Ensign Sees Opportunity in Post-COVID Specialization, PDPM-Driven M&A Spike

Skilled nursing giant The Ensign Group (Nasdaq: ENSG) continues to be immune from COVID-era pressures, posting another quarter of record earnings and plotting out post-pandemic growth — with an eye toward taking a page from its spinoff of its non-SNF business lines.

The San Juan Capistrano, Calif.-based Ensign has engaged with advisors to potentially capitalize on the value of its owned real estate, chief investment officer Chad Keetch said Friday.

“We envision a structure that not only creates better visibility into the demonstrable value of our real estate, but will also provide us with an efficient vehicle for future acquisitions of properties which could be operated by Ensign affiliates or other third-party operators — just as we have done with the Pennant Group,” Keetch said during Ensign’s first-quarter 2021 earnings call.


The Pennant Group (Nasdaq: PNTG) spun off from Ensign in October 2019 in a bid to separate the company’s home health, hospice, and senior living holdings.

“More education about and visibility into these uniquely situated operations will create a better understanding of the value we believe remains somewhat hidden and overshadowed by the market’s perception of the skilled nursing industry at large, despite Ensign’s successful history of outperforming industry peers in many key metrics,” Pennant CEO Daniel Walker wrote in a letter explaining the deal.

Back in 2014, Ensign spun off CareTrust REIT (Nasdaq: CTRE), separating its real estate holdings from the skilled nursing operations. But Ensign has steadily acquired real estate of its own in the interim, and executives have expressed a desire to enhance that aspect of its business in recent quarters.


“We also seek a structure that will preserve the optionality that enables us to take advantage of private and public market conditions in order to maximize long-term shareholder value,” Keetch said Friday. “We are very excited about the new opportunities embedded in this chapter of our growth story, and look forward over the coming quarters to updating you on our progress.”

Those new opportunities may include a bumper crop of distressed properties as the federal government looks to potentially adjust the Patient-Driven Payment Model (PDPM). The Centers for Medicare & Medicaid Services (CMS) recently determined led to a 5% increase in Medicare spending on skilled nursing care, counter to its stated goal of budget neutrality, and any changes could end up pushing weaker companies to sell, CEO Barry Port noted.

For a company with a long-term strategy of turning around underperforming facilities, that could end up being a positive.

“If it all happened at once, it would be bad for everyone in the very short term — but most importantly for the poorly capitalized companies that just are hanging on by a thread right now,” Port said. “For us, it would most undoubtedly create a pretty large buying opportunity, which wouldn’t be a horrible thing for us to see.”

CMS has floated a hypothetical 5% cut — either spread out over multiple years or implemented with significant advance warning — but Port said Ensign identified potential problems with the federal government’s analysis in its formal response to the proposed payment rule, which the company submitted this week.

CMS asserted that the increase in spending was independent of COVID-era waivers that temporarily expanded Medicare coverage of SNF services, though Port and others have argued that the pandemic still played a role in the rising costs.

“We feel that there’s some deficiencies on the analysis that was done as it relates to budget neutrality, just given the nature of the pandemic, the complexity of the patients, and we lined out those details in our response,” Port said.

The quarter brought more good news for Ensign, which has consistently clocked record earnings even during the pandemic — and despite returning all of the CARES Act and other federal funding that it has received.

The provider increased its earnings guidance from $3.44-$3.56 per share to $3.54-$3.66 per share after logging quarterly revenues of $626.8 million, up from 6.4% in the first quarter of 2020.

“We have seen occupancies increase as the pent-up demand for health care services in our markets has continued to increase, while Medicare census has begun to trend towards pre-COVID levels,” Port said. “As our affiliates saw improvements in overall census, we were particularly pleased by the continued improvement in our managed care growth across the portfolio.”

The CEO also pointed to efforts by leaders in specific Ensign markets to fill gaps in acute care partners’ need. Port gave the example of the Healthcare Resort of Plano, a Dallas-area facility that partnered with physicians from multiple local hospitals to develop a specialized cardiac rehab program.

In doing so, the facility has boosted occupancy by 6% and Medicare-covered skilled mix by 29% from the first quarter of 2020.

“Not only has this careful coordination with continuum partners resulted in improved outcomes and reduced rehospitalization rates, it has also led to increase revenues, as many patients continue to receive outpatient rehabilitative services post-discharge,” Port said. “The team at Plano has created full transparency with their partners, giving them access to key metrics that impact outcomes and costs.”

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