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Edited Transcript of ENSG earnings conference call or presentation 6-Feb-20 6:00pm GMT

Q4 2019 Ensign Group Inc Earnings Call

MISSION VIEJO Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Ensign Group Inc earnings conference call or presentation Thursday, February 6, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry R. Port

The Ensign Group, Inc. - President, CEO & Director

* Chad A. Keetch

The Ensign Group, Inc. - CIO, Executive VP & Secretary

* Suzanne D. Snapper

The Ensign Group, Inc. - CFO & Executive VP

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Conference Call Participants

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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Frank George Morgan

RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst

* Gerard Carmelo Campagna

Stephens Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to The Ensign Group Fourth Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Chief Investment Officer, Chad Keetch. Sir, please go ahead.

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Chad A. Keetch, The Ensign Group, Inc. - CIO, Executive VP & Secretary [2]

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Thank you. Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, February 28, 2020. We remind any listeners that may be listening to a replay of this call that all the statements made are as of today, February 6, 2020, and these statements have not been nor will be updated subsequent to today's call.

Also, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason.

In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly-owned independent subsidiaries, collectively referred to as the service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly-owned captive-insurance subsidiary, which we refer to as the captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as for workers' compensation insurance liabilities. The words Ensign, company, we, our and us refer to the Ensign Group Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the service center and the captive are operated by separate wholly-owned independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of the terms we, us, our and similar terms used today are not meant to imply nor should it be construed as meaning that The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group.

Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available on yesterday's press release and is available in our Form 10-K.

And with that, I'll turn the call over to Barry Port, our CEO. Barry?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [3]

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Good morning, everyone. We are thrilled to report another record quarter, as we achieved our highest earnings per share in our history. These record results were achieved even without the significantly positive contribution of the very healthy operations of the Pennant Group that we spun out in October. Our GAAP earnings per share for the fourth quarter was $0.49, an increase of 48.5% from the prior year quarter. And our spin-adjusted earnings per share was $0.60, an increase of 39.5% over the prior year quarter and an increase of 33.3% sequentially over the third quarter.

Our GAAP earnings per share for the year was $1.97 and adjusted earnings per share was $2.24, up 29.5% for the entire year. Most of the improvement we experienced this year came from strong growth in occupancy, in skilled mix days and revenue across same-store, transitioning and newly acquired operations.

We are pleased to see our same-store occupancy rise again to 80.3%, an increase in 216 basis points over the prior year. Similarly, we also saw an increase in our transitioning occupancy to 78.1%, an increase of 279 basis points over the prior year. In addition, this is the fourth quarter in a row we have experienced an increase of over 150 basis points in occupancy in both same-store and transitioning operations quarter-over-quarter. These results are made positive -- possible by the extraordinary local, operational and clinical leadership teams and all of their field-based and service center partners who put their heart and soul into their respective stewardships every single day.

We are especially impressed that these amazing leaders were able to achieve these record results in the midst of a -- of completing a transformative spinoff transaction and implementing a brand-new reimbursement system, both of which could have been -- become excuses or distractions. Instead, our local leaders were able to pull off something truly remarkable. With all of that going on, we saw a significant bottom line improvement in all 21 markets in which we operate, including some of our newer markets. These results were the combination of the number of improvements on multiple fronts, including occupancy, skilled mix, self-insurance programs and collections. In addition, we made dramatic improvements to our transitions process and are very pleased with the performance we saw from nearly all of our newly acquired buildings.

While we have been making progress in each of these areas at different times, we are encouraged to see those efforts paying off, as these improvements are occurring simultaneously in nearly every single market. We also want to remind you that we can see tremendous organic growth potential in our 73 transitioning and newly acquired operations as well as our 140 same-store operations. It often takes several years to truly transform a health care operation as the clinical, reputational and cultural transitions take time. The improvement we have been expecting in many of our operations continues to materialize, and we are very excited about our continued operational momentum and expect it to continue into 2020.

