing assets, which will often be the subject of long-term leases with other real estate partners. During the quarter and since, we have…

Thanks, Chad. Over the past 2 years, our nation and industry have grappled with the COVID pandemic and associated staffing shortages, and our affiliated facilities have not been immune to these challenges but it has been inspiring to see how our high-caliber local leaders have repeatedly used these challenges as opportunities to refine their systems, refocus their efforts and improve their clinical outcomes and financial performance. Today, I’d like to share 2 examples: 1 from a large suburban operation and another from a small rural facility that highlight how our model continues to thrive regardless of circumstances. The first highlight comes from Willow Bend Nursing and Rehabilitation located in the Dallas Metro area. This 162-bed facility led by CEO, Kevin Reese; and COO, [Valerie Kosanovich] has achieved 5-star ratings in quality measures, health inspections and overall excellence and earned a reputation for being the provider of choice that can meet the changing needs of health plans and hospital systems. For years, Willow Bend has been one of our strongest performing affiliates in Texas. But in the first quarter, they managed to grow overall occupancy by more than 8% and managed care occupancy by more than 17% compared to the prior year quarter. And as a result, their pretax earnings increased by 28%. These incredible results were made possible because of the team at Willow Bend’s relentless focus on hiring and retaining high-caliber staff. In fact, during the first quarter, the team’s recruiting efforts resulted in a growth of their care staff by more than 8% in spite of one of the most competitive hiring environments we’ve seen in decades in the Dallas-Fort Worth area. The second example we’d like to highlight is Owyhee Health and Rehab, an award-winning 58-bed facility in Homedale, Idaho, a town with a population of 2,600…

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 diluted earnings per share was $0.89. Adjusted diluted earnings per share was $0.99, an increase of 13.8%. Consolidated GAAP revenue and adjusted revenues were both $713.4 million, an increase of over 13%. Total skilled services segment income increased 10.5% to $98.3 million. GAAP net income was $50.3 million, an increase of 2.3% and adjusted net income was $56.4 million, an increase of 13.7%. Other key metrics as of March 31 include cash and cash equivalents of $248.5 million and cash flow from operations of $45.9 million. As of March 31, 2022, we repurchased 133,000 shares of our common stock for approximately $10 million, completing the October 2021 stock repurchase program. Given the stock’s recent performance, our liquidity and our confidence in near and long-term results, we have established an additional share buyback program of $20 million, and we believe this to be a very wise use of our capital. As we said before, share buybacks are one of the many levers we have to deploy capital to benefit our shareholders. We also wanted to address the current status of the state of emergency and reimbursement matters. Recently, HHS extended the public health emergency for another 90 days. With this extension, the federal government will continue to provide various waivers and enhanced FMAP funding to July 14, 2022. Additionally, as a reminder, the suspension of a 2% sequestration continued through April 1, 2022, at which time the suspension amount was adjusted to 1% through June 30. Starting July 1, the full 2% sequestration will be back in place. The suspension had and will continue to have a positive impact on our…

Thanks, Suzanne. We again want to thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We know that this year will continue to be present with us several unique challenges, but we’re encouraged by our operational strength in our core business. We’re also thrilled to have an additional growth lever in Standard Bearer, which will help us accelerate our mission to change post-acute care. With Ensign affiliated operations as its primary tenant, it’s a perfect launching pad to create significant real estate value as we follow our proven model while we align with others in our industry. As Chad pointed out earlier, we believe little to no values being assigned to our real estate by investors, but in fact, the values more than $1 billion. We’re eager to grow that value and take advantage of opportunities 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. And speaking of talented field leaders, we want to recognize them for their heroic efforts, along with those of our nurses, therapists and other frontline care providers who continue to provide industry-leading example of life-enriching service to our residents, coworkers and their communities. We’re also appreciative of 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 single day. We’ll now turn the Q&A portion over to our call. Victor, can you please instruct the audience on the Q&A procedure?

[Operator Instructions] Our first question will come from the line of Tao Qiu from Stifel.

Barry, I really appreciate the details you provided on labor management initiatives to improve recruiting and reduce turnover. And certainly, your performance has surpassed many of your peers. I wanted to ask about another staffing matter that could have long-term implications of the industry. I think the federal government is trying to implement a minimum staffing requirement. That could be implemented by next spring. We know that CMS is engaging in the industry to formulate their guideline. Obviously, some of the states already pushed out their own rules. Could you maybe talk about the staffing level today in your facilities and the mix of new RNs, [CNs] etcetera? And where do you think the [Fedroom] may shake out to be to give us an idea on the kind of the potential impact.

Yes, it’s a good question, Tao. And the answer could be a lengthy one, but I’ll try to summarize it in a pretty straightforward way. I mean first and foremost, there’s -- we know very little, right? There’s been just an overall kind of impetus to look at this. It will begin with a long-term study that will take a full year to do as they’ve outlined it. They’re certainly asking for a lot of feedback from the operator community, which is positive, and we are involved with that at our federal association level and will continue to be. But one important distinction in the face of a potential federal staffing mandate, as you pointed out, we see ourselves a bit differently. And frankly, we are different than, I would say, most of the post-acute world in the skilled nursing space in that we already take a higher acuity type patient that necessitates a higher than, what I would call, average staffing level. So when you think about just the kind of the overall drive for a federal staffing mandate, it has to contemplate all types of providers and the vast majority have a lower acuity level than what we typically see. That being the case, a federal staffing minimum that takes into account kind of what the average operator does would mean that we’re probably much higher than the average threshold just given our acuity levels that we already see. So we don’t worry too much about it. We don’t -- we try not to focus too much on the what, especially when there’s very little detail given around it. But we feel okay. I mean it’s certainly not a model we necessarily agree with. That’s not the way to drive quality in our opinion. But regardless of what the federal government does with a regulatory mandate around staffing, we’re not too worried about it. Just given our model and the types of patients that we see.

Got you. My second question is for Chad on Standard Bearer. In the prepared remarks, I think you mentioned you are in active discussions with like-minded operators. Could you talk about any quality or traits that you’re looking for in your operator partners? Are these going to be smaller, regional operators? Or would you consider partnering with larger multistate operators as well? And in terms of the opportunities you’re looking at, what is the current breakdown of mature versus turnaround opportunities. Are there any new markets you’re contemplating getting into?

Yes. Thanks. It’s a great question. So yes, I mean, I wouldn’t say the size of the operator is necessarily a factor. I mean for us, it’s going to be kind of, as Barry was saying, I mean, I think it’s operators that see the post-acute space much like we do. And I think cultural alignment will be important as well. Just in terms of just, again, generally how we see efforts towards quality and making sure that we’re a solution to whatever the hospital and managed care partners need us to be and those kinds of things. All that said, there’s lots of ways to be a really good operator. And we don’t presume to have all the answers, and we have our model, but there’s other ways of doing things. And so we’re very cognizant of that as well, and we’ll look to learn from others as well. And so in terms of the criteria, I think, obviously, our first priority or our first desire would be if there’s an opportunity to operate it ourselves. But there are many opportunities that come our way that for various reasons, they’re not a fit for us. One of the things that we look to first is who the leadership is going to be in any particular market. And so oftentimes, we’re approached with a set of facilities that present new markets or new areas where we don’t currently have a presence. In many cases, we’ve kind of lost out on opportunities because we were saying we would only do the deals that are in our markets already. And oftentimes, sellers like to work with a single buyer. That’s not even necessarily always a new state. Sometimes, there can be markets within a state that we’re not in. So there are…

I think the other thing we’re looking for is people who want to be in it for the long call. We want to have very successful operations. They aren’t trying to offload every dollar into the real estate and look at it as a onetime transaction for them. But someone here really is excited about being the best-in-class operator themselves. And so that we can have that great partnership that Chad just talked about.

Our next question will come from the line of Scott Fidel from Stephens.

Wanted to maybe just start -- first question, just going back to the proposed CMS Medicare rule for FY ‘23. And just interested in how you’re handicapping what you think ultimately probably ends up to be the likely outcome. I mean, I would assume maybe we end up with like a 2-year phase-in of the PDPM recalibration could be 1 scenario. And how you balance the opportunities and the risks from that with opportunities, clearly, the potentially more opportunity on the M&A front and the risk being just needed to manage margin against maybe a bit tighter pricing. So interested in all your thoughts around that topic.

Yes, Scott. And just a reminder, I think it’s sometimes confusing when you talk about the year that starts. This is the rate starting October 1, 2022. Obviously, it’s the 2 components that we’re really looking at that positive that I talked about in the prepared remarks, the 3.9% increase and then the parity -- proposed parity adjustment of the 4.6% cut for the overall negative 0.7%. I think we’re -- we see that the positive is really good, having all those components in it. Obviously, there’s still a component that’s always missing because of the inflation that incurs in the current year really isn’t reflected for has about a year lag period. And so we believe if this is what we’ll get this year that there’s another opportunity for that to have another forecasting error adjustment next year where we might have another big positive comment. So that’s on the kind of net market basket rate that we would normally see. And then with regards to the parity adjustment, kind of looking at that, we -- as we’ve been talking about, and again, in the prepared remarks, I said we’ve included the whole thing going into our overall guidance. But we’re really hopeful and we see a lot of pathway forward to having that cut maybe over to potentially even a 3-year period. But more likely over a 2-year period and really cut in half. And so that really has been if that gets cut in half, that really puts us kind of exactly where we initially had our guidance and the assumptions that we had in our initial guidance that we released in Q4 was around 1.5%, 1.6% increase overall. But I’ll let Barry give some additional color on that.

Yes. I mean we -- look, the reality is whether it happens this year in full or not, -- it’s -- I think on the one hand, if it does happen, we see. It happens all in 1 year, we see an opportunity for growth, which is exciting for us. On the other hand, if it happens over a 2-year span, we still -- we certainly see a pathway and no need to adjust any guidance and have any concern for us being on the path that we predicted that we would be on for the year.

So long story short, that either way, we feel like it’s going to be within the range of guidance that we put out. I think the other thing that we’ve been talking about is that there’s an opportunity for us to continue to see acquisitions out there. And maybe Chad can give some color on that.

Yes. It’s been kind of an interesting period here because we see a lot of deals. And obviously, we did 9 this last quarter. So finding deals in there that are priced appropriately. But we’ve also been sort of outbid, I would say, by others that are -- we think paying prices that just don’t make sense. And we continue to see some sellers coming to market with really high expectations. And with all of this on the horizon, we just -- we’re going to stay disciplined and think that at some point, that’s going to have to correct. And so yes, I mean, again, the pipeline is still strong, and we still -- like I said in our prepared remarks, we’ve got a dozen-or-so deals we’re working on now. But we -- this all happened in 1 fell swoop in the fall. It just might accelerate some of that adjustment in pricing expectations. And -- and that’s why we’ve updated our revolver and have all that dry powder.

Understood. And then maybe just as my follow-up question, it could be helpful if just on the staffing dynamics if you’re able to give us any insight on how the sequencing of hires and turnover sort of played out over the course of the quarter? And any early observations you can give us on the staffing dynamics that you’re seeing so far in the second quarter through April?

Yes. Great question. So we obviously we track it very closely, and we’re looking at it for a number of -- from a number of different angles, both in terms of agency usage and we call it kind of net hires. And so we -- certainly, the winter was -- has kind of been the toughest. It peaked for us in kind of January. And since then, we have seen really, really positive momentum in terms of our net hires. And when you look at it in terms of full-time equivalents, we’ve grown our workforce by 3%. We’ve seen our agency usage finally start to come down, and we expect that trend to continue as we track things through where we are currently. And so all very encouraging trends as we kind of break that down and see all those indicators pointing towards a real positive direction for us, Scott.

Great. And if I could just sneak one more in. Just interested on your current thinking around occupancy and maybe how you’re modeling it internally in your outlook in terms of -- would you -- should we expect that absent another new severe variant coming into the picture that, that generally will just see sort of progressive improvement in occupancy sort of play out throughout the course of the year? Or do you think that will have some of the traditional seasonality play out when thinking about the various quarters? And that’s...

