The Ensign Group, Inc. (NASDAQ:ENSG) Q4 2023 Earnings Call Transcript
The Ensign Group, Inc. (NASDAQ:ENSG) Q4 2023 Earnings Call Transcript February 2, 2024
The Ensign Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensign Q4 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Keetch. Please go ahead.
Chad Keetch: Thank you, operator, and welcome, everyone. 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, March 1, 2024. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, February 2, 2024, 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 independent subsidiaries 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 independent subsidiaries, collectively referred to as a service center provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other independent subsidiaries through contractual relationships with such subsidiaries.
In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims-made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare, REIT, Inc., which is a captive real estate investment trust that invests in healthcare properties and enters into lease arrangements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with the Ensign Group. The words Ensign, company, we, our and us refer to the Ensign Group Inc., and its consolidated subsidiaries. All of our independent subsidiaries, the Service Center, Standard Bearer Healthcare, REIT and the insurance captive are operated by separate independent companies that have their own management, employees and assets.
References herein to the consolidated company and its assets and activities as well as of the use of words we, us and our in similar terms are not meant to imply nor should it be construed as meaning that the Ensign Group 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 in 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?
Barry Port : Thank you, Chad, and thank you everyone for joining us today. Our local teams have once again posted impressive clinical and financial results and continue to build remarkable momentum in each market across our portfolio. Our success is entirely due to the efforts and commitment of those leadership teams, caregivers, field resources and service center partners. One of our most important priorities is to support those that care for our patients every day. After another record quarter, we're excited about the many opportunities to continue to capture the enormous potential inherent in our portfolio as we relentlessly focus on our operational fundamentals, both in existing operations and the growing number of new acquisitions.
We are pleased to see same-store occupancy of 79.9%, which grew by 240 basis points over the prior year quarter. In addition, we saw an improvement in occupancy on a sequential basis of 40 basis points over the third quarter. We saw increased volume in our combined same-store and transitioning managed care revenue and managed care census, which increased during the quarter by 12.3% and 3.5%, respectively, over the prior year quarter as a result of strengthened relationships with our managed care partners and quality outcomes. As expected, we saw an increase in our skilled mix during the quarter as our same-store days for the quarter increased by 110 basis points sequentially over the third quarter. We are encouraged by the continued strength in our skilled mix as it demonstrates the continuously increasing demand for skilled post-acute services.
By applying proven cultural and operational principles, our local leaders continue to retain and recruit high caliber individuals, which then go on to achieve tremendous success across our growing footprint. We continue to be encouraged by the reduction in our use of third-party nursing agencies, which improved again for the fourth quarter in a row, representing a reduction in agency usage of 58% since its peak in December 2022. We're also thrilled to see lower turnover for the third year in a row, which is a result of our local leaders' focus on our customer second philosophy, which has and will continue to result in better patient care and outcomes. Likewise, we are also encouraged to see the pace of wage inflation continue to slow along with improvement in our ability to successfully recruit new talent.
As of the end of the quarter, we saw net new hires increase by approximately 6,000 employees over the course of the year, which is particularly impressive given that from the start of the pandemic in 2020 until December 2023, there has been a 9% reduction in employment for the skilled nursing sector. We are confident that by being true to our cultural values, strong clinical results and proven operating principles that the near and long-term future is bright. We are humbled by what we were able to accomplish in 2023, but we are eager to continue to drive improvements in our existing portfolio, and take advantage of the acquisition opportunities that we see on the horizon. We are issuing our 2024 earnings guidance of $5.29 to $5.47 per diluted share and annual revenue guidance of $4.13 billion to $4.17 billion.
The midpoint of this 2024 earnings guidance represents an increase of 13% over our 2023 results and is 30% higher than our 2022 results. The annual guidance comes on top of the extraordinary growth we experienced in the last few years. To put this performance in perspective, since we spun out Pennant Group in 2019, we have seen adjusted EPS grow by 168% with a compound annual growth rate of 28%. The performance is not due to some large event or single transformative transaction, but instead is the result of consistent growth and performance quarter-after-quarter, which comes from following the proven Ensign principles. We are excited about the upcoming year and confident that our partners will continue to apply our proven, locally-driven healthcare model.