As most of you know, we just completed our first quarter of operations under CMS's patient-driven payment model or PDPM. We are grateful to our team members who have worked tirelessly to ensure that we're ready for the program when it went live and continue to help each operation adapt.

We congratulate CMS for creating an excellent long-term patient-centered program that rewards operators that serve high-acuity patients and deliver high-quality outcomes. After adjusting for the recent market basket increase, we experienced a range of growth from approximately 3% for our transitioning operations to approximately 6% for our same-store operations, which generally serve a higher-acuity patient as they mature into clinically complex operations.

As we pointed out in the past, there is a shift in the acuity and complexity, as we build clinical strength and capability. So it's no surprise that our same-store buildings are reflecting a higher rate improvement. Our locally driven model of improving our clinical capabilities has always been focused on increasing our acuity, which has resulted in consistent improvement in earnings, independent of the current rate environment.

While we experienced a modest rate improvement in our first quarter under the new system, the lion's share of our performance during the quarter is totally unrelated to the PDPM impact. We want to remind you all that this is just 1 quarter, and we believe it will take several more quarters to have a better sense for the long-term impact of PDPM.

We are confident that our performance in the past, present and future, are sustainable going forward, independent of PDPM.

Given the strength of the quarter and our expectations for continued improvement over the next few quarters, we are raising our 2020 annual earnings guidance by 12.4% to $2.50 to $2.58 per diluted share and annual revenue guidance of $2.42 billion to $2.45 billion. We are very optimistic that with the continued upside that is inherent in our portfolio and the attractive acquisitions on the horizon that we will be able to continue to meet or exceed our historic growth rates. To underline this confidence, the midpoint of our 2020 guidance represents an increase of 30.3% over the 2019 spin-adjusted results, which was $1.95 per diluted share when adjusting for the full year impact of the Pennant spinoff.

In addition, this guidance represents an increase of 13.4% over our adjusted-diluted 2019 results of $2.24, which includes Pennant results for the first 9 months of 2019.

In the fourth quarter, we more than placed Pennant's historical earnings much sooner than anticipated, and we expect that trend to accelerate into 2020.

We are very excited about our performance this year and are confident that as our local leaders continue to stay true to our operating model, our strength will continue into 2020 and beyond.

We have not even come close to reaching our full potential. And to do so, it will take a relentless commitment to our culture and a rigorous adherence to sound fundamentals.

And with that, I'll ask Chad to give us an update on our recent investment activity. Chad?

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Chad A. Keetch, The Ensign Group, Inc. - CIO, Executive VP & Secretary [4]

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Thank you, Barry. During the quarter, we paid a quarterly cash dividend of $0.05 per share, representing an increase of 5.3% over the prior year. This is the 17th consecutive year we have increased our dividend, which we hope shows our continued confidence in our operating model and our ability to return long-term value to shareholders.

Also during the quarter and since, we announced the acquisition of 1 independent living operation in Utah, that is part of a health care campus we have been operating for several years, 9 skilled nursing operations in Texas, 2 health care campuses in Texas and 1 skilled nursing operation in Arizona. In total, we added 58 senior living units in Utah, 1,431 skilled nursing beds in Texas, 194 senior living units in Texas, which were all part of campus additions, and 160 skilled nursing beds in Arizona. Of the 13 acquisitions, 8 included the purchase of real estate.

We now own 92 real estate assets and continue to methodically add value to that real estate by improving the operating results in our owned operations and by acquiring additional real estate assets. We remain very excited about the opportunities we have to unlock the value on our own real estate in the future and continue to evaluate various alternatives. But whatever we decide to do with that real estate, our focus has been and will always be to carefully consider the health of the operations and the long-term value that can be created in both the operations and the real estate.

