Ensign Group Touts ‘Enormous Organic Growth’ Potential for Skilled Nursing Properties
The Ensign Group (Nasdaq: ENSG) turned in yet another upbeat quarterly earnings call last week, emphasizing its improved turnaround strategies for underperforming skilled nursing facilities and its strong partnership with landlord CareTrust REIT (Nasdaq: CTRE).
CEO Christopher Christensen touted Ensign’s progress on bolstering operations at buildings the Mission Viejo, Calif.-based operator took over in 2017 and 2018, which turned in an EBIT margin that was 760 basis points higher than the group of skilled nursing facilities it acquired in 2015 and 2016.
The company’s struggles with its crop of 2015 and 2016 properties came largely from a strategy that saw Ensign leave the former leadership teams in place, which led to difficulties implementing the provider’s management systems.
“We made a mistake thinking we could make it work. And it didn’t work. And we kind of had to start all over again in those acquisitions,” Christensen said Friday, adding that the success of its 2017 and 2018 pickups came from adjustments based on the failures associated with the 2015 and 2016 buildings.
During the second quarter of 2018, Ensign saw overall same-store skilled nursing revenue of $286.3 million, an increase of 4.2% from the same quarter last year, along with a 6.3% boost in revenues associated with “transitioning” skilled nursing facilities — which consists of those properties Ensign picked up in 2015 and 2016. Part of that success, according to Christensen, comes from Ensign’s decentralized model: Each local operator has significant autonomy over purchasing and management decisions, while a single operations center handles certain back-end functions to form a kind of local-national hybrid.
“We have great confidence that the combination of our locally-driven operating model, along with the backing of our world-class service center, will continue to create enormous organic growth in our newly acquired, transitioning, and same-store buckets,” Christensen said.
Christensen also heaped praise on his company’s ongoing partnership with CareTrust, the real estate investment trust (REIT) that spun off from Ensign back in 2014, noting that the relationship has allowed both parties to flourish without some of the struggles that REITs and operators have faced elsewhere in the industry.
“We refused to take any steps that would leave a crippled operating company at the mercy of relentless escalators, all with the sole purpose of producing a one-time gain,” Christensen said. “While many encouraged us to do what others had done, we never wavered in our balanced approach.”
Despite having a close REIT partner, Ensign currently owns 68 properties — including an 115,000-square-foot office in San Juan Capistrano, Calif. that the company purchased in June to house its service center staff.
Ensign’s management expressed optimism about the coming Patient-Driven Payment Model, which the Centers for Medicare & Medicaid Services (CMS) finalized last week. While other voices in the industry have expressed concerns about the new rule’s 25% cap on group and concurrent therapy reimbursements, Ensign Services chief operating officer Barry Port positioned that threshold as an opportunity — and not a ceiling.
“We do less than 2% in group therapy, and we’re now able to go up to 25% in group therapy,” Port said. “That’s a tremendous opportunity for us financially on a cost-savings front, to be able to do that level. Fifty percent would have been even greater, but 25% represents just a giant opportunity for more than offsetting, we think, the potential revenue decline would be.”
Written by Alex Spanko