Ensign Group Takes Victory Lap After Record Quarter for Earnings

Executives at skilled nursing operator The Ensign Group (Nasdaq: ENSG) on Thursday touted record earnings numbers and continued to insist that the post-acute and long-term care space isn’t as difficult as the headlines and headwinds may make it seem.

The Mission Viejo, Calif.-based firm set company records for adjusted earnings per share and diluted earnings per share in the fourth quarter of 2018, taking in a total of $102.1 million in adjusted net income for 2018 — an increase of 38.3% over the prior year.

The company’s skilled nursing assets played a significant role in that growth, with total transitional and skilled services income of $190.9 million for 2018, representing a 38.1% boost from 2017. Occupancy also picked up last year, with same-store SNF census increasing 63 basis points to 78.8%, and occupancy at newer transitioning buildings jumping 296 basis points to 75.0%.

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CEO Christopher Christensen took the opportunity to specifically credit Ensign’s hybrid local-national model. In an era that has seen a move away from national skilled nursing chains — with Kindred Healthcare’s total exit from the business in 2017 and HCR ManorCare’s extended distress serving as the poster children for the trend — Ensign has managed to blend the strengths of a national back office infrastructure with a network of local leaders empowered to make their own staffing, operational, and partnership decisions.

By putting those local partnerships to work on underperforming assets, executives said, the company has been able to pull off significant turnarounds over the last few years.

“Our countless leaders have proven this pathway to progress over and over again,” Christensen said on Thursday’s fourth-quarter 2018 earnings call.

Christensen in particular singled out the work that the company has done in Utah, where Ensign has been able to fight its way into narrow referral networks; while the increasingly shrinking pool of SNF partners that hospitals choose serves as a headwind for many operators in the space, the Ensign CEO presented it as an advantage.

“As a result of the narrowing of networks, our operations have been rewarded with higher volumes of skilled census and overall occupancy, resulting in significant growth in revenue and EBITAR,” Christensen said.

In addition, the provider has seen growth in the Beehive State through the diversification of services, with Christensen citing the company’s St. Joseph’s Villa skilled nursing and assisted living campus as a prime example of the trend. Acquired by Ensign in 2011, the Salt Lake City community now offers a wide variety of services, including high-acuity ventilator and behavioral care.

“St. Joseph’s meets almost any medical need in the market,” Christensen said. “As a same-store campus, they still managed to grow EBIT by 16.5% over the same quarter last year, all while maintaining a CMS five-star rating.”

As he had on previous earnings calls, executive vice president Chad Keetch called out other players in the space — without naming names — by calling into question their skilled nursing M&A strategies.

“We continue to see several transactions involving financial or real estate buyers trading at overly aggressive cap rates and lease coverages — all of this in the face of news reports indicating that large, historically strong operators are defaulting on rents as a result of poorly structured capital market transactions, onerous leases, and unhealthy leverage,” Keetch said. “The dynamics in our industry, while sometimes challenging, are not nearly as difficult as many are led to believe as a result of these self-imposed challenges that follow creative financial engineering.”

The company isn’t done with its extensive expansion push, which has seen Ensign acquire the operations of 169 facilities since it spun off its physical assets into the newly formed CareTrust REIT (Nasdaq: CTRE) back in 2014. The provider has derived its strong growth from small, opportunistic acquisitions of buildings from either local operators or bigger players looking to shed non-core assets or underperforming SNFs, Keetch noted, and that strategy won’t change going forward — with several buildings in the pipeline for the first half of 2019.

Christensen also pointed to the 72 real estate assets the provider currently owns, even after the CareTrust spin-off.

“We also believe it’s important to recognize the growing, underlying value in our own real estate, and that there are many options available to us to unlock this value for the benefit of our shareholders,” Christensen said.

Ensign stock closed Thursday’s trading at $48.98 per share, an increase of $4.79 or 10.8%.

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