In the meantime, our focus is on continuing to build equity value in these assets, most of which were distressed at the time we acquired them and are still maturing into Ensign-caliber operations. As we saw last quarter, the pipeline for our typical turnaround opportunities and well-priced strategic deals remain strong. We are still being very selective and are keeping plenty of dry powder on hand for what we believe will continue to be an attractive buyer's market.

We are very excited to grow within our existing geographical footprint and we'll continue to do so as we see significant advantages to adding strength in markets we know well, including some of our newly -- newer emerging markets, as they continue to mature and prepare for growth.

As I reminded you last quarter, our primary constraint to growth is not capital or pipeline, it's the availability of locally driven clinical and operational leaders. When we evaluate each opportunity, there are many factors we use to evaluate our level of interest, including the availability of local leadership, the building's reputation and the long-term return potential.

Our acquisition decision-making process relies on the local leaders and the health of their neighboring operations. When they are strong, it fuels our growth. And because we see health across so many of our markets, we have the ability to be aggressive in our growth when prices are right.

Whether it's 1 or 2 at a time or a larger deal that spans over several of our markets, our transition process is scalable. While we certainly have lots of room for improvement, we continue to perfect our transitions and have been very pleased with the results we are seeing in all of our 2019 acquisitions.

We remain confident, that, there are, and will be many opportunities to be had at right prices and are making the necessary investment in leadership talent that are all anxious to help us grow. As our fellow shareholders can attest, the spinoff of Pennant has created significant value. We are very pleased with the results of the spinoff so far, and are pleased to report that the separation of Pennant Group from Ensign has gone very well. We continue to remain closely connected to our Pennant partners and continue to work together as we seek ways to adapt to the ever-changing needs of our patients, payers and other providers, within the continuum of care. In the meantime, our unique entrepreneurial spirit remains alive and well, and we have several other companies that are in the very early stages of growth. We look forward to fostering our entrepreneurial culture and applying proven Ensign operational principles to each of those businesses.

And with that, I'll turn the call over to Barry. Barry?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [5]

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Thanks, Chad. Before Suzanne runs through the numbers, we'd like to share a few examples that represent some of the vast improvements that have been made over the quarter. We have consistently highlighted our strategy of acquiring underperforming operations, implementing CEO-caliber leadership and improving clinical capabilities. And as we pointed out, our operational improvements are almost entirely organic, as facilities in our portfolio progressed from newly acquired to transitioning to same store, we see dramatic changes. For example, in 2019, our skilled mix revenue for same-store operations was 51.2% compared to 44.9% for transitioning facilities. Having that kind of revenue and margin expansion opportunity in such a large portion of our portfolio represents tremendous organic upside as those buildings mature and expand their clinical expertise.

To help you get a better sense for this transformation, we'd like to provide some recent examples. In June of 2019, we acquired Golden Palms Rehabilitation and Retirement. A 60-bed skilled nursing, 51-bed assisted living and 99-bed independent living campus in Harlingen, Texas. This newly acquired health care campus was losing hundreds of thousands of dollars prior to our ownership, led by Executive Director, Brad Edmunds; and DON, Nadine Perez, Golden Palms has undergone some rapid expansion in its first 7 months. With a sharp focus on taking more complex patient profile, Golden Palms has seen total occupancy grow by 242 basis points and skilled mix grow by 471 basis points when compared to its first full quarter of operations. This has led to EBITDAR growth last quarter of 90.4% compared to its first 3 months of operation.

Golden Palms is well on its way to becoming one of the premier campuses in all of South Texas and has plenty of room to grow.

Desert Blossom Health and Rehabilitation Center is a 106-bed skilled nursing operation in Chandler, Arizona, that was acquired in 2017. It's a perfect example of how a transitioning facility improves in almost every conceivable way, since acquisition. CEO, Scott Petty, and Director of Nursing, [Meredith Balandin], have worked closely with their managed care partners to build up their capabilities and grow their reputation in the community. Over the first 3 years of operation, they grew occupancy from 77% in year 1 to 86.3% in year 2 and finally to 90.7% in year 3. Similarly, skilled mix days have grown from 34.3% to 36.6% to 40.2% in the first 3 years of operation. As a result, EBITDAR has grown by 161% from 2017 to 2019 with much more opportunity for growth over the next many years.