As we evaluate our expanding portfolio, we continue to see enormous organic growth potential within our existing portfolio and are very excited about the continued growth in occupancies that we experienced during the fourth quarter and that continued so far in the first quarter of this year. There are so many opportunities in front of us to improve in expense management and drive occupancy and skilled mix, as we continue to successfully unlock value in the dozens of recently-acquired operations. We are poised to again showcase our ability to find, acquire and transition performing and underperforming operations, by applying proven Ensign principles developed over two decades. When we consider the health of our organization combined with our culture and proven local leadership strategy, we are well-positioned to have another outstanding year in 2024.
Next, I will ask Chad to provide some additional insights regarding our recent growth. Chad?
Chad Keetch: Thank you, Barry. We are very excited about the three new operations and one real estate asset we added during the quarter and since, bringing the number of operations acquired since 2022 to 54. These new operations include a healthcare campus in Houston, Texas, which included the real estate assets that were acquired by Standard Bearer, one operation in Kansas, one operation in Nevada and our First Campus in Tennessee, totaling an additional 528 new operational beds. These additions were all carefully selected amongst the many opportunities available to us and were chosen because of the huge clinical and financial potential. Following our recent SNF growth in 2023, occupancy and skilled mix days for the skilled nursing operations in the recently acquired bucket were 77.6% and 27.5%, respectively, for the quarter.
When compared to our same-store occupancy and skilled mix days of 79.9% and 30.9%, respectively, there is enormous upside in each of these new operations, as they continue to transform into same-store caliber operations. We also remind you that there is nothing about the designation of same-store within our three buckets that should be seen as a cap on the occupancies that our more mature operations can achieve. Our leaders consistently drive remarkable improvement in our most mature assets, many of which achieve and maintain occupancies well under the 90% plus range as they seek and deliver on opportunities to expand their clinical capabilities into new functional areas and provide alternatives to long hospital stays. We are very optimistic about the organic growth potential within our existing portfolio, including our new acquisitions.
Because Tennessee is our first new state in several years, I thought I would just briefly highlight our new market program. As most of you know, the foundational principle of our entire strategy is the recognition that post-acute care is a locally driven business and the success or failure of any operation is largely determined by the quality of the leadership and the vision of the team leading each unique multimillion-dollar business. Because we believe that so deeply, we take entering into a new state very seriously. Long before we acquired our first asset in Tennessee, one of the most trusted and tenured leaders in our organization, Tyler Albertson, identified that market as one with extraordinary potential. For years, Tyler successfully operated one of our flagship operations in California and later led one of our most dynamic markets in Southern California, developed a business plan for Ensign's growth in Tennessee and presented it to his partners.
That business plan was debated and discussed and ultimately approved by his peers. Tyler carefully prepared to replace himself in his existing role as a market leader in Southern California and only after it was clear that he was leaving his old role in better hands than he found it. Tyler moved his family to Tennessee to begin the process of learning the dynamics of the market, meeting new talent and evaluating acquisition opportunities. After many months of preparation and after evaluating dozens of opportunities, Tyler and partners from other supporting geographies agreed to acquire our first building as of January 1. So far, the transition has gone well and we fully all his hard work and preparation to pay off. Over the next several months, as Tyler and his team of resources transition the initial acquisition, we anticipate that they will acquire additional operations to build a cluster of facilities over the next few quarters.
As we have seen recently in South Carolina, eventually this will grow into multiple clusters, which will eventually comprise a sizable market. We can't wait to watch Tyler and his team of leaders and caregivers apply Ensign's operating principles in this new market and look forward to Tennessee becoming another reflection of the template of growth and development we've seen across our footprint over the last 25 years. We also remind you that we are now in 14 states and have significant bandwidth to grow in the other 36 states. The pipeline for new deals remains strong. We are lining up several exciting opportunities and expect to announce several deals over the coming months, and we remain poised to grow with over $1 billion in dry powder for future investments.
