Good day and thank you for standing by. Welcome to the Ensign Group, Inc. Fourth Quarter 2022 Earnings 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. I will now hand the conference over to Mr. Keetch.

Thank you, and 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 3, 2023. We want to remind any listeners that may be listening to a replay of this call that all statements are made as of today, February 3, 2023, and these statements have not been or 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 a 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. And in addition, our wholly owned captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional…

Thank you, Chad, and thank you for joining us today. We were 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. They have again achieved record results in spite of the continued disruption in labor markets. Remarkably, we saw continued improvement in occupancies, skilled revenue and managed care revenues. We are particularly pleased that we achieved sequential growth in overall occupancy for the eighth consecutive quarter, with same-store transitioning operations increasing by 2.9% and 4.3%, respectively, over the prior year quarter. As of the end of the quarter, our same-store occupancy reached 77.8%, and we continue to get closer to our pre-COVID occupancy levels, which was at 80.1% in March of 2020. We are amazed by the commitment of our caregivers and their continued endurance and strength. We've also been very pleased with the progress we've made in improving our skilled mix. As those that have followed us know, growth in skilled mix only happens after our local teams demonstrate over and over that they can achieve successful outcomes for sicker patients that need more advanced care. During the quarter, our same-store operations grew their skilled mix revenue by 9.1% over the prior year quarter. Additionally, in the wake of the pandemic, there's been a lot of noise around potential shifts to home-based care or lack of support for inpatient post-acute services from hospitals and managed care providers. But when compared to pre-COVID levels, our skilled mix has remained elevated, showing just how important high-quality post-acute services are within the continuum of care. We've always been confident that our skilled mix would continue to be strong but we are very…

Thank you, Barry. As we expected, we continue to add to our growing portfolio and are very excited about the 12 new operations we added during the quarter. These newly acquired operations include three skilled nursing operations in South Carolina, one skilled nursing operation in Arizona; six skilled nursing operations in Texas; and two skilled nursing operations in Colorado, totaling an additional 1,505 new operational beds. We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets like Arizona and Colorado. Each of these operations were very carefully selected and will bolster our ability to fulfill the needs of our health care partners and geographies we didn't previously or it simply enhances our service offerings and markets we have been in for years. We are also particularly excited about completing our first set of acquisitions in South Carolina since we entered that state several years ago. As we said before, entering new states is challenging and can often take time to gain the trust of the local health care community. Each of these operations in South Carolina is off to a great start, and we hope that we will be able to continue to build the Ensign footprint in the Mid-Atlantic region. In addition, we also completed the previously announced acquisition of 20 skilled nursing operations in the state of California that have been operated by North American health care. The real estate assets are all owned by Sabra Health Care REIT and have been added to our long-term triple-net master lease with them. As we said when we announced this transaction last November, honored that Sabra will be entrusting us with the operation of this portfolio and are very excited to expand our…

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. Those of you who are familiar with Ensign's history now that our organization was born in challenging times, and our model has proven time and time again that industry challenges present great opportunities to innovate and thrive. While there continues to be significant growth potential in our same-store facilities, because of recent acquisition growth, the two facility highlights I want to share today are operations in our transitioning category. These examples illustrate the post-acquisition turnaround process that continues to be so fundamental to our long-term success. The first highlight is surprise rehabilitation, located in Phoenix, Arizona Metro area. This 100- bed facility was a new build that had been shuttered due to the prior owner struggles with local licensing and regulatory authorities. And when it was acquired in August of 2019, the facility had no residents and no staff. With the support of our cluster partners and the strong Bandera resource team, CEO, Brian Lorenz, COO, Heather Rucker; and Executive Director, Derek Bowen, systematically began building a team that shared their vision. Their vision attracted great health care professionals and soon their sensors and reputation were growing. The team worked relentlessly on developing high clinical standards and improving staff competency. As a result, the facility has increased its capacity to successfully treat high-acuity patients, including those needing ventilators and other respiratory care. Despite the challenging acuity, Heather and her team have attained and maintained a five-star overall rating from CMS as well as a five star score for quality measures. These clinical accomplishments have been made possible through the surprise team's commitment to creating a unique environment where people want…

