Leadership at The Ensign Group (Nasdaq: ENSG) feel confident about its future growth and financial stability at this point in the pandemic, as occupancy continues to improve while labor woes subside.
Ensign CEO Barry Port pointed to the most recent SNF final rule issued by the Centers for Medicare & Medicaid Services (CMS) as well during the company’s 2Q earnings call, noting the more favorable 2.7% bump in payments for 2023, along with the two-year spread of Patient-Drive Payment Model (PDPM) cuts.
“It’s certainly encouraging to see the recent events on the increased market basket adjustment and the two-year runway on the parody adjustments,” Port added.
Given a successful track record of the industry making their voices heard by CMS, most recently with the final rule, Port believes any mandates the agency seeks to implement will likely be reasonable.
“We’re not worried about what that will end up looking like in the end, mostly because we feel like we’ve got a seat at the table,” Port noted, referring to the federal minimum staffing ratio due to be proposed next year.
Port said Ensign’s localized business model was “built for times like these,” highlighting the importance of locally-driven leadership that has allowed the company to push through Covid trends, effectively use government waivers and navigate political climates.
“Our operating model allows for each operator to independently adjust to the needs of their local markets, while also drawing on metrics and insights gained through best practices made possible through our transparent culture, including methods for attracting new health care professionals into our workforce and retaining and developing existing staff,” Port said.
Breaking down small market success by the numbers
Ensign’s results amid labor market challenges and a global pandemic are “not coincidental,” Port added.
In terms of labor, Ensign reported a 4% drop in agency use compared to the first financial quarter across the board. Another labor metric Ensign has been paying close attention to – turnover – is lower than that of their peers, Port said, although he wasn’t able to give a consolidated number during the call.
Nursing home operators on average are experiencing a 25% increase in turnover compared to last year, according to the 45th annual Nursing Home Salary & Benefits Report published on Thursday by the Hospital & Healthcare Compensation Service. Ensign, meanwhile, has experienced an improvement in turnover from year to year.
“Those two metrics give us a lot of hope for where we’re headed. Certainly wages are higher and that’s expected but as reimbursement adjusts around that, when we look at what we can control, we feel pretty optimistic about the path ahead,” Port said.
Ensign’s operators were also able to achieve sequential growth in overall occupancy for the sixth consecutive quarter, Port said. Same store and transitioning property occupancy increased by 1.8% and 6.4% compared to 2Q of 2021, respectively.
Ensign reported a 14.7% increase in year-over-year revenue despite a still challenging operating environment for nursing homes, and a 15% adjusted EBITDA growth. The company increased its full year guidance from $4.05 to $4.15 earnings per share (EPS), and annual revenue guidance from $2.96 billion to $3 billion.
Total skilled services revenue was $702.5 million for the second quarter, an increase of 14.6% compared to 2Q of 2021.
In terms of acquisitions, Ensign signed off on 11 acquisitions during the quarter and after, Ensign CIO Chad Keetch said during the call, while its real estate investment trust (REIT) Standard Bearer acquired six new skilled nursing assets.
Acquisition activity brings Ensign’s growing portfolio to 259 health care operations across 13 states.
As Ensign accelerates growth and investments, expanding margins and improving reimbursements, all while issuing higher guidance, Stifel analysts say the company’s consistency in growth and profitability deserve more credit.
Market-specific business model in action
Port pointed to Atrea Health and Rehabilitation in Phoenix, Ariz. and Los Angeles-based Panorama Gardens Nursing and Rehabilitation as further examples of Ensign’s market-specific business model in action.
The 161-bed Atrea facility was purchased just eight months ago as a turnaround facility, Port said. The building was in “desperate straits,” placed on CMS’ special focus list and falling to a one-star Medicare rating.
Within the first two quarters since acquisition, the Atrea team grew occupancy by 12% and revenue served by nearly 40%.
Facility leaders relied on cluster partners in the market to help support training initiatives, Port said, and in turn facility staff implemented and fine-tuned best practices to improve outcomes and efficiency.
Existing employees “blossomed into incredibly effective department leaders,” added Port, after years of being underutilized and underappreciated.
Panorama is a same store legacy facility, and has the lowest turnover rates out of the entire Ensign organization at 14%, continued Port. The Los Angeles facility was able to maintain 98% occupancy for the second financial quarter without using agency staff.
Total skilled days have increased by 20% at Panorama, and managed care days increased by 20% compared to 2Q 2021. A “relentless focus on eliminating waste and managing fundamentals” also led to a 56% increase in EBITDA compared to 2Q 2021.
“These facilities, and many others like them, are sharing their strategies and processes with their cluster partners and the rest of the organization. This allows these best practices to spread quickly and elevate performance everywhere,” Port said.
Ensign’s busy summer of deals
Keetch said the team has had a “very busy summer” so far with its 11 new acquisitions during the second quarter, including six SNFs in Texas and one in Nevada.
Other acquisitions included two senior living operations in California, one in Washington and a “health care campus” in Arizona.
The new properties represent an expansion into Ensign’s more mature geographies like Arizona and Texas, while Nevada is a new health care market for the company.
“We can’t wait to see each of these additions contribute to the success of their clusters and their markets as they implement proven Ensign operational and clinical principles,” said Keetch.
Standard Bearer added six new SNF real estate operations, all of which will be leased to an Ensign-affiliated tenant, Keetch said. The REIT brought in $17.6 million in revenue for the quarter, a 23.8% increase from the prior year quarter. Funds from operations (FFO) was $12.1 million for 2Q.
Properties include: 99-bed Premier Care Center in Palm Springs, Calif.; 97-bed Brookside Healthcare Center in Redlands, Calif.; 138-bed Broadway Villa Post Acute in Sonoma, Calif.; along with the real estate and operations of The Eden of Las Colinas, a 118-bed facility in Irving, Texas; Villa Maria Post Acute and Rehabilitation, a 65-bed facility in Tuscon, Ariz.; and Park Manor of McKinney, a 138-bed facility in McKinney, Texas.
The ratio between leased and owned will vary depending on circumstances, Keetch said of the REIT’s assets, while the group “first and foremost” focuses on the operational health of acquisitions.
“These acquisitions continue to showcase one of Standard Bearer’s primary strategies, which is to capture the upside created by Ensign operators and properties that have historically been subject to a long-term lease,” Keetch said.
Standard Bearer comprises 101 properties owned by the company, 73 of which are leased to affiliated skilled nursing and senior living operations.
Looking ahead, Keetch expects Ensign to have a busy fall and winter as well, and even more growth into 2023. Pipeline opportunities for the company’s typical turnaround property acquisitions and leases is growing, he said. Struggling operators are eventually reaching a point where they will make their properties available for some sort of deal.
“In the meantime, we have a handful of new additions we’re closing on in the coming months and continue to see new opportunities arise every week,” Keetch said. “In some cases, particularly with larger deals, pricing is still out of whack.”
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