Our local leaders continue to recruit future CEOs of Ensign affiliated operations and we have a deep bench of CEOs in training that are eagerly preparing for their opportunity to lead. We continue to see evidence that many operators in this industry are struggling, and we expect that the operating environment will translate into many near and long-term opportunities to both lease and acquire post-acute care assets. However, we do not set arbitrary growth goals and will remain true to our disciplined acquisition strategy only growing when we have the right leaders in place and the pricing is right. We continue to provide additional disclosure on Standard Bearer, which is comprised of 108 properties owned by the company and leased to 79 affiliated skilled nursing and senior living operations and 30 operations that are leased to third-party operators.
Each of these properties are subject to triple net long-term leases and together generated rental revenue of $21.9 million for the quarter, of which $17.7 million was derived from Ensign affiliated operations. Also for the quarter, we reported $14.2 million in FFO and as of the end of the quarter had an EBITDAR to rent coverage ratio of 2.2x. And with that, I'll turn the call over to Spencer, our COO to add more color around operations. Spencer?
Spencer Burton : Thank you, Chad, and hello everyone. As was mentioned earlier, the continued success we experienced during the fourth quarter was a result of continued improvement in occupancy and staffing, combined with hundreds of small but meaningful innovations by facility leaders and clusters. Today, I'd like to share two examples that demonstrate how diverse geographies and business lines are maturing and in turn providing more and more opportunities for growth and expansion as we enter 2024. The first facility highlight is The Healthcare Resort of Topeka Campus. This 94 bed skilled nursing and senior living campus has consistently grown since opening in 2016. While the facility has maintained a high census and been successful for many years, going into 2023, CEO, Ben Leiker and Director of Nursing, Amanda Perron, together with their interdisciplinary team, developed a strategy to take performance to the next level, by leveraging their reputation and the stability in nurse staffing to improve skilled mix in the SNF and improve revenue quality in their senior living.
The strategy involves concerted efforts to develop clinical programs that met their local hospitals discharge needs, as well as strengthening partnerships with key managed care plans and conveners. As a result, the senior living section of the campus maintained 100% occupancy for all of 2023 and the campus grew revenues by 13.4% over prior year quarter. During that same period, skilled mix days improved by 17%, driven specifically by an increase in managed care days of more than 40%. This growth in acuity was accompanied by an equal focus on recruiting and retention, which led to one of the lowest turnover rates in the market and zero agency staffing during all of 2023. The stability in staffing resulted in great regulatory performance, including no survey deficiencies and allowed the facility to avoid much of the cost associated with orienting and training new staff.
As a result, HCR Topeka accomplished its best ever EBIT performance for 2023, including 70% EBIT growth in Q4 over the prior year quarter. The second example comes from Riverside, California. The Grove Healthcare and Wellness Center is a thriving campus which includes 38 skilled nursing beds and 90 senior living units. Led by Executive Director, Michelle Mora, the skilled nursing portion has been operated as an Ensign affiliate since 2009. However, in April 2022, the Grove Senior Living portion was acquired from Pennant Group. And over the past 18 months, the Unified Campus has been enjoying exceptional growth. As they have operated more as a healthcare campus DON, Maria Manalo and her team are able to provide integrated and comprehensive care to more and more acute residents within the senior living.
At the same time, the SNF portion of the campus has been able to utilize the senior living to safely discharge residents to lower levels of care, which has allowed for more skilled admissions and has increased the skilled mix by 14% and revenues by 23% in Q4 2023, compared to the same quarter for 2022. Over the past year, community partners including managed care plans have taken note and occupancy has frequently hit 100%, in large part due to an 88% increase in Managed Care Census over prior year quarter. Perhaps the most important aspect of the Grove's success story is the incredibly supportive culture that the team has developed. For example, 100% of the Grove's employees voluntarily contribute a portion of their paychecks to Elevate Charities, our charitable fund that provides emergency assistance for employees in crisis.
