Ensign COO: No Slowing Down on Deals as 3Q Marks Busiest Acquisition Quarter in Years

The Ensign Group (Nasdaq: ENSG) kept busy during the third financial quarter, signing off on a whopping 17 new skilled nursing deals.

Ensign COO Chad Keetch told listeners during the company’s latest earnings call on Thursday that it was “one of the biggest” acquisition quarters in several years.

The San Juan Capistrano, Calif.-based operator is poised to overtake Genesis HealthCare as the largest nursing home operator in the country — if it hasn’t already, according to ownership data released earlier this month by the Centers for Medicare & Medicaid Services (CMS).

The majority of facility acquisitions were in Texas, with the 12 properties ranging from 118-bed to 140-bed SNFs. Deepening its presence in the Mid-Atlantic, Ensign added two South Carolina properties to its list of assets, along with one 266-bed property in Nevada and two SNF properties in Arizona.

A small behavioral health unit and assisted living facility in Arizona were also purchased in 3Q. Additions bring Ensign’s growing portfolio to 268 health care operations across 13 states. Ensign owns 107 real estate assets, 78 of which it operates, according to the company’s earnings report.

Additions were “carefully selected” among many opportunities, although there are several markets that still have yet to see pricing improve, according to Keetch. Ensign’s wealth of operational bandwidth, thanks to its locally-driven operating model, will allow further growth across dozens of markets.

“Looking forward we have another busy fall and winter ahead of us and are preparing for even more growth in 2023,” said Keetch. “While we expect the pace of closings to slow for the remainder of the year, we continue to see a wide range of large, medium-sized and small portfolios, some of which are strong performers.”

Standard Bearer, Ensign’s real estate investment trust (REIT), also announced the acquisition of three SNFs in California, two in Texas and two in Arizona, along with an assisted living facility and behavioral health unit; there appeared to be some overlap in property names between what was announced for Ensign acquisitions and those attributed to Standard Bearer.

Strong performance despite headwinds

Stifel analysts expect continued outperformance from Ensign into 2023 even as economic uncertainties are high, citing an experienced management team, its localized operating model, disciplined capital allocation and a strong balance sheet.

Ensign is raising its earnings guidance for the year once again, from $4.10 per diluted share to $4.80 per diluted share. Annual revenue guidance increased from $3.01 billion to $3.02 billion.

Ensign CFO Suzanne Snapper based guidance on the inclusion of acquisitions in reimbursement expectations, along with one-time gains from asset sales.

Snapper said variations in reimbursement systems, delays and changes in state budgets and seasonality as it relates to occupancy are factors that may impact quarterly performance in the months ahead.

Additionally, inflation pressure on staffing costs and census, “variations on insurance accruals” and changes with Covid-19 will also play a role in Ensign’s overall performance, she said.

Still Ensign has enjoyed stable, steady occupancy growth the past six financial quarters in a row, leadership said during the call. An increase in Covid cases during the third quarter affected both Ensign’s patient population and employee count.

“Obviously when you’ve got a situation like that, you tend to go backwards a little bit on your progress with agency,” said Port. “In spite of that, because of the offset we saw in our skilled mix and the acuity level of the patients that we were taking care of, we were able to mitigate a lot of that.”

Ensign reported same store and transitional occupancy increases of 1.0% and 1.6% respectively, compared to 2Q 2022. From Q3 2021, same store and transitioning occupancy increased by 2.4% and 5.3%, respectively.

Between Q3 2021 and Q3 2022, Medicare and managed care revenue improved by 13.9% and 9.7% for same store, respectively – transitioning Medicare and managed care revenue increased by 18.3% and 25.9% for the same period.

The operating giant disclosed an adjusted diluted earnings per share of $1.04, a 14.3% increase compared to Q3 2021. Total skilled services revenue for 3Q was $739.3 million, a 15.1% increase compared to Q3 2021.

Turnaround success and growth in new states

Ensign’s local leaders continue to transform struggling operations into facilities with sustained performance and long-term value, according to COO Spencer Burton.

Many deals on the market involve distressed properties, Burton said, including those acquired during 3Q. Despite low occupancy, high use of agency staff and poor clinical and financial health, Burton said Ensign’s cluster model and resource teams are ready for the challenge.

Using Westover Hills Rehabilitation and Healthcare in Texas as an example, Ensign acquired the facility in 2019 and was able to increase its star rating from one to five. From Q3 2021 to Q3 2022, Westover has seen occupancy jump by more than 25%, and revenues increased by 32%.

Approval and licensing to become a training site for certified nursing assistant (CNA) classes was a major contributor to its success, Burton said, along with partnership agreements between Westover and local nursing school to also be a training site for licensed practical nurses (LPNs) and registered nurses (RNs).

“They have increased their clinical competency, which enables them to accept high acuity admissions, and deliver great outcomes … as a result, hospital systems and managed care organizations have chosen Westover Hills for preferred partnership agreements,” added Burton.

Another example given during the earnings call, this time in South Carolina, speaks to an increasing presence in the state since 2016. After bringing existing four facilities to a financially solid place, all with four to five stars, the local market team took on more properties in 3Q.

Leadership at Opus Post-Acute Rehabilitation in the state has cut clinical turnover in half and increased occupancy by 18% and skilled revenues by 58% between Q3 2021 and Q3 2022.

“These results, in combination with similar progress in the other three cluster facilities, have allowed the office team to play a very active role in supporting the team in new South Carolina acquisitions,” added Burton. “Now they’re hard at work helping these new partner operations begin their own similar transformation.”

Mind the gap

While the public health emergency (PHE) was recently extended through January 2023 – enhanced Federal Medical Assistance Percentage (FMAP) funding along with it – operators may see a gap between the eventual discontinuation of FMAP waivers and permanent Medicaid rate increases in certain states, according to Port.

While Port is not concerned such a gap would impact Ensign’s revenue generally, he recognized it’s an unknown operators should consider.

In California and Arizona, Ensign has “good, long-term visibility” into 2023 rates, according to Port; these state Medicaid rates will be stable regardless of the state of emergency and FMAP funding, he said.

Wild card Texas, one of the company’s bigger states in terms of operations, may see a “really healthy increase” in the state Medicaid rate, Port added.

“The only piece that is uncertain is the timeframe between when the potential FMAP funding might go away and when the rate increase would happen towards the latter half of the year,” he said. “That will become more clear over the next couple of months. That’s really the only piece of the picture that isn’t entirely clear for us.”

Stifel analysts said healthy state funding and growth in its skilled mix helped Ensign rise above an “otherwise challenging” third quarter, thanks to labor disruptions and continuing inflation costs.

In terms of Medicare, there is a lot of visibility in terms of where the industry is headed – CMS finalized a 2.7% increase in skilled nursing payments for 2023, or a $1.7 billion increase, according to the final rule issued in July.

The agency will also be phasing in payment adjustments to the Patient-Driven Payment Model (PDPM) over two years – a 2.3% cut in 2023 and 2.3% cut in 2024.

“I feel like CMS has been really thoughtful about the changes they’ve made within the confines that they operate. We have a good outlook there,” added Port.