Thank you, Spencer, and good morning, everyone. Detailed financials for the quarter and 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 $3.95, representing an increase of 15.5%, and adjusted diluted earnings per share was $4.14, an increase of 13.7%. Consolidated GAAP revenues and adjusted revenues were both $3.025 billion, an increase of 15.1%. The GAAP net income was $224.7 million, an increase of 15.4%, and adjusted net income was $235.7 million, an increase of 13.8%. For the quarter, GAAP diluted earnings per share was $1.06, an increase of 23.3%, and adjusted diluted earnings per share was $1.10, an increase of 13.4%. The GAAP net income was $60.5 million, an increase of 24.1%, and adjusted net income was $62.7 million, an increase of 14.1%. Other key metrics as of December 31 include cash and cash equivalents of $316.3 million, cash flow from operations of $272.5 million, and $593 million of availability on our revolving line of credit. We continue to provide additional disclosure on Standard Bearer, which is now comprised of 103 properties owned by the Company and are leased to 75 affiliated skilled nursing and senior living operations as well as 29, which are senior living operations that are leased to the Pennant Group. Each of these properties is subject to triple-net long-term leases and generated rental revenues of $19.4 million for the quarter, of which $15.6 million was derived from the Ensign affiliated operations. Also, Standard Bearer produced $13 million in FFO and had an EBITDA to rent coverage ratio of 2.4x. We continue to delever our portfolio, achieving a lease-adjusted net debt-to-EBITDAR ratio of 1.98 times, a decrease of 2.13 times from last year. We also own 108 assets, 84…

Thanks, Suzanne. We want to again thank everyone for joining us today and express our appreciation to our shareholders for their confidence and support. We know that this year will be not without some unique challenges; however, we're encouraged by our operational strength and our core business. As always, we want to recognize our talented field leaders 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 our communities. We're also appreciative to our colleagues 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. We'll now turn the -- turn over to the Q&A portion of our call. Carmen, can you please instruct the audience on the Q&A procedure?

[Operator Instructions] And it comes from the line of Ben Hendrix with RBC Capital Markets. Your line is open.

I just wanted to ask about your skilled mix momentum. Clearly, we're seeing evidence of your higher acuity capabilities, but also some COVID and respiratory impacts in there as well. How should we think about steady- state mix for your same-store portfolio? And then from a modeling standpoint, how should we think about skilled mix evolving through the year?

Yes. I'll just -- I'll speak generally about it and let Suzanne fill you in on any other insight she has. But as we compare kind of where we are today from a skilled mix standpoint to where we were both last quarter and last year, and even pre-COVID. We are pretty confident in the strength that we're building and the momentum that we're building in our ability to continue up the acuity chain and attract sicker patients, which is ultimately, the goal to be the best resource for our hospitals and managed care partners is always at the forefront of what we're thinking and that means an evolution towards being nimble and adaptive to what their needs are and their needs include ensuring that we have the capability to care for a more acute patient. So as we look at the impact of COVID this quarter, certainly, it was a little bit higher than the same quarter last year, but comparable to kind of where we were last quarter. What we see is that even though there was more COVID activity this quarter than there was in the same quarter last year, it's not much. And so, what that indicates to us is on a steady state basis, even in quarters where we're not really impacted by COVID, we're still fundamentally higher than where we were kind of going into this pandemic. And that momentum, just it just continues. And so we're encouraged by that. Anything you want to add to that, Suzanne?

No. I think you said it really well. I think one of the things that we've been noticing for the last couple of quarters is a little bit less dependent on the waivers and maybe that COVID and our skilled mix isn't as aligned. And so that, I think, as Barry mentioned, I think we're really excited for where we are and the relationships that we've made throughout the entire year with our manned care partners continue to be strong and as we continue to see that portion of the skilled mix build.

Just a quick follow-up. You've noted that states have been supportive of the PHE roll off and the soft landing there. But is there any cadence -- quarterly cadence considerations we need to be thinking about as we think about the second half of the year?

Yes, great question. Obviously, we have the announcement out there on the end of the PHE with the White House then leaning towards that May date. And so as we kind of look through that, we're planning on getting some additional funding through that May date from the states that have been supportive. And as we've talked on previous calls, just a reminder that was California, Arizona and Texas. I think on the last call, we talked about that California really has broken away from tying anything to the state of emergency. So, they've really said that they're going to be supportive for the remainder of the year. So, I feel great about California. Arizona has really thought through this good and well. And as they look to put the dollars in more into the rate, and so we've already started to see some of that come through in Arizona. And then Texas, I think, is the last one out there. They've kind of done a couple of things. They've looked at the PHE, but they've also done some grants that we're expecting to see come in through the year. And then as we've talked to you guys about there's that potential that we would have a hole between kind of when the state of emergency and the grants may not cover to the end of -- or beginning of September. So, we feel pretty good about how the states are lining up, what it's going to be a mix of kind of continued funding additional rate funding and then some of these grant programs that we've seen in the states put in place. Barry, what did I miss?

