The Ensign Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Ensign Group's second quarter fiscal year 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to end the conference Over to your host, Chief Investment Officer and Executive Vice President, Chad Keetch.

Thank you and welcome, everybody. We appreciate you joining us today. And as always, before we begin, I have just a few housekeeping matters. We filed our earnings press release in 10Q yesterday. Thank you for joining us. 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 the other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly owned captive insurance subsidiary, which we refer to as a captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as for workers' compensation insurance liabilities. All of our operating subsidiaries, including 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 Ensign or the consolidated company and its assets and activities, as well as the use of 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 gap reporting with non-gap metrics. When viewed together with our gap 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 gap reports. A gap to non-gap reconciliation is available in yesterday's press release and is available in our 10-Q. And with that, I'll turn the call over to Barry Port, our CEO.

Barry? Good morning, everyone. We want to begin today's call by thanking our operational leaders and their frontline teams for their inspirational efforts that require more than most could ever imagine. As they care for our country's most fragile and vulnerable in the most intimate of healthcare settings, they continue to show up to work each day donning an uncomfortable mask, gown, eye protection, and other personal protective equipment to do some of the most challenging but important work during one of the most difficult times in our industry's history. We thank each of them from the bottom of our hearts for doing so with the utmost professionalism and selfless dedication. Our local leaders, caregivers, and other frontline staff are deserving of all the praise that we can muster. Appropriately, we often devote a lot of energy into acknowledging first responders and hospital workers for heroic work amidst life-threatening circumstances. Our sincere hope is that we, as a nation, begin to similarly recognize workers in the post-acute setting with that same accord. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant. But because of the unselfish dedication of our talented leaders and the heroes serving alongside them, we are optimistic that we can continue to thrive through this uncertainty. Their heroism and dedication over the last several months has been truly inspiring. We're pleased to report that in spite of continued unique challenges presented during the current global pandemic, the operational momentum we experienced in the first quarter continued into the second quarter, where we again achieved record-breaking results. For the second quarter in a row, we achieved our highest adjusted earnings per share in our history of 78 cents, an increase of 100% over the prior year quarter, and slightly above a record-setting first quarter. The strong results came from quarter-over-quarter improvements in skilled mix across same-store transitioning and newly acquired operations, cost-saving initiatives, improved collections, sequestration suspension, and improved Medicaid rates in certain states. We also continue to implement a number of actions to respond to the impact and uncertainty caused by the pandemic, including incurring additional COVID-19-related labor expenses, and the ongoing acquisition of unprecedented levels of PPE and other equipment. We announced yesterday that, similar to a few other well-capitalized healthcare providers, in June we began returning all of the CARES Act provider relief funds that we received. These funds were meant to cover lost revenue and increased expenses tied to the COVID-19 pandemic. and we want to underline again that our results do not include any benefits related to those distributions. As you all know, most of our revenue comes to us from sources that are funded by taxpayer money and as stewards of those funds, we know that there is a high degree of responsibility that accompanies government reimbursement. In addition, as a for-profit operator, our organization pays tens of millions of dollars a year in taxes. After taking a hard look at our balance sheet and our liquidity, including our strong relationship with our lenders and landlords, and after gaining a better understanding of our financial performance after several months of operating in the COVID environment, we determined that it was not in the best interest of our organization to accept funds from Rounds 1, 2, or 3 of the CARES Act at this time. If there are additional future grants available, We will reevaluate the purpose and needs of those grants, specifically considering the potential costly testing requirements or other newly mandated regulations. Overall, our company is not being overwhelmed by COVID-19. However, as you might expect, similar to what the country as a whole is experiencing, the impact has varied market by market and building by building. More recently, As expected, our portfolio has experienced an increase in COVID-19 cases in our buildings where the number of cases in the community overall are increasing, such as parts of Texas, Arizona, and California. As of August 3, 2020, the company's 226 affiliated operations across 13 states had 909 confirmed COVID-19 patients in-house. Also, as of August 3rd, 19 operations had over 20 COVID-19 positive cases, 46 operations had less than 20 cases, and 161 operations had no confirmed cases of COVID-19 in-house. To add some additional context, four of our operations at the request of the local healthcare community proactively and intentionally dedicated their whole building to the care of COVID-positive patients. and 20 of our operations have dedicated entire wings to COVID-positive patients. It is also important to clarify some details regarding the spread of COVID-19 in nursing homes. According to recent independent studies by researchers at Harvard Medical School, Brown University and the University of Chicago, the