These same employees have also bound together to eliminate agency staffing and reduce turnover, which in turn have contributed to a 103% increase in EBIT over prior year quarter at the skilled nursing and to an all-time record EBIT for the campus as a whole. These examples demonstrate the strength of our operating model and how frontline leaders and their local teams are innovating and providing healthcare solutions to their communities and to the residents they serve. 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 will open up for some questions. Suzanne?
Suzanne Snapper: Thanks, Spencer, and good morning, everyone. Detailed financials for the year and the quarter are contained in our 10-K and press release filed yesterday. Some additional highlights for the year include consolidated GAAP revenues and adjusted revenues were both $3.73 billion, an increase of 23%. GAAP diluted earnings per share was $3.65 and GAAP net income was $209.4 million. Adjusted diluted earnings per share was $4.77, an increase of 15.2% and adjusted net income was $273.5 million, an increase of 16%. Highlights for the quarter include consolidated GAAP revenues and adjusted earnings were both $980.4 million, an increase of 21%. GAAP diluted earnings per share was $0.38 and GAAP net income was $21.7 million.
Adjusted diluted earnings per share was $1.28, an increase of 16.4% and adjusted net income was $73.7 million, an increase of 17.5%. Other key metrics as of December 31, 2023 include: Cash and cash equivalents of $509.6 million and cash flow from operations of $376.7 million. We continue to delever our portfolio, achieving a lease adjusted net debt-to-EBITDA ratio of 1.98x, which is particularly noteworthy given the amount of growth we have taken on over this last year. In addition, we currently have over $593 million of available capacity on our line of credit, which when combined with our cash on our balance sheet, give us over $1 billion of dry powder and future investments. We also own 113 assets, of which 108 are held by Standard Bearer and 89 of which are owned completely debt free and continue to gain significant value over time, adding even more liquidity to help our future growth.
During the quarter, we increased our quarterly cash dividend to $0.06 per share, marking the twenty-first consecutive annual dividend increase. Given our strength, we plan to continue our 22-year history of paying dividends in the future. CMS continues to review the thousands of comments they have received as they look to finalize a federal minimum staffing rule. However, if the rule is implemented, we do not expect the rule to impact us in 2024. Also, during the quarter, we settled a litigation matter that we previously disclosed. We are pleased to put this matter behind us and look forward to focusing solely on our mission of providing compassionate care to patients and achieving our goal of setting the standard for high quality healthcare services throughout the industry.
As Barry mentioned, we are providing our annual guidance of $5.29 to $5.47 per diluted share and annual revenue guidance of $4.13 billion to $4.17 billion. We have evaluated multiple scenarios and based on the strength in our performance and positive momentum we've seen in occupancy and skilled mix as well as some additional strengths in Medicaid and managed care programs, we have confidence that we can achieve these results. Our 2024 guidance is based on diluted weighted average common shares outstanding of $58.5 million, a tax rate of 25%, the inclusion of acquisitions closed in the first half of 2024, the inclusion of management's expectations for Medicare and Medicaid reimbursement net of provider tax, and with the primary exclusions coming from stock-based compensation and certain expenses related to specific litigation matters arising outside the normal course of business.
Additionally, other factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy and census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals and other factors. And with that, I'll turn it back over to Barry. Barry?
Barry Port: Thanks, Suzanne. As we to wrap up, I can't emphasize enough how incredibly honored and grateful we are to work alongside our facility leaders, field resources, clinical partners and service center team that are behind these record setting results. We never cease to be amazed by their impressive resiliency as they focus on supporting one another in new and innovative ways. Their commitment has blessed the lives of so many including our own. We're excited about our future because of our amazing partners and we have complete faith in them and the culture that they have collectively built. We'll now turn over to the Q&A portion of our call. Operator, can you please instruct the audience on the Q&A procedure.
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