I think that's it, Ben. I mean, ultimately, I think as our guidance indicates, we feel pretty strong about even though there are some small unknowns from state to state. Overall, I think we feel like there's a pretty clear pathway for us to not have some massive blips on the state reimbursement front as FMAP fades. Like we mentioned earlier, it doesn't really just go away. It steps down. And so even with that step down, if there were no -- like I say, it wasn't a bridge in Texas, for example, I don't think that would impact our outlook for the year at all.

One moment for our next question please. And it comes from the line of Tao Qiu with Stifel. Please proceed.

Congrats on closing the North American transaction. So Barry, I really appreciate the comment on the performance of the Legend portfolio. So, on the North American assets, I think Sabra has reported that their EBITDAR rent coverage for these assets have been about 1.1 times. So it sounds like this should be accretive on day one. Are these California assets different from Legend or your typical turnaround opportunities if you look at them from either occupancy, scale mix or cost-saving potential? And how long do you think it would take you to get your stabilization? And as a follow-up, could you also comment on the leadership pipeline and the current capacity to take on more assets?

Yes. That's great question, Tao. We -- so this portfolio is an excellent one. It's one we've -- there was an opportunity to look at it a few years back. We're excited about them. We know these buildings. They are buildings that we have competed with in the past. They are buildings that we have relationships with some of the leaders. And so, we're really excited about this portfolio. We think it will be a great addition. I will say this, not just about North America, but about transitions we're seeing in general. Given the labor challenges just globally, most buildings and these are no exception, have high amounts of agency labor usage, and so more than obviously typical, as we're seeing ourselves. But these, in particular, have quite a bit. And so again, like with some of the recent ones we've taken on, the pathway for kind of traditional recovery is somewhat hampered there. Getting agency out of a building in an environment like now is much more difficult, as you can imagine. So that's one of the primary challenges that we're facing is just to get to where we like to be as quick as we need to be is going to be challenged by the current state of labor. That said, these buildings are in really good condition clinically and have really good culture overall. I've been able to visit a few already. I've gotten to know some of the leaders of these buildings and some of the clinicians. And given the clinical stability that exists there, I think that provides us somewhat of an advantage for us to not say, it's going to take forever. But it will take some time, regardless in spite of that. But again, like we mentioned in our prepared remarks, we…

Yes. And my second question is we noticed that the DSO ticked up a little bit sequentially. I think we also saw that in your 10-K. We updated the risk disclosure around the growth of the Medicaid managed care organizations and the potential delay or reduction in Medicare reimbursement. Just curious, if you have any general observations about the billing and collection trends, and for managed care in general, anything worth calling out there?

Yes, great question and a couple of different aspects to that. Obviously, in the current quarter for Q4, we had a lot of acquisitions. And so what we talked about, and just want to remind people, during stages of heavy acquisitions are anticipated collections will be slower. That is just a normal part of doing acquisitions as we go through the change in ownership process and transfer everything over. As we kind of look for fourth quarter, it was just a little bit slower in normal and the normal basis as well. And that really had to do with a lot of managed care organizations and a couple of states paying a little bit slower than they normally do at the end of the year. With regards to the risk factor, what we added on, we did just want to highlight that there are more and more states that are changing from a direct pay system to a managed care system. So now almost all of our large states are all in managed Medicaid states. When the program goes from just a railer direct pay to managed Medicaid, the payments do come slower to us. And so our -- one of our big states, California switched in 2023 to that. And so, we just want to get people a heads up that we'd expect some slowdown in our Medicaid collections in the state of California due to that transition.

Got you. And a final question, if I may. If I look at the balance sheet, right, obviously, that's under levered and you have abundant liquidity and very strong cash flow. We are forecasting somewhere around $300 million of operating cash flow and really $200 million of free cash flow for the next few years. Just curious in terms of capital allocations, what are the things that you would prioritize? I know that you have raised the dividend. You had a stock repurchase program last year. How should we think about where you would allocate capital?

Yes, Tao, I can take that. This is Chad. Certainly, acquisitions would be the top of our list. We see ourselves very much in growth mode and will continue to be. And then obviously, CapEx on the physical plants is another big spend, right? And one note on the cash flows, too. When we have large or heavier periods of acquisition like we have over the last six months, that can tend to have a little bit of a drag on our cash flows and as we see AR climb a little bit with just the nature of licensing and just part of kind of the process of a transition from one operator to another. So that will actually probably impact our cash flow a little bit. I think you'll see that. But yes, I mean, as we've talked about a lot, we keep our balance sheet the way it is so that we can be ready when great opportunities arise. And as I said in my prepared part of the script, I think we expect to see additional opportunities coming up this year and next and we want to be prepared for that. So, that's how we kind of look at the balance sheet.

And prepared both on the operating front as well as the Standard Bearer REIT front. So, I think as we kind of look at that multifaceted ability to acquire that would definitely be our number one use of those flows.

