The Pennant Group, Inc.

Thank you for standing by, and welcome to the tenant group fourth quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star then one on your touchtone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Derek Bunker, Chief Investment Officer. Please go ahead.

Thank you, Valerie. Welcome, everyone, and thank you for joining us today. Here with me today, I have Danny Walker, our CEO, Brent Garasoli, our president, Jen Freeman, our CFO, and John Gochner, our COO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-K yesterday. This announcement is available on the investor relations section of our website at www.pennantgroup.com. A replay of this call will also be available on our website until 5 p.m. Mountain Time on Friday. March 25th, 2022. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, March 1st, 2022, and these statements have not been or will they 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, Pennant 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 Pennant Group, Inc. is a holding company with no direct operating assets, employees, or revenues. Certain of our 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. The words pennant, company, we, our, and us refer to the Pennant Group Inc. and its consolidated subsidiaries. All of our operating subsidiaries and the service center 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 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 tenant group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the tenant 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 that 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 in our 10-K. With that, I'll turn the call over to Danny Walker, our CEO. Danny.

Thank you, Derek, and welcome, everyone, to our full year and fourth quarter 2021 earnings call. At the outset here, I'd like to first thank our clinical and operational teams for the work that they have done through this most recent Omicron surge. The individual and collective efforts have been both harrowing and heroic, and we are deeply grateful. In 2021, we produced record full-year results in our home health and hospice segment, achieving double-digit top- and bottom-line growth. and strong quality outcomes while adding 11 agencies to our portfolio despite a difficult operating environment. Our senior living segment weathered three waves of COVID-19 surges and a record winter storm in Texas and is now poised to recover in 2022 with one, more robust leadership throughout the segment, two, stronger clusters and markets, three, better data and systems, and four, signs of an improving operating environment. Ultimately, our 2021 results fell short of our high expectations we established for ourselves. In general, the demands of completing the spinoff successfully, including completely overhauling our IT system infrastructure, the high volume of home health and hospice acquisitions, the leadership overhaul of our senior living segment, and the investment of time and resources in early-stage new business ventures combined with the unique pressures of the COVID-19 pandemic and the administrative requirements associated with full Sarbanes-Oxley 404 compliance, have temporarily limited our ability to achieve the exceptional operating results we have been accustomed to. However, as we look to 2022, we are encouraged by what we see. As described last quarter, we took action to, one, ensure that each local team is executing at a high level without distractions, two, retrench around our core opportunities across both segments, and three, reinforce the core principles of our operating model that have led to our historical successes. In the fourth quarter and since, we executed on these key initiatives, and we will continue to do so throughout 2022 to ensure we return to the healthy growth patterns and performance in both segments that we have achieved throughout our history. After a careful review of our core opportunities and how we could immediately limit distractions, we took several significant steps to this end. First, we recently announced that we entered into a transaction with our partners at Ensign to transfer to them five senior living communities, all of which share a campus setting with Ensign-affiliated skilled nursing operations. In a COVID-impacted operating environment where sharing a kitchen, laundry facilities, and staff became increasingly costly and complex, we believe that combining these operations in these campus settings will allow for care, staffing, and other strategic refinements that will better address the needs of the residents and families involved. This transaction underscores the value of our ongoing partnership with Ensign through the Ensign Pennant Care Continuum where we continue to explore mutually beneficial collaborations, and these changes will allow our senior living leadership to focus on fewer operations across a tighter geographic footprint. Based on the performance of these five communities in 2020, we expect that this reconstitution to be mildly accretive to earnings, and representing one of just many steps we've been taking to recover from the effects of the pandemic and realize the value inherent in our portfolio. Second, we've restructured our mobile physician services and our home care agencies to optimize payer mix and better contain expenses while largely retaining the upside potential of each of these lines of business. Third, We've completed the SPIN-related system infrastructure development and implementation of Sarbanes-Oxley Section 404 compliance. We have also invested in and will continue to invest in the development of our service center teams and their ability to accelerate our operational results. The combination of these efforts will allow for us to focus on our highest upside opportunities in our existing footprint and position us to continue to grow in 2022 and beyond. We are seeing these efforts bear fruit in the first quarter. Although there remain significant opportunities in both segments that we are excited to realize in 2022 and for many years to come, we continue to focus relentlessly on our biggest opportunities. As we announced in our press release yesterday, We are providing revised guidance for our full year of 2022 in light of the expected ramp in the Hospice ADC, the impact of the five senior living communities we're transferring to Ensign, and considering the lingering COVID-related impacts to staffing, labor, and revenue experience throughout 2021. We anticipate full year revenue in the range of $450 million to $460 million. and adjusted earnings per share in the range of 60 cents to 72 cents. Throughout 2021, we provided guidance based on the operating landscape at the time, and we assumed that we wouldn't have further impacts from COVID-19 surges, which consistently changed throughout the prior year. In our 2022 guidance, we have used the lessons we've learned from 2021, and our guidance is issued with a view of COVID and many of its impacts becoming endemic in the communities that we serve. We again want to thank our operators and clinical partners for their tireless efforts to navigate a very difficult operating environment in 2021, and we are grateful to look into 2022 greater stability and predictability in our operating results. And with that, I'll turn the time over to Brent to provide more detail on our fourth quarter operational results.

