Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensign Q3 Earnings Call. [Operator Instructions] I would now like to turn the call over to Chad Keetch, Chief Investment Officer. Please go ahead.

Thank you, operator, and welcome, everyone. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, November 24, 2023. We want to remind any listeners that may be listening to a replay of this call that all the statements made are as of today, October 26, 2023, 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 a service center provide accounting, payroll, human resources, information technology, legal, risk management and other services to other operating subsidiaries through contractual relationships with such subsidiaries. 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 liability as well as for workers' compensation insurance…

Thanks, Chad, and thank you all for joining us today. We are 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 and caregivers and leaders who work endlessly to support and love one another, which allows for the high-quality patient outcomes they consistently achieve. During the quarter, we saw continued improvement in occupancies in managed care revenues, which is particularly impressive given the persistent labor market pressures and the return of more typical seasonality. More specifically, we were pleased to see same-store occupancy of 79.5%, which grew by 290 basis points over the prior year quarter and by 97 basis points sequentially over the second quarter. Given the upward trend in same-store occupancy through the quarter, we are confident that we are on a path to reach and eventually exceed our pre-COVID same-store occupancy at 80.1% as we move into higher mission months of fall and winter. We also continue to build stronger relationships with our managed care partners due to better coordination of care, increased capabilities and strong clinical outcomes. As a result, we saw increased volume in our same-store and transitioning combined managed care census and managed care revenue, which increased during the quarter by 6.6% and 13.8%, respectively, over the prior year. As expected, we saw a seasonal decrease to skilled mix during the quarter. However, due to our local operators strong clinical reputations, we are continuing to see elevated skilled mix when compared to pre-COVID levels. This continued growth in skilled mix demonstrates the increasing and sustainable demand for skilled post-acute services, including within the context of our managed care patients. We are very excited to see our…

Thank you, Barry. As we expected, we continue to add to our growing portfolio and are very excited about the six new operations and four real estate assets we added during the quarter and since bringing the number of operations in our newly acquired bucket to 51. These skilled nursing operations include two operations in South Carolina, one operation in Kansas, one operation in Colorado and two operations in Washington, totaling an additional 621 new operational beds. We are excited to continue to grow in some of our most mature states, including Colorado and Washington and to add an operation in Kansas that was formerly operated by a hospital. We are also thrilled to close on a transaction where Standard Bearer was able to acquire the real estate in Washington and lease a portion of the portfolio to a third-party tenant. We’ve seen many transactions similar to the one we closed in Washington that have been presented to us in the past and are anxious to utilize this new strategy to do more deals we likely would have missed out on prior to implementing this approach. All of these additions were carefully selected amongst the many opportunities we had and each of these were chosen because of the enormous clinical and financial potential in each operation. We have been patient and look forward to seeing our discipline pay off as these new operations continue to improve. As a result of the skilled service expansion so far in 2023, occupancy and skilled mix days for the skilled nursing operations in the newly acquired bucket was 77.4% and 26.1%, respectively, for the quarter. For those that have been following us for years will note, this is a very impressive starting point from which to build. However, when compared to our same-store occupancy…

Thank you, Chad, and hello, everyone. As Barry highlighted, we’ve seen some exciting trends in occupancy, managed care growth and cost containment as well as continued progress in our recently acquired operations. For the next few minutes, I'd like to share highlights from two facilities to illustrate how local leaders are driving these improvements in spite of ongoing headwinds. The first example comes from Santa Rosa, California. One of the first facilities we ever acquired. Since joining the organization in the year 2000, Summerfield Healthcare Center has consistently achieved strong outcomes year after year, while also providing strength to sister facilities in the Northern California area. However, over the past year, COO and Director of Nursing, Enedina De La Cruz and CEO, Cason Bush have taken performance to the next level. Compared to the prior year quarter, Summerfield's overall occupancy has increased by 7.5%, and skilled days have increased by 52.3% with meaningful improvement in both Medicare and managed care payers. As a result, total net revenue has improved by 40%, while EBIT has soared by 126%, all while maintaining top-notch customer satisfaction and 5 Star CMS ratings in quality measures and overall. But the impact of Summerfield goes far beyond the performance of their facility. For example, when the North American transition occurred in February, three of these newly acquired facilities joined Summerfield's cluster. Leading up to the transition and since Cason and Enedina as cluster leaders have given countless hours of time and support to help their new partners acclimatize to the new culture and embrace the rigor of the cluster model. Results have followed. For example, despite initially having high agency and some of the newly acquired facilities, the entire cluster is now agency free. At the same time, clinical systems have strengthened, skilled mix has increased…