Thank you. One moment for our next question please. And it comes from the line of Scott Fidel with Stephens. Please go ahead.

Actually, just wanted to pick that right up on that last topic just around operating cash flow and maybe get a little more visibility into what you're building into your outlook for next year. You've been running in that $275 million area for the last two years. And then you've talked about in the near term, having some of these -- some of these dynamics just around the acquisitions. Is it reasonable to think about operating cash flow stepping up a bit in 2023, just given the larger revenue scale? Or are you assuming it remain relatively stable with where it's been trending the last two years? And then also what you're modeling for CapEx as well?

Yes, great question, Scott. I think the one thing, when you're looking at cash flows and you kind of think through the number of acquisitions that we've done, our states can vary between four months and 18 months is the longest transition that we've ever had as they've got us on. And then so as you kind of think through where those cash flows go, we try to try to normalize it all and hope that they all come in kind of in the middle of that realm. And then after we get that licensing process done, then we have to go through the managed care process and get them re-credentialed through our new license under managed care. So that's a secondary step. And again, that can take two to six months on top of that after you've already waited. And so, it's a little bit of a waiting game. And so that's why we kind of -- as you listen to chat of use of cash, one of the things that we'll probably end up having to do is use some of that working capital to get us through those to processes. Now our hope and we have great systems and great processes that it goes very succinctly. And we're on the early end of that. But unfortunately, we are at each individual state governments processing time line a little bit here with regards to how quickly it goes through. So I think it wouldn't be unreasonable to say we would expect kind of that same flow net-net because AR will grow and...

Just a little bit there. California tends to be one of the slower states too. Texas is faster than California and that's why it'll probably be a little more pronounced with this particular set of deals as well.

Right. And definitely, different states have different things they turn off immediately. So Texas turns a lot more stuff off immediately. And so, we get not a dollar in the door. In California, there's a little bit we get some cash in the door quick and then we have a turn off period and then goes back on. So every state again is -- it's -- we're talking super nuance here, so a little bit up and down there.

We haven't talked a whole lot very recently about Standard Bearer, but I mean, we have been preparing for this and are still thinking a great deal about opportunities for Standard Bearer. So having cash availability for deals that, again, may not fit our operating footprint, but might be good real estate opportunities or something we always want to be ready for as well, not signaling that we have anything in the works necessarily, but we have great hopes for Standard Bearer to have some opportunities as well for growth.

Understood. And certainly, you have a tremendous amount of liquidity, but as we're just sort of phoning in and trying to model the operating cash flow correctly, is it -- maybe is it reasonable for us to think about that those 4Q dynamics persisting over the next quarter or two, and then you sort of get more of that cash flow normalization in the back half of the year? Or do you think that's sort of a reasonable baseline assumption?

I think that a reasonable baseline yes, a reasonable baseline assumption, knowing that we did just as much in Q1 as we did in Q4. And so, I think it's a reasonable baseline. And then as we can update you guys throughout the year, as we always do, as you see the cash come in or if we see somewhat extending with regards to the timing of the licensing process, which would make it less longer or if they tighten up and they do a great job at the states and you won't see it as pronounced in the cash flows.

Got it. And then just my second question. Just interested, if you can give us an update on your managed care contracting for 2023 and how you've seen your managed care rate trends sort of playing out relative to some of the inflationary dynamics? And then just interested to if you've had a chance, I'm sure you've started this for sure, to just dig into the managed care contracting at the North American facilities and whether you see opportunities to improve the managed care rates as you try to drive synergies off of those acquired properties?

Another great question. I think when you think through the dynamics that we have, we do have some of our larger contracts that we feel really good about and that they have recognition that that labor has increased and overall cost has increased. And so we have at least one MCO provider who's actually recognized that I think a lot of the other MCOs are looking and still struggling with regards to our overall cost increasing. And so they're kind of at their historical rates as a starting point, anywhere between 2% and 3% as a starting point. But as we try to demonstrate to them the cost increases that we have had I think that they're -- that's the beginning of the negotiation. And so we've had some really good success with a few, there are some that are a little bit more holdout. So I think some of that progress and the negotiation time might go on a little bit longer, because where we are asking for rates to increase is higher than they've historically done. And again, we've been very successful with some of the larger ones. And remember, we don't have -- for the most part, we don't have one contract that covers the entire company, but we really have a lot of smaller contracts so that -- what happens is we'll get wind throughout the year, and then that'll kind of come in over the entire period of the year.

Thank you. And with that we end our Q&A session for today. I would like to turn the conference back to Mr. Barry Port for his closing remarks.

Thank you everyone for joining us today, and we look forward to a great year.

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