The Ensign Group (Nasdaq: ENSG) is in a position to grow in select markets, while its newly-formed real estate investment trust (REIT) Standard Bearer allows the skilled nursing giant to finance other promising operators in the sector.
Ensign executives discussed future M&A plans and what it looks to accomplish through its REIT during a virtual non-deal roadshow (NDR) on Wednesday with Stifel.
Stifel analysts mentioned in a note published this week that Texas markets in particular are a potential growth area for Ensign. The company operates 50 facilities in the state – which has 1,400 total – and only four SNFs in Houston.
“With 2% market share, Ensign is still a regional operator in a highly fragmented industry, and there is plenty of space to grow,” the analysts noted.
Ensign’s M&A is ahead of their 2021 pace already, with 10 completed deals year-to-date; leaders have $800 million in liquidity to work with for future acquisitions.
The San Juan Capistrano, Calif.-based post-acute health care services provider and investor sees itself as an “incubator of new business,” as all of Ensign’s subsidiaries are profitable.
The company also sees at-home dialysis as a promising business, according to Stifel.
Management still feels pricing is too aggressive compared to underlying earnings, Stifel analysts said; Ensign was outbid in a few deals by private buyers.
Rising rates and the lack of government support moving ahead should change M&A aggressiveness, Stifel analysts noted.
Looking ahead, Ensign is exploring value-based programs, including partnering with another company to form an I-SNP.
Such plans fit well for the more acute needs of SNF residents.
The team also discussed Covid trends, the state of the labor market and business innovations in the works during the NDR.
Most notably, Ensign executives expect the three-day stay waiver to end this summer, which is tied to the public health emergency (PHE). Health and Human Services (HHS) is expected to extend the PHE beyond July 15, as the entity said it will give the sector 60 days notice before announcing its final end.
While Ensign has seen an uptick in Covid case counts recently, leaders told Stifel the increase is not as severe as previous surges, and hospital referrals have not slowed as a result.
Covid testing and personal protective equipment (PPE) have cost less too in recent months, Ensign leaders said. The vaccine mandate has not been an issue and if staff do contract the virus, the quarantine period is cut in half, from 14 to five days.
Ensign leaders see labor pressures “stabilizing,” Stifel said, as the level of agency staff has improved in April and May. From the end of 2021 to February of this year, agency use at Ensign properties peaked around 5% – average levels are usually around 1-2%.
Staff turnover has been flat at 60%, which is considerably better than the overall industry’s 100%. More than 400 of Ensign’s employees have earned seven-figure equity value in grants received, resulting in 15% leadership turnover, according to Stifel.
Ensign has an “edge” over others in the industry in managing labor challenges, Stifel said, given its cluster model.
“Local leaders have full transparency over and real time data on each other’s operation in the same cluster,” Stifel analysts said. “They engage in ongoing dialogue on operations including sharing of staff, setting the right wage rate, use of agency.”
Ensign executives believe the company will be able to handle an expected patient-drive payment model cut, even if the Centers for Medicare & Medicaid Services (CMS) applies the full 4.6% in one year. Sector leaders have discussed the possibility of the PDPM cut spread over a couple years, but the industry won’t know for sure until the final rule is published in July.
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