Thanks, Spencer, 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 the following: GAAP diluted earnings per share was $1.11, an increase of 12.1%. Adjusted diluted earnings per share was $1.20, an increase of 15.4%. Consolidated GAAP revenues and adjusted revenues were both $940.8 million, an increase of 22.2%. GAAP net income was $63.9 million, an increase of 13.7% and adjusted net income was $69 million, an increase of 16.6%. Other key metrics as of September 30, 2023, include cash and cash equivalents of $467.9 million and cash flow from operations of $291.4 million. Currently, we have $593 million of available capacity under our revolving line of credit, which, combined with the cash on our balance sheet, give us over $1 billion in dry powder for future investments. We also own 112 assets of which 107 are held by Standard Bearer and 88 are owned completely debt-free and gaining significant value over time, adding even more liquidity to help us with future growth. During the quarter, we paid a quarterly cash dividend of $0.0575 per share. We also continued to delever our portfolio, achieving a lease adjusted net debt-to-EBITDA ratio of 1.99x, which is particularly noteworthy given the amount of growth we have taken over the last year. As many of you know, CMS issued a proposed federal minimum staffing rule. We are now in the comment period and CMS has received and will continue to receive thousands of comments on the rule. However, if a final rule is implemented, we do not expect the rule to impact us in 2023 or 2024. We are encouraged by the strong reimbursement environment for Medicare and other payers. As of October 1, we will receive…

Thanks, Suzanne. As we wrap up, I can't emphasize enough how incredibly honored and grateful we are to work alongside our facility leaders, field resources, clinical partners, and our service center team that are behind these record-setting results. We never cease to be amazed by the impressive resiliency as they focus on supporting one another in new and innovative ways. Their commitment has blessed the lives of so many, including our own, and we're excited about our future because of these amazing partners. We have complete faith in them and the culture they have collectively built. With that, we'll turn it now over to the Q&A portion of our call. Bailey, can you please instruct the audience on the Q&A procedure?

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

Thank you very much. A quick M&A related question, and I think I've asked this on past calls, but I wanted to get an update I appreciate the commentary on the leadership development and price being, kind of gating items for M&A, but I wanted to get -- any thoughts on -- or any changes to strategy with regard to financing acquisitions amid the current rate environment? And if there's any kind of capital allocation considerations from that perspective? Thanks.

Yes. Great question, Ben. Thanks for that. As we mentioned in the call, we have over $1 billion in dry powder. A good portion of that is cash. So we've got a lot of cash and then our revolver has been completely -- it's just totally available to us. So usually, what we do is, it's some kind of a blend between the two and our debt levels are extremely low. And frankly, our overall sort of cost of capital is attractive. It's SOFR-based with spread to it that I think is very, very competitive and certainly puts us in a spot that is enviable amongst many financial buyers, in particular. So pretty excited about the ability we have both with cash and to use our revolver to fund it. Obviously, we have a lot of real estate that we own that's completely unlevered as well. That's doing mortgage financing is something that we've done in the past. Given current rates, though, that's probably not on the horizon at least in the near-term.

Thank you.

Your next question comes from the line of Scott Fidel with Stephens. Your line is open.

Hi. Thanks. I actually wanted to just follow-up on the same topic, as Ben just talked about with the M&A opportunity and just given the extensive capital available to you. Just interested if maybe you could drill into the profile of deals looking out to 2024 that may be available when thinking about the larger portfolio deal you did with North America this year. And, I guess, with the pipeline of sort of other portfolio opportunities may look like as compared to some of the more targeted deals that you often also do during the course of the year.