primary drivers of COVID-19 outbreaks are a function of location of facilities as it relates to geographic prevalence Asymptomatic Spread, and Availability of Testing, not quality ratings, infection citations, staffing, or for-profit or not-for-profit status. That said, we continue to learn and find ways to help defend against outbreaks and prevent the spread of COVID-19, and we believe we are prepared to operate effectively in the COVID environment for the foreseeable future. Our local leaders and caregivers, with the assistance of their service center resources, are methodically acquiring unprecedented levels of PPE and other supplies and equipment and are providing the latest and best practices in both clinical protocols and safety measures at a significant expense. As our local operators have responded to the needs of the healthcare community, our operations have seen an increase in the number of higher acuity patients, including COVID-19 positive patients. As the number of COVID-19 cases in the surrounding communities we serve has increased, especially in Texas, Arizona, and California, our state and county health leaders and local hospital systems have looked to enzyme-affiliated operations to care for all varieties of high-acuity patients that can safely be admitted to or remain under our care. We continue to learn a great deal through this process and our local leaders are proactively preparing for and executing on plans to provide care for all patient types, whether COVID positive, negative, or unknown. As previously mentioned, our operations have, at the request of the local community, dedicated entire buildings and wings to care for COVID-19 patients, which are generally skilled patients that need high levels of nursing care. These efforts vary building to building and market to market and are being done in partnership with local and state public health officials to ensure compliance with infection prevention protocols and the comprehensive recommendations provided by the CDC and other public health authorities. We reported yesterday that the vast majority of the decline in occupancies we've experienced began in the latter half of March due to governmental stay-at-home orders, a pause on vital procedures in the hospitals, and overall lower hospital occupancies, all of which directly impact patient referrals into the post-acute setting. As COVID cases began to decline in late May and June, We saw an increase in occupancy and a slight decrease of skilled mix as the needs of higher acuity patients were fewer. More specifically, between mid-May to mid-June, same-store and transitioning occupancy increased by 0.4% and skilled days decreased by 1.1%. However, the recent influx of COVID-19 cases in several key states resulted in occupancies that have begun to decrease slightly while skilled mix improved as the number of high acuity patients increased. More specifically, between mid-June and mid-July, combined same-store and transitioning occupancy was down approximately 1.9%, and skilled mix actually increased by 8.1%. As you can see, we see a pattern emerging When COVID cases in the community increase, occupancies are negatively impacted, but skilled mix improves. As we compare these numbers with what we see happening more broadly, it is clear that our operators have remained flexible in shifting capabilities to respond to the needs of the local market. When the number of very sick people in the community increases and as hospitals need assistance with higher acuity patients, including COVID patients, we see skilled days increase. At the same time, occupancies decline as extra precautions are taken on new admissions. When COVID retreats, occupancies begin to recover and skilled mix begins to normalize. While occupancies are lower than they were a year ago at this time, the fact that occupancy levels have remained relatively steady over the last few months combined with the comparatively strong skilled mix demonstrates the resilience of our model and our local leaders' ability to adapt to changing circumstances in their local healthcare markets. As we said last quarter, this pandemic arrived at our doorsteps at a time when our organization has never been stronger clinically and financially. Our local leadership model is shining through in these results and our local approach is the reason why we were able to report such a strong quarter. As we've said before, Ensign was born in times much like these and our model is not only designed to survive but to thrive and grow in the face of uncertainty. Our current health combined with our culture, proven local leadership strategy, healthy balance sheet, and the enormous potential in our newly acquired transitioning and same store operations gives us confidence that we are well positioned to manage through these unusual times and a rebound to our pre-COVID path. As we've said today, we've seen and we expect to continue to see a significant impact from the pandemic on our results throughout the remainder of our year. But with several months of COVID behind us and following two record quarters in a row, we are raising our annual earnings guidance to $3 to $3.10 per diluted share up from our previous guidance of $2.50 to $2.58 per diluted share, and we are affirming our annual revenue guidance of $2.42 billion to $2.45 billion. We are confident that we can provide this guidance for several reasons, including our better than expected results in the first half of the year, the operational adjustments being made by our local operators, and the benefits we've received from regulatory waivers, rate adjustments, and the other continued efforts already mentioned. While the pathway to achieving these results has and will differ significantly from what we expected when we gave guidance prior to the pandemic, we are confident that we are well positioned to operate in the current environment, but more importantly, to regain much of our pre-COVID momentum as the flow of patients continues to normalize over time. As the year progresses, we will continue to evaluate the impact of COVID-19 across the portfolio and readjust as necessary. And with that, I'll ask Chad to give us an update on our recent investment activity. Chad? Thank you, Barry.