Finally, let me highlight a same-store growth story. Glenwood Care Center is a 99-bed skilled nursing operation in Oxnard, California, acquired in November of 2003. Executive Director, Tim Cooley; and COO, [Sheryl Santos], have continuously elevated performance in spite of being one of our flag flying operations. Through improved partnerships with large managed care organizations, local hospitals and dedicated physicians, they have developed a reputation as one of the most trusted post-acute providers in all of Ventura County. Glenwood has never plateaued, and their team continues to improve and innovate in order to continue to grow. Accordingly, they have seen occupancy grow by 256 basis points and skilled mix revenue by 577 basis points when compared to the same quarter in 2018, resulting in EBITDAR growth of 17.6%.

Our local leaders are the reason that Ensign operations continue to set the standard for post-acute care, one operation at a time. As these examples demonstrate, as a true Ensign operation, this progress endures for many years beyond acquisition. This incremental improvement is at the heart of our story.

And with that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance. And then we'll open it up for questions. Suzanne?

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [6]

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Thank you, Barry, and good morning, everyone. Detailed financials for the year are contained in our 10-K and press release filed yesterday. Some additional highlights for the year and the quarter include the following. GAAP net income was $91.7 million, an increase of 54.1% over the prior year. Spin-adjusted net income for the year was $109 million, an increase of 40.5% over the prior year. Same-store and transitioning skilled managed care revenue increased by 8.4% and 15.7%, respectively. Consolidated GAAP revenues for the year were $2.29 billion and consolidated adjusted revenues for the year were $2.28 billion, an increase of 20.4% over the prior year. Other key metrics as of December 31 included cash and cash equivalents of $59.2 million and $135 million of availability on our revolving line of credit.

We maintained a lease-adjusted net debt-to-EBITDAR ratio of 3.95x at quarter end, a decrease from 4.14x when adjusting the prior period for the spinoff. This is particularly impressive, given that we had a heavy quarter of acquisitions, which tend to temporarily raise the ratio while EBITDAR from new acquisitions catches up. Also, our cash flow from continuing operations for the year was $168.9 million. These improvements are attributable to the growth in our EBITDAR from same-store, transitioning and newly acquired operations and enhanced cash collections.

We've raised our previously announced 2020 annual guidance to between $2.50 to $2.58 per diluted share, and revenue to between $2.42 billion and $2.45 billion. The midpoint of this 2020 guidance represents an increase of 30.3% over our 2019 spin-adjusted results, which were $1.95 per diluted share. The increased 2020 guidance is based on diluted weighted average common shares outstanding of approximately 57.6 million, tax rate of 25%, the inclusion of acquisitions expected to close in the first half of the year, the exclusion of losses associated with start-up operations, which are not yet stabilized, the inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax, with the primary exclusion coming from stock-based compensation.

Additionally, other factors that could impact our quarterly performance include: variations in reimbursement systems, delays and changes in state budgets, the seasonality of occupancy and skilled mix, the influence of a general economy on our census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals and other factors.

And with that, I'll turn the call back over to Barry. Barry?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [7]

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Thanks, Suzanne. We want to, again, thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We're also appreciative to our colleagues in the field and the service center for making us better every day.

We'll now turn the -- turn to the Q&A portion of our call. Latif, can you please instruct the audience on the Q&A procedure?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chad Vanacore of Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [2]

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So just thinking about the increase in guidance, you listed EPS guidance for 2020 by 12%. How much of that would you attribute to the accelerated acquisitions pace and then how much toward internal performance?

