Skilled nursing operator Ensign Group, Inc. (Nasdaq: ENSG) is experiencing a “positive shift in momentum” in its core skilled nursing business, and is hoping to capitalize on this energy in its other business lines.
The Mission Viejo, Calif.-based company also provides assisted living, rehabilitative care, home health and hospice services.
In the third quarter. the company’s total transitional and skilled services segment income totaled $36.9 million, an increase of 26.2% year-over-year, and a gain of 16.3% over the second quarter.
The third quarter of 2017 afforded the company with “significant operational improvements,” according to Ensign President and CEO Christopher Christensen.
“Our local leaders’ efforts to integrate 46 recently acquired and 68 transitioning skilled nursing and assisted living operations into the organization are just beginning to bear fruit,” Christensen said during the company’s third quarter earnings call.
The momentum the company is seeing in its skilled nursing line is also reflected in its assisted living/independent living and home health and hospice portfolios.
“We have been quietly building significant value in our other lines of business,” Christensen said.
In fact, Ensign’s assisted living/independent living portfolio, consisting of 49 stand-alone operations and 21 campuses in 12 states, now represents 7.5% of Ensign’s total consolidated revenue—a slight uptick from 4.8% just three years ago, according to Christensen.
Meanwhile, its home health and hospice portfolio company, Cornerstone Healthcare, Inc., represents a 7.6% slice of the company’s total consolidated revenue. In contrast, this segment was only 5.1% three years ago.
Christensen’s disclosure of this growth in the company’s ancillary service lines is the first time it has publicly spoken about it in granular terms, according to Dana Hambly, CFA, research analyst with Little Rock, Ark.-based financial services firm Stephens.
“The market is putting higher valuations on those types of assets … They’re becoming substantial,” Hambly told Skilled Nursing News.
Hambly predicts positive performance for Ensign moving forward as they grow these business lines.
“My initial reaction is that we will continue to see sustained … revenue growth in both of those services lines as they start to mature,” Hambly said, predicting the growth rate percentage of these business lines to be in the mid- to upper- teens in the next year. “They’re probably getting better at running those businesses now, as well, as they grow.”
A methodical approach
Driving this performance is the company’s “steady flow” of acquisition opportunities across its business segments, according to Ensign Executive Vice President and Secretary Chad Keetch.
For acquisitions, the company likes to participate in small pieces of larger portfolio transactions, allowing the company to be methodical in its approach, he explained.
“This approach allows us to select the assets that provide the most upside and the geographies in which we’re prepared to grow,” Keetch said.
As far as activity for the quarter, Ensign tallied its acquisition of The Villas at Sunny Acres, a post-acute care and retirement community in Thornton, Colorado; Desert Blossom Health and Rehabilitation Center in Mesa, Arizona; and Pueblo Springs Rehabilitation Center in Tucson, Arizona, among its highlights.
“In the near term, we are currently working on a variety of sellers ranging on small, mom-and-pop and non-profit operations, to well-known public and private operators that are looking to dispose of non-core or turnaround assets,” Keetch said. “We expect to acquire some of these operations later in the fourth quarter.”
While the company is celebrating its growth for the quarter, Christensen did acknowledge that the company’s operating results were challenged by increases in healthcare insurance costs.
“Had these expenses as a percentage of revenue remained at the same levels as in 2016, our year-to-date earnings per share would have been 9 cents higher,” Christensen said.
Ensign’s operational improvements have made up for a small portion of the negative impact from the first three quarters, according to Christensen.
“While we expect to make up more of it in the fourth quarter, the impact will be too much for us to overcome this year,” he said. “We continue to evaluate the cause for these increased costs and expect to find ways to improve the predictability going forward.”
Despite this hurdle, Hambly still sees strength in the company’s overall portfolio.
“My takeaway is that they’re still operating a very good portfolio. I think they acknowledge that there are industry challenges, but they’re not insurmountable,” he said.
At the close of market Thursday, Ensign’s stock increased 1.13%, with an estimated value of $23.24 per share.
Written by Carlo Calma