Brent? Thanks, Danny. Turning first to our home health and hospice segment performance. Through yet another surge of COVID-19 cases in many of our markets, we increased revenue 4.5% to $77.9 million over the prior year quarter. while adjusted EBITDA of $11.2 million declined $2.7 million, or 19.1%, from the prior year quarter. Even as our hospice admissions and average daily census were down from the third quarter, we saw solid growth in our total home health admissions, which rose 9% over the prior year quarter. The decline in hospice ADC is largely the result of a modest decline in admissions, as well as a higher mix of referrals for more acute settings that tend to have a lower average length of stay. This softness was concentrated in a handful of markets more acutely impacted by the effects of higher COVID-19 cases and other operational headwinds, which have continued into the first quarter. However, As we focus on meeting the needs of our local healthcare communities, strengthening relationships with new and existing key partners, and adding key talents, we are confident we can grow census and produce stronger results as operating conditions continue to improve. The bedrock of our confidence in future growth is our relentless focus on providing exceptional clinical care to our patients. We continue to achieve high marks and several quality scores across our home health and hospice segment with an average home health CMS star rating of 4.2 and a 12.7% acute care hospitalization rate according to real-time third-party analytics, meaningfully below the reported national average of 15.4% in the fourth quarter. We have successfully improved our quality measures in our recent acquisitions as well, with the average CMS star rating of our home health agencies acquired in 2020 improving from 3.7 stars at the time of acquisition to 4.3 stars currently. Additionally, our average discharge to community rate, which measures the percentage of patients discharged to the same or lower level of care, was 79% in the fourth quarter. which compares favorably with the reported 72.8% national average. Our hospice quality composite score continues to trend well at 96% as of the end of the fourth quarter, compared to the reported national average of 89%. We are confident our emphasis on quality clinical outcomes will be increasingly recognized by our referral partners as we continue our high performance standards in these areas. Our senior living segment continues its recovery in the face of another surge of COVID-19 cases that impacted our staffing and census in the quarter as it has throughout 2021. We are not satisfied with our quarterly results, although we are pleased to see some wins in this segment, including the first year-over-year increase in segment revenue since the pandemic began, despite a decrease in average occupancy of 310 basis points compared to the same period. We were able to drive targeted rent and care services rate increases that more than offset our occupancy decline. Thanks to better data and resident assessment tools, which we've been rapidly deploying since we completed the spinoff system separation that was such a heavy distraction through the first half of 2021. In addition, the fourth quarter, we increased revenue by 10%. 1 million and adjusted EBITDAR by 0.7 million sequentially over the third quarter, highlighting the incremental margin upside achievable as we drive further revenue growth. The benefits of having complete control over our systems and our IT resources dedicated to accelerating the results of our field will compound over time, driving more informed local decision-making improved resident care, robust accountability around best practices, and ultimately stronger financial results. In the fourth quarter and since, we have made significant progress in building a stronger leadership foundation, developing market and cluster leaders, expanding our marketing and sales expertise by elevating and recruiting talented professionals and equipping them with better data analytics and tools, and instilling rigor around the key focus areas that will accelerate our ongoing turnaround in this segment. As Danny mentioned, we have taken significant steps in recent months to retool our senior living footprint in a way that we believe will generate immediate and long-term benefits. The transaction with Enzyme is a one-time pairing of campus-based operations, some of which are geographic outliers, allowing us to concentrate leadership efforts on our core opportunities. So far in the first quarter, we are seeing occupancy grow sequentially as our operations continue to win the trust of our new residents and their families. With this leaner senior living portfolio, a deepening bench of leaders in the field and service center, better data and systems, and better data and systems, We are confident we can recover lost ground and realize the significant potential in this segment. With that, I'll ask Derek to provide an update on our recent investment activity. Derek? Thanks, Fred.

Our fourth quarter was uncharacteristically quiet with no closed acquisitions as we focused on the ongoing transition of the 11 home health, hospice, and home care agencies we added earlier in 2021 and the 15 added in 2020. and navigated the impacts of the Omicron surge. We are excited for each of these new operations as they hit their stride in their operating model. As these agencies continue to mature, we are confident they have the potential to grow in ways much like the agencies we've acquired for most of our history, many of which still average 20% or more growth year after year and have paid back our investment many times over. The development of certain recently acquired agencies has been slower than we expected as we work to identify the right leaders for each operation and support them as they built culture and established rigor around best practices. We are confident these deals are fundamentally sound and we look forward to driving the growth in 2022 and beyond that will lead to better overall performance in our home health and hospice segment. In addition, our pipeline of potential deals is expanding as we continue to source quality home health hospice and senior living opportunities. And as we continue to execute in our recently acquired operations, we're excited to add new quality operations to the Pennant family. That I'll hand it over to Jen for a review of the financials. Jen.

Thank you, Derek. And good morning, everyone. Detailed financial results for the full year and three months ended December 31, 2021 are contained in our 10-K and press release filed yesterday. For the full year ended December 31, 2021, we reported total GAAP revenue of $439.7 million, an increase of $48.7 million or 12.5% over the prior year. GAAP diluted earnings per share of $0.09 and non-GAAP adjusted earnings per diluted share of $0.46. Please note that our non-GAAP adjusted earnings per share Results for the full year and three months ended December 31, 2021 include the benefit of the Medicare sequestration holiday and adjustments for the impairment losses associated with the five senior living communities transferring to Ensign. While difficult to perfectly capture all such expenses and lost revenue, we estimate that our full year and fourth quarter results were negatively impacted by COVID-19. in the amount of $10 million and $2 million respectively in lost revenue and $5.4 million and $2 million respectively in expenses, 90% of which are increