Good day and thank you for standing by. Welcome to The Ensign Group Q3 2022 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] It is now my pleasure to introduce Executive Vice President, Chad Keetch.

Thank you. Welcome, everyone, and thanks for joining us on our call 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 p.m. Pacific on Friday, November 25, 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, October 27, 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 [indiscernible] all of our operating companies, the Service Center, Standard Bearer and the insurance captive are operated by separate wholly owned independent entities 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 like we, us, our and similar terms are not meant to imply nor should it be construed as meaning that The Ensign Group 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 on our Form 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?

Thanks, Chad, and thank you for joining us today. We're proud to report another strong quarter and are pleased that we have been able to continue to improve our clinical and financial results across our portfolio. We are grateful for the efforts and commitment of our teams, caregivers and leaders who work endlessly to love one another and support each other, which allows for the high-quality patient outcomes they consistently achieve. In spite of yet another quarter of impressive results, we also recognize that there are many opportunities to improve on certain operational fundamentals, both in existing operations and the growing number of new acquisitions. During the quarter, we experienced steady improvement in occupancies, Medicare revenue and managed care revenue. Our operators also achieved sequential growth in overall occupancy for the seventh consecutive quarter. Our operations experienced strong quarter-over-quarter growth in skilled mix revenue, with same-store skilled mix revenue of 54% and transitioning skilled mix revenue of 48%. Additionally, we saw continued improvement in occupancy, with same-store and transitioning operations increasing by 2.4% and 5.3%, respectively, over the prior year quarter. Recently, the federal government extended the state of emergency to January 2023, which keeps in place many of the regulatory and other forms of assistance helpful to patient care. We continue to benefit from improved Medicaid funding in several states. And while we certainly can't know for sure what the COVID future looks like, it is possible that this additional funding will not continue to be extended. Given the improvements we continue to see in occupancy, skilled mix and reimbursement, we are raising our annual 2022 earnings guidance again to $4.10 and $4.18 per diluted share, up from the previously increased guidance of $4.05 to $4.15 per diluted share. In addition, we are raising our annual revenue guidance to…

Thank you, Barry. As we expected, we continue to add to our growing portfolio and are very excited about the 17 new operations we added during the quarter and since, making this one of the biggest acquisition quarters in several years. All of these additions were carefully selected amongst the many opportunities that came our way so far this year and were chosen because of the enormous clinical and financial potential we saw in each operation. We have mentioned many times that we were seeing many opportunities, but at a pricing that was still, in our view, too high in many cases. However, as the consummation of these recently announced deals show, we have seen pricing improve in certain pockets. We have been patient and are very excited to see our discipline paying off with the successful addition of these additional operations, all of which represent significant potential for operational and financial improvement. We look forward to seeing them contribute to the success of their clusters and their markets as they implement proven Ensign operational and clinical principles. These operations include a health care campus and a skilled nursing operation in Arizona, one skilled nursing operation in Nevada, two skilled nursing operations in South Carolina and 12 skilled nursing operations in Texas, totaling an additional 2,276 new operational beds. While most of them are located in some of our more mature geographies, like Arizona and Texas, others are in relatively new health care markets for us, like South Carolina and Nevada. We are particularly excited about doing our first set of acquisitions in South Carolina since we entered that state several years ago. As we've said before, entering new states is challenging and can often take time to gain the trust of the local health care community. With this new…

Thanks, Chad. As Barry and Chad have indicated, an important part of our story has been our local leaders' ability to acquire struggling operations and transform them into Ensign-caliber operations. We also want to be clear that while our teams are urgent and decisive in taking steps to quickly improve the operations we acquire, our primary commitment in acquisitions is building sustained performance and long-term value. This is important because after years of COVID-related challenges, expiring emergency funding from the government and in the midst of a very difficult staffing environment, many of the deals we're seeing, including the recently acquired facilities, are deeply distressed operations. The past couple of years have been very difficult for skilled nursing operators. And we see evidence of that in the low occupancy, high utilization of contract labor and poor clinical and financial health of the facilities we recently acquired. However, we are confident that as our clusters and resource teams continue to infuse culture and systems into these facilities, they, like the hundreds of others that we have transitioned over the past two decades, will become sustainable quality operations that provide strength to our organization while benefiting the communities they serve. Notably, many of the acquisitions of the past few months are located in Texas. And so we would love to share an example of a Texas facility that was acquired a few years back to illustrate the post-acquisition turnaround process that continues to be so fundamental to our long-term success. On November 1, 2019, we acquired Westover Hills Rehabilitation and Healthcare, a 124-bed skilled nursing operation located in San Antonio, Texas. This operation was a one-star facility when we acquired it, and it suffered from a poor reputation in the community, which was evident in persistent staffing challenges, low occupancy and poor…

Thank you, Spencer. Good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights from the quarter include the following: GAAP diluted earnings per share of $0.99, an increase of 19%; adjusted diluted earnings per share was $1.04, an increase of 14%; consolidated GAAP and adjusted revenues were both $770 million, an increase of 15%; GAAP net income was $56.2 million, an increase of 19%; and adjusted net income was $59.2 million, an increase of 14%. Other key metrics as of September 30 include cash and cash equivalents of $309 million and cash flow from operations of $222 million. 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 fundings through January 11, 2023. Also, on October 1, 2022, the PDPM Medicare payment rate increased by 2.7%, which included a net annual market basket increase of 5.1% that incorporated a positive forecasting error and a negative productivity adjustment, offset by a negative 2.3% parity adjustment. Additionally, as a reminder, the full 2% sequestration is back in place on July 1, 2022. As Barry mentioned, we are once again raising our 2022 annual earnings guidance of $4.10 to $4.18 per diluted share and annual revenue guidance to $3.01 billion to $3.03 billion. This guidance is based on diluted weighted average common shares outstanding of approximately 57 million, a tax rate of 25%, the inclusion of acquisitions closed to date and the inclusion of management's expectation on reimbursement, with the primary exclusion coming from stock-based compensation, a onetime legal fee, gains on the sale of assets. Additionally, other factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals, surges in COVID-19 and other factors. And with that, I'll turn the call over to Barry. Barry?

Thanks, Suzanne. We would like to apologize for the earlier delay due to technical difficulties, and we also just want to thank you all for joining us today, once again, express our appreciation to our shareholders for their continued confidence and support. It's always important to conclude by recognizing our local leaders, Service Center partners and field resources for their heroic efforts, along with those of our nurses, therapists and other frontline care providers, who continue to provide industry-leading examples of life-enriching service to our residents, coworkers and communities. We simply would not be who or what we are today without their incredible ownership and personal sacrifices. Everyone mentioned is working tirelessly to love one another as they provide a wonderful experience for our residents and patients in spite of the challenges they continue to face. So thank you for making us better every day. We'll now turn to the Q&A portion of our call. Andrew, can you please instruct the audience on the Q&A procedure?

[Operator Instructions] And our first question comes from the line of Tao Qiu with Stifel.

So Barry and Suzanne, you talk about the phasing out of some temporary state relief next year. Just thinking about the various drivers, recovery in occupancy is still in progress. Skilled mix may normalize. And we got the Medicare rate update as well as some pretty strong Medicaid rate increases. So could you maybe give us some pointers on how we should think about the revenue building blocks for -- in terms of growth for 2023 and whether we can see the impressive 8% organic growth that you achieved this quarter, maybe that will moderate, but maybe offset by higher transitional performance similar to the two examples that Spencer highlighted and obviously, more acquisitions? And how about an early read on the labor cost growth for next year as well.

Okay. I'll try to remember all those, Tao. I'll start with the revenue side. I mean obviously, there are some pieces to the revenue picture next year that aren't entirely clear. But for the most part, there's a lot of visibility into kind of where we're headed. I feel like CMS has been really thoughtful about the changes they've made within the comp lines that they operate. And so we have a good outlook there. On the state side, obviously, the overhang there would be on the FMAP funding and whether or not the state of emergency continues. With that all said, we have really good visibility into our state-by-state funding for the most part. Whether the state of emergency sticks with us or not, we have, in our larger states like Arizona and California and some of our other states, we've got good long-term visibility into our rates for 2023 that will be stable regardless of the state of emergency and FMAP funding. We also have a pretty clear indication that in Texas, one of our bigger states, that a rate increase is on the horizon, a really healthy increase that's much needed. The only piece that's uncertain there is on the time frame between when the potential FMAP funding might go away and when the rate increase would happen towards the latter half of the year. And that's a piece that will become more clear over the next couple of months. And that's really kind of the only piece of the picture that isn't entirely clear for us. So overall, we feel really good about the revenue picture for 2023 and how it's shaping up. On the other front, I would just tell you the fundamentals behind our revenue, which is obviously occupancy, we feel really strongly about…

Got it. My follow-up is for Chad. I saw in the press release that you said you expect some -- that you expect the pace of deal closings to slightly slow down in the next few months. I think Spencer also mentioned some deals that you recently closed are more distressed in nature. Just curious if you are seeing more macro uncertainties out there. Or is the slowdown anything unique to the type of transactions you're working on?