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [3]

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No. I think, when we look at it, it's really -- the vast majority is the internal performance. I mean, I think, when we went out there in Q3 and looked at the acquisitions that we were going to take on, pretty much everything that we included and accomplished in Q4, all those acquisitions were known. It was just a matter of timing if they were going to come in, in December or if they were going to come in, in January.

And so we were able to get those in a little bit earlier. But the vast majority of it has to deal with just that continued performance. I think one of the things that we continue to see is that occupancy number grow up quarter-over-quarter over the 150 basis points for the last 4 quarters. We continue to see that skilled mix drive like we have been seeing all year long. And so just that continued confidence that we had gotten to that next level of maturity. And had so many more of the individual operations, be at that greater than 80% occupancy, gave us that continued confidence that we could boost up the earnings.

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [4]

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I'd just maybe add to that, Chad, that it's just -- it's also -- it also is a function of how the acquisitions have been transitioned over the last many quarters and how they've become more accretive earlier for us as well.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [5]

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Okay. And then just looking at the quarter, rates seem to be the primary driver of outperformance in the quarter. I noticed skilled mix by days, basically flat year-over-year, but skilled mix by revenue was up 110 basis points.

So can you give us some more color on what drove that Medicare and Medicaid Advantage rates up? And were there any end-of-the-year true-ups or any more onetime items we should consider?

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [6]

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Yes. And I think we've talked to you about this a little bit. When you look at our numbers as a percentage of the overall, and so looking at a skilled mix as a percent, it's a little bit misleading.

I think one of the things you need to step back and look at, I know we put these in our releases, is looking at the increase on a whole day and whole dollar amount for revenue. And so on a whole day, it actually increased pretty substantially on the Medicare and managed care and other skilled fronts, as skilled as a whole day and whole revenue dollar increased. So the skilled mix as a percentage of the outlook is pretty flat. But when you look at the underlying data, you actually -- we actually did see a drive in those. And you can see that because you could see the continued occupancy growth.

Turning to the rate portion of your question. I think we continue to see, as we always do in Q4, that's when all of our rates pretty much are in for a full quarter, including the Medicaid rate, Medicare rate, and we have a couple of the managed care rates that come in during the fourth quarter. And so those are both -- the managed care rates are a combination of level patients, some people are on the RUG system still, they did not flip over to the PDPM and a few of them flipped over to the PDPM.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [7]

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All right. Well, then thinking about one of the things that might affect the rate was the PDPM impact. So what's your experience been in terms of like rate? And then on the cost side of that? And then maybe you could share with us how much group of concurrent therapy you're using nowadays in the Medicare population?

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Chad A. Keetch, The Ensign Group, Inc. - CIO, Executive VP & Secretary [8]

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Yes. I'll take that one, Chad. So when we look at how we performed under PDPM, our -- if you look at it and break it out by bucket, it presents a little bit clear story. So about 3% improvement on rates. When you factor out the market basket increase, 3% for transitioning, and it's about 6% for same-store on the rate side. And obviously, as we've said before, our focus is on acquiring unsophisticated buildings and transforming them into an acute clinical powerhouse. And so part of that transformation is raising acuity and you see that in the difference in the rates between those 2 buckets.

I'll tell you that there are some acuity-related expenses that also go up as well. Nursing costs go up a little bit as we -- you would expect to when we see an increase in acuity. But that increase in acuity didn't necessarily come as a function of PDPM, that came as a function of our increase in skilled census.

And so you see some of the acuity-related expenses also drive up as you see the rates go up. So looking at the rate by itself, it's not a perfect picture of what's happened as a function of acuity. But if you look at them together, there definitely was an improvement from PDPM, kind of -- we saw what happened with PDPM was a little bit of the opposite what CMS said would happen. But it makes sense when you consider that acuity drove -- our acuity level drives our rates higher, but also drives our expenses a little bit higher as well.