Yes. Great. Thanks, Scott. Great question. And that’s a good question. Seasonality, we expected last year to see some of that happen. It didn’t necessarily. We saw a steady improvement even through the summer, which was very unusual for us. We’re on our fifth quarter in a row of consecutive improvement in occupancy. More than that, when you look at managed care, look, we’re pretty positive about the direction we’re going. And I wouldn’t be surprised. I mean, normally, at this point in time, we see some slowdown, as we head into the summer months, we haven’t seen that yet, knock on wood. So overall, we feel pretty positive that we’ll continue to improve. I mean it makes sense for us because we’re still in a recovery mode from where we used to be from an occupancy standpoint. We know that the -- we know that the demand is there. We see volume. And we’re only -- we’ve only been limited by some kind of artificial things that have happened or onetime things that have happened, both in terms of surges and variants and some staffing challenges. But even in spite of those, we’ve seen improvement in occupancy, which gives us some confidence that, that trend will keep continuing at the pace that we’ve seen it.

[Operator Instructions] Our next question will come from line of Ben Hendrix from RBC Capital Markets.

On your managed care revenue growing and that becoming a larger piece of the skilled mix. Can you talk a little bit about your managed care contracting and how that’s progressing and the willingness of your managed care payers to acknowledge the higher staffing costs you’re seeing?

Yes, maybe I’ll start and then Barry can add some color. I mean, I think this is something that we -- as you could recall, we’ve been working on a really long time. Those relationships are both simply [indiscernible] at a national level, but the strong part of the relationship is that local level, that local operator, that local clinician, that local managed care resource really working with the managed care team that at their local level and really create an atmosphere where they can make solutions and solve problems there. And so that’s really what we’ve seen really take up. I think what we saw was during the pandemic, a lot of discussion about acuity of the patient and how the acuity of the patient played into getting care to skilled nursing facility versus potentially getting care in other locations during that period of time. And I think it created some additional trust with us and our managed care partners that we’ve seen continue to happen after the pandemic. And I think early on, we were hopeful for this, but it feels like it’s really in full motion. I would say on the increases, I think managed care is always looking to make sure they capture as much dollars as they can, and we are as well. And so it’s -- as you can imagine, healthy discussion and debate about what right people should get and how much people should get in. So we’re always in discussion with them and at various levels again locally as well as nationally to try to make sure that people recognize the additional cost associated with that direct labor component that we are obviously occurring right now and showing that information and those members and trying to give them some additional insight until that labor market that is a challenge right now. And so it’s a discussion I wouldn’t say it’s one and done. It’s an ongoing discussion that’s going to take because we don’t have 3 or 4 contracts in that organization. We have hundreds of contracts that happens daily with our team as well as the managed care providers.

And then separately, just with the expectations for rising interest rates, is this any changes at all or any impact on the way you’re thinking about your growth strategy, whether it be changes in your triple net lease term rates or your capacity to -- even though you have very strong liquidity, any capacity to potentially lever your unencumbered real estate assets.

Yes, it’s a great question, Ben. I mean, we certainly keep a close eye on it. And I would just say we’re going to just make sure that we’re in line with where the market is, especially from kind of the real estate side of things. But really happy with the terms of our new credit agreement there is kind of a, I guess, a floating kind of SOFR-based element to that. But we’re so healthy and our debt levels are so attractive, our banking partners gave us a really good terms. So we’re really excited about that. We obviously have a bunch of unlevered real estate assets that we could get some fixed financing if we want to do that, too. All of it, though, at the end of the day, it comes down to the prices that you’re paying. And so long as you’re doing that and everything we do, we make sure there’s a forward-looking element to how we think we can perform. And obviously, real estate expenses are a big part of that. But as long as you can make sure you’re paying a proper price and that there’s enough cushion there to give the operators room, it doesn’t impact our sort of growth path. It just kind of affects the terms of the deal, so to speak.

I’ll just add one thing too, Ben, as you’re talking about the triple net leases, I mean Chad and his team have been very diligent over the years to ensure that all of our leases have kind of a cap on inflation as far as the rate increases go, the escalators. So we really -- our average escalator increase cap is right at around 2.5% for all of our triple net leases, which has been a really good hedge against what we’re seeing ahead. So we’ve got a good safety net there that will keep our leases in line.

And I’m not showing any further questions in the queue. I’d like to turn the call back over to Barry for any closing remarks.

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

And this concludes today’s conference call. Thank you for participating. You may all disconnect. Everyone, have a great weekend. Thank you.