Yes. No, great question, Tao. Thanks for that. It's really just a matter of just the rhythms of the deals and closings and the time line that it takes to get licenses in place and those sorts of things. So there's probably no science really around that so much. We will have some deals that will happen throughout the remainder of the year. But just 17 in a quarter is a significant amount. And certainly, in certain markets, like the Austin, Texas market, just added four buildings. And so the way our model works, right, is each local geography is responsible to transition those new operations. And in doing so, they often leave their existing building to go support the new operation. And so our bandwidth to grow varies by geography and based on the number of deals we've done in that particular geography. So that's also probably something, just to mention, that we always keep in mind. When we have a big surge in deals, we want to make sure we're able to digest those and transition them the right way. But that said, doing four deals in Austin, Texas doesn't impact our ability to grow in Houston or obviously, other states. So yes, we definitely continue to see a healthy pipeline of opportunities and are excited about the deals that we see on the near-term horizon. And at this point in the year, unless a deal is pretty far along, it's likely to slip into next year. And so that's a little bit why we're kind of guiding towards next year, or in Q1, as maybe the next quarter where we see some more significant growth activity. So hopefully, that helps.

And our next question comes from the line of Scott Fidel with Stephens.

First question, I just wanted to just pick back up on occupancy, and you've had a pretty sort of predictable ramp in recovery in occupancy that you've been talking about now and we've been seeing for a while. Just interested as we sort of look ahead now, to both the fourth quarter and then into 2023, how you're thinking about sort of occupancy trends. And would you expect to see sort of that continued, ramp higher? Or is there any seasonality that you would also call out that we should be thinking about, too?

Yes. Look, I mean, I think it's a great question, Scott. And it's obviously one that we're focused on a bunch operationally. And I think there's a pretty high degree of confidence that our trend will continue. We're sitting in a -- on a same-store basis, 70 -- almost 77%, which is getting really close to kind of where we were pre-pandemic. We have several markets that are ahead of their pre-pandemic occupancy. It's more of the kind of rural markets and secondary markets that kind of take their time to build back. So -- but fundamentally, I think we feel optimistic that the pace will continue. It typically accelerates in the fall. So I wouldn't be surprised if our rate of growth in the fall is higher than is typical. And that might accelerate our ability to get that closer to kind of where we were before. But that is one area that we look at, is kind of getting back to pre-pandemic occupancy. I think our thought and expectation though is that there's so much potential in so many of these operations that our sites are well beyond kind of pre-pandemic levels. I think our feeling is that we'll continue to see growth for quite a while.

Okay. Got it. And then just -- I know we've drilled into pricing across the payer classes quite a bit. I would be interested just if you can give us an update on your managed care contracting for 2023. How are your updates looking in terms of factoring in the inflationary environment? And then just interested just on -- with some of the Medicare Advantage plans and some of the focus around value-based contracting, if there's any sort of new or innovative contracts that you're exploring when you think about your commercial managed care payers.

Yes. Thanks for the question. It's a good one. As we've been talking to with a lot of our managed care payers, they are starting to recognize the additional inflation, both on the wage front and on the supplies front. And so definitely looking at in a negotiation with a lot of them to have higher-than-typical rates going into next year as a recognition of that additional inflation on the wage as well as the pipeline.

Okay. And then just a last quick one. Just on adjusted EBITDA margins, all in, you settled that around 12.5% in the 3Q. Just interested as how you see that as the jumping-off point for fourth quarter. And obviously, there's a number of moving takes to 2023, and you haven't given guidance yet. But would you view this as being in the range of what you would see as a sustainable sort of margin in terms of what you've been producing, looking out at the third quarter? And that's it for me.

I'll start, and Suzanne can add any color. Yes, I think so. I mean with the high acquisition activity, there's some obvious pressure on margins. Whenever we acquire a bunch, we typically see higher expenses in the beginning. The offset though, thankfully with the timing of this growth, is that we will see the full impact of our Medicare increase. We'll start to see some of the state increases kick in more fully during the fourth quarter as well. And so I think, all in all, that sets the stage for a -- what we think is a pretty stable margin going from Q3 to Q4.

Yes. And I think the other X factor really is the COVID. But again, what you've seen us do every single time when COVID does come in is that we grow revenue. So we get the revenue growth with maybe a little bit higher cost of services on that. But overall, it's done well and kind of consistent with what we saw come in during Q3.

And our next question comes from the line of Ben Hendrix with RBC Capital Markets.

Most of my questions have been answered, but just a quick numbers question on Standard Bearer. Can you guys offer any guidance on the total rental revenue and FFO on a run rate basis adjusted for the, I guess, the pro forma contribution of the real estate acquisitions that you guys have done over the past quarter?

Yes, I appreciate the question, Ben. There really was only one. So yes, it certainly isn't a material increase or change there. But I don't know, Suzanne, anything else we can say about that?

Yes. I would say that there's one that's happening in the Q4, and then you see the other ones already in. So the ones that happened during the quarter, those three had occurred already in the Q3 numbers. So it's going to be just a small increase. It's not going to be a large increase kind of running into Q4.

Now I'm showing no further questions. So with that, I hand the call back over to CEO, Barry Port, for any closing remarks.

Yes. Thank you, Andrew. And we would like to thank everyone for joining us today. Once again, we appreciate your time and support. And hope you have a great day.

Thanks, everyone.

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