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [9]

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So Chad, just to add to that. One thing I think we want to make sure we underline is, while that's been our experience, it's not a comment on other buildings in the space. I mean our -- the acuity level on our buildings isn't necessarily representative of what you see in, for example, a building we're looking to acquire.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [10]

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All right. Chad, just thinking about acquisitions, knowing that you're opportunistic, but do you have a more or less target deployment of capital for acquisitions this year in mind?

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Chad A. Keetch, The Ensign Group, Inc. - CIO, Executive VP & Secretary [11]

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We really don't, Chad. I know that sounds odd, but we -- our focus is to just be very opportunistic on that front. And I will say that we have the capacity to do more deals this year, for sure, both on the balance sheet side, but also just the strength of our operations. We have -- as Barry mentioned, we improved in all 21 of our markets in 2019. And to the extent there's strength in each of those markets, their ability to grow follows with that.

So I think the scope of geography that we're looking in this year might be a little broader than it's been in the past. But, yes, we really don't have a dollar target. We're just going to take each deal, as they come one at a time and use the sound fundamentals that we've always used to evaluate each of them.

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Operator [12]

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Our next question comes from Scott Fidel of Stephens.

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Gerard Carmelo Campagna, Stephens Inc., Research Division - Senior Research Associate [13]

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This is Gerard on for Scott. Yes, just a couple of questions here. You guys called out growing in all 21 of your markets. Just curious what you guys are maybe seeing from an industry perspective? Or is that growth kind of primarily driven by your market share gains or is seeing kind of any underlying growth in just the overall industry?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [14]

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Yes. Certainly, we see -- and good question, Scott. We see improvements in our relationships in each of those markets with payers and acute providers. But really, it's a function of our model, Scott.

We -- our leadership model is kind of coming to fruition in most of our markets and maturing in a very healthy way. We see each of our markets improving on kind of similar fundamentals across the board. That's really sound collections growth in total occupancy and skilled mix across the board and then just improvements in all of kind of our underlying business fundamentals.

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Gerard Carmelo Campagna, Stephens Inc., Research Division - Senior Research Associate [15]

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Great. Now that's helpful. And then maybe just a separate question. Obviously, you've talked a lot about occupancy in the same-store and transitioning buckets. We left 2019 at, call it, 78% and over 80%. Just can you help us think about the kind of incremental opportunity that's left in those buckets and maybe kind of the maturity of the facilities, I guess, that would translate really more to the transitioning bucket and kind of where those facilities are along that time line then at this point?

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [16]

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Yes. It's a really great question. I think really what you're trying to drive at is, is there room for additional growth in each one of the buckets that we have as far as occupancy goes.

And absolutely is the answer to that question. When we have -- we report 80% on average. We have a very high proportion of the same-store operations, who aren't even close to that 80%. And the same thing when you go down to the transitioning buckets and other buckets. There is a very large percentage of each 1 of those buckets where the operations aren't even close to that average. So it's not that we have most of them operating at the average, but we really have a vast majority of them operating below the average.

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Operator [17]

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(Operator Instructions) Our next question comes from Frank Morgan of RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [18]

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I know you called out the rate growth differential between your same-store and your transitioning portfolios. And I'm curious, how -- and part of that's driven by clinical mix, how long does it really take to transform that clinical mix of a facility? I mean is it fair to say that the transitioning bucket could also have a similar rate growth profile? But how long would that take?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [19]

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It really varies building by building, but that's the model that we try to employ. Yes, in some operations, that can happen much quicker, Frank, and other operations, it takes a little longer. It really kind of depends on kind of the underlying clinical reputation and capabilities a building had in the past. But the opportunity is definitely there. When you talk about the buckets as a whole, the opportunity for growth is there.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [20]

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I guess, a question -- just looking at your consolidated margins, I mean, when I look at the occupancy growth and the rate growth in all those positive levers, I look at a nice 50 basis point improvement in the consolidated margins, but it looks like -- I almost would have thought it could have been even more than that. Is there sort of a target margin you think you can get to once you sort of -- more of these transitionings get up to the same-store level? And maybe any kind of color around what is -- maybe not exact numbers, but just sort of what is the margin differential between the same-store and the transitioning?

