With Captive REIT Valued at $1B, Ensign Ready to Build on Solid Q4 Results

With the company’s newly launched captive REIT valued at $1 billion and Covid-19 pressures starting to moderate, leaders with The Ensign Group (Nasdaq: ENSG) plan to bolster operations and expand in 2022.

A third-party appraiser has valued Standard Bearer Healthcare REIT at $1 billion, Ensign announced in conjunction with its Q4 2021 earnings results. The book value of Standard Bearer, which officially launched Jan. 3, is approximately $720 million, reflective of the initial price paid plus capital improvements on assets, Ensign Chief Investment Officer and Executive Vice President Chad Keetch said during the Thursday earnings call.

“Our real estate strategy has always been an important part of our DNA,” said Keetch. “This new strategy will open up new doors to growth that we have pursued in the past, allowing us to accelerate Ensign’s strategy of acquiring and operating both performing and underperforming operations.”

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San Juan Capistrano, Calif.-based Ensign, which provides post-acute health care services while investing primarily in skilled nursing and senior living facilities, has already begun evaluating transactions for Standard Bearer.

Potential transactions involve health care properties operated by company affiliates and other third party operators, Keetch said. In future, Standard Bearer will allow Ensign to pursue new partnerships as well.

Keetch and other Ensign executives also touted how well the company navigated through significant challenges at the close of 2021, with Covid-19 infections surging and staffing pressures increasing. And, they are optimistic that some of these pressures are beginning to moderate.

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A return to fundamentals

Ensign beat earnings expectations for the fourth financial quarter despite continuing labor challenges, delta and omicron infection waves.

The company beat analyst expectations on adjusted earnings per share (EPS) but missed revenue estimates for the quarter.

Reported GAAP diluted earnings per share (EPS) was 86 cents for the fourth quarter, a 4.9% increase from Q4 2020; GAAP diluted EPS for 2021 was $3.42.

Consolidated GAAP revenues and adjusted revenues were $2.6 billion for the year, a 9.5% increase compared to 2020. Skilled nursing income increased 14% from 2020 to 2021, landing at $373.6 million for the year.

For the quarter, Ensign’s SNF segment income increased to $100.2 million, a 19.1% increase from 2020 Q4.

“We think it supports our thesis that Ensign’s unique operating model can consistently add value and outperform peers despite broader industry challenges,” Stifel analysts said in their note on the results.

Shares of Ensign on Thursday were up 5.32%, to close at $78.98 on the Nasdaq.

Ensign has consistently beaten earnings per share (EPS) the past two years, and has beaten revenue estimates 63% of the time during that period, according to Seeking Alpha.

The company’s allocation of FMAP dollars to cover COVID costs during the latest surges helped bolster margins in the fourth quarter, but CEO Barry Port expects that funding to “taper off,” hopefully along with Ensign’s dependence on such funding. In this case, margins should not decline as government support wanes.

“We’re using the funds only to the extent that we have COVID-related expenses,” explained Port. “Our focus this year is on returning to fundamentals after having so much time and focus and energy on the pandemic-related issues.”

The company in 2022 plans to return to its efficient operating model once COVID is less of a central focus, Port added.

While Port expects the public health emergency (PHE) to subside in the second half of 2022, he said Ensign will be able to make “operational adjustments” depending on COVID trends or changes in the political climate.

“If COVID continues to have different variants and outbreaks, that support might continue, but we’re taking a guess that it will likely end sometime this year,” said Port.

While addressing staffing concerns, Port said about 5% of nursing expenses are attributed to agency use. Although the percentage is “much lower” than Ensign’s competitors and a small portion in overall labor costs, Port still said it’s a significant burden which the company is focused on reducing.

Port expects the expense will lessen as direct hires increase.

“We’ve seen a massive increase in our hires over the past two quarters. We’re seeing more evidence of that in the first quarter which is a really good lead indicator that we’re starting to see light at the end of the staffing tunnel,” he said.

He listed Pinnacle Nursing and Rehab, a facility in Utah, as a good example of how a SNF team has led successful staffing initiatives.

In an effort to prevent employee turnover, facility leadership pioneered an in-person and virtual certified nursing assistant (CNA) training program. The team also partnered with a local community nursing college to ensure an inflow of clinicians.

As a result, the facility’s turnover rates are less than a third of the national average, Port said, and the facility created a pipeline of worker referrals from employees encouraging their friends and family to join the Pinnacle team. Pinnacle is an affiliate of Ensign.

“The successful culture at Pinnacle continues to produce exceptional clinical outcomes, including a five star rating overall for quality measures,” Port added. “Similarly, the facility increased revenues, occupancy and skilled mix throughout 2021 which resulted in the 31% EBIT growth over 2020’s record financial performance.”

M&A momentum

Since its third financial quarter earnings release, Ensign took over operations at six skilled nursing properties across four states, and the real estate of five SNF and assisted living facilities in three states.

Ensign added 17 operations to its portfolio in 2021, including the six facilities. The growth brings Ensign’s health care operations to 248 locations across 13 states; the company owns 101 real estate assets, 70 of which it operates.

“We expect strong recent momentum to carry on in 2022,” Stifel analysts said of Ensign’s Q4 M&A activity. “The struggling SNF industry creates many opportunities for Ensign to consolidate at a faster pace than prior years.”

Keetch said turnaround opportunities, including leases and real estate purchases, are strong and improving – “several deals” are expected to close in the next few months and the Ensign team anticipates 2022 to be an active acquisition year.

“We have a lot of dry powder to grow, both from a leadership and a capital perspective, but will always make sure we stay true to our principles of disciplined growth,” Keetch noted.

When asked about elevated valuation in terms of M&A activity, Keetch said he’s seen an uptick in deals over the last three weeks as pricing – at least for deals Ensign is looking at – has become “a lot more realistic.”

Ensign’s new REIT platform also “broadens the pipeline,” the Stifel analysts said.

The REIT structure allows Ensign the option to do a spin-out or other transactions without “duplicating efforts,” Keetch said, while the in-house concept maintains a cultural connection between its real estate business and facility operations.

For context, Ensign continued to buy real estate after its CareTrust REIT spin-out several years ago. Standard Bearer “checked a lot of boxes” for the company, Keetch said when the structure was first announced in December.

“This new structure gives us more flexibility to grow in new ways without triggering significant capital gains tax and other inefficiencies, provides us with additional flexibility and deployment of capital and gives us full visibility into the growing value of our real estate,” he summarized on Thursday’s call.

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