Yes. Great question, Scott. So first of all, the onesie, twosies, the deals have really built Ensign, those are -- there's lots of them. So that's kind of, I guess, our typical pattern, and we expect to follow that. But in terms of portfolio deals, we have seen, even just in the last couple of months, an uptick and the number of larger deals that are out there. It's an interesting mix. Some include real estate that would require an actual cash payment. Others are more lease heavy. And as we've shown, we prefer to buy the real estate where we can, but really attractive leases are a great way for us to grow as well. I would say really all the portfolios that we've seen and the sizable ones are very much distressed in a turnaround situation. That is a little bit different than the North American deal we did last year. That one was unique for sure in terms of occupancy, it's California-based. So -- but all that said, the biggest factor as it was alluded to earlier, is the leadership and having leaders in our pipeline that are waiting for those opportunities. And obviously, geography is important as well. We want to stay in the states we are in and is sort of our first priority simply because there's a lot of benefit in building scale in the same markets. We know them, there's a lot of benefit in having relationships with hospital systems and managed care payers and all of that. So that's our first -- our very first priority is to grow in the states we are in and some of these opportunities are in states we are in. The next one would be states that we are not in, but that are close by. And that -- so there are a few new states that could potentially happen either at the end of this year or early next. We take those very seriously. It's a lot of work to go into a new state. But that's definitely something on the horizon as well. Anything I missed, [indiscernible]?

No, nothing

Okay, great. Thanks, Chad. And then a follow-up question, just wanted to pivot over to the staffing rule. And I guess just asked a question about sort of, I guess, how you're approaching this from the advocacy versus the operational perspective, I think everyone recognizes how disruptive this proposal would be for the industry if it went forward, and it seems realistic to think that there will be some meaningful changes made in the final rule, but at the same time, we may not even see that till next summer or so. So I'm just curious, are you at this point, largely just focusing your efforts on sort of the advocacy side? Or are you also considering any types of starting to pursue operational adjustments, looking out over a multiyear time frame that this rule would go into effect?

Yes. It's a great question, Scott. Operationally, I don't think there's much that we feel like we need to do to adjust other than making sure we are really, really focused on the things that we are always focused on, which are keeping turnover as low as we can by making sure we've just got amazing practices around how we treat and incentivize and celebrate our people, making sure that we're the employer of choice in every market, making sure that we are very efficient in how we staff and the communication we have with our staff on how and why we are staffing a certain way, and getting their input on that as well. So that has been our focus for quite some time, removing agency and ensuring that the workplace is a place where people really want to be. That really is our focus because if and when there is some adjustment to how the Federal Government decides we should staff on a building-by-building basis. If our people systems aren't where they ought to be, then that becomes more challenging. So our efforts operationally are around making sure that we continue to be the absolute best employer we can be. And -- so the silver lining of this whole noise around this proposed rule is that it gives us impetus in a rally cry to kind of focus on making sure that we are the best at being great partners with our employees. As it relates to what we are doing organizationally, it really is very much a grassroots kind of focus. So we are in a heavy comment period right now, ends November 6. Our organization has produced well over 1,000 comments. The industry has produced over 11,000 comments. Congress just recently had -- nearly 100 Congress…

Thanks. I appreciate those comments. If I could just slip one more question in, too, for you. Just I know there's a Medicaid rebasing process that's underway. I think in California, would appreciate maybe if you could just bring us up to speed on sort of what exactly is going on there and sort of what you'd be looking for out of that process underway? Thanks a lot.

Yes. Great question, Scott. Definitely a lot of things happening in California with regards to the Medicaid rate. We are very, very, very active with both our associations, lobbyists in California and the Department in shaping what that will ultimately look like. And so we continue to be very active in that and be a part of this discussion.

As far as any rebasing, I don’t -- we really don't feel like there's any overarching threat to the population that we serve, it's more community-based Medicaid patients that are being redetermined and I know there are some questions about the redetermination process on Medicaid in some states, and you've asked about that before too, which is separate from what you asked Suzanne about. That piece too is something that is really not much of a threat to what we are seeing in our facilities as far as our patient population other than it's just creating a slowdown in terms of getting Medicaid patients approved.

Okay, great. Thank you.

There are no further questions at this time. Mr. Port, I will turn the call back over to you.

Okay. Thanks, Bailey, and thanks, everyone, for joining us today. We appreciate, obviously, your support and look forward to a strong finish to the year.

This concludes today's conference call.