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [21]

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Yes. Maybe -- and just to add a little bit to what Barry said on the first -- the other question on clinical. I mean, there is a ton of upside. I think you saw Barry give us 3 examples to hopefully try to demonstrate the Glenwood that we have out there, where we've got continued clinical improvement over time and the subacute units that we've added on other clinical services, so just to make sure you have a full picture of that. There is this continuous cycle where we can get more and more sophisticated from the continued -- for the clinical outcomes and clinical services that we could provide and add-ons that we could provide.

And then when you're looking at the margin portion of the business, obviously, if you're looking at consolidated, especially in the quarter, like we've been talking about, where we had a very heavy acquisition period. That's going to bring that consolidated margin down pretty substantially because when we take those acquisitions on and they're turnaround acquisitions, they just aren't putting -- bringing a lot to the bottom line.

We've gotten better, but that doesn't mean all of a sudden that they're putting it -- there's a ton of dollars hitting to the bottom line. We expect that to accelerate, based upon our new processes and things that we put in place and the strength that we have out in our markets, but -- and that's why you see that guidance go up, too, is that we think that we could have that continued strength and then more hit the bottom line throughout the quarters coming up.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [22]

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Got you. And then you mentioned in the earlier prepared remarks about the -- noting the size of the growth in the real estate portfolio. And that you might be looking at considering something down the road. Is there sort of a benchmark level of facilities that you would want to get to before it actually is worthy of the time to consider some type of transaction? So I guess, that'd be my next question.

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [23]

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Yes, Frank, not really. I think the focus there is more about making sure that, that equity value that I mentioned is not maximized, but at least on its way to being there. Most of those real estate assets are still pretty new, at least to us.

And so our focus is more about turning the operations around and making sure that they're humming on all cylinders before we were to try to unlock the value. We wouldn't want to do that too soon, if that makes sense.

So certainly, there's a critical mass there with 92, but just keep in mind how new those are to us.

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Chad A. Keetch, The Ensign Group, Inc. - CIO, Executive VP & Secretary [24]

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Got you. We are at the size now in terms of number of real estate assets, that we were when we spun off CareTrust.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [25]

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Great. That was going to be one of my questions. Okay. And then finally, just any updates you might have on the -- some of these potential proposals around Medicaid supplemental payments (inaudible). Just any thoughts or updates you have there, and I'll hop-off.

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [26]

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Yes. Look, we don't get too overly worried about what we see in some of those. Obviously, the CMS put out some initial kind of proposals that we don't believe will stand as they were initially released. We don't spend a whole lot of time worrying ourselves about that. We know there's a lot of support behind making sure there's kind of a tempered approach taken by CMS. We're actively involved in discussing proposed changes with CMS, the American Hospital Associations involved in that comment process, as is the National Governors Association. So there's a lot of dialogue happening, and we expect that there will be some dialing back from what was initially put out there. But we're not too overly concerned about it at this point.

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Suzanne D. Snapper, The Ensign Group, Inc. - CFO & Executive VP [27]

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Yes. And with regards to the [MPAR] proposal, even in the proposal, the potential implementation time is a couple of years out. And so I think that, that will give -- and like you've seen us do before, when a new regulation comes, we do prepare. And so we adjust and make sure that we know whatever the relation may be, we have a plan in place that we can execute on when new things come out.

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Operator [28]

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At this time, I'd like to turn the call back over to CEO, Barry Port, for closing remarks. Sir?

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Barry R. Port, The Ensign Group, Inc. - President, CEO & Director [29]

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We'd like to thank everyone for joining us, and we'll go ahead and wrap up the call. Thank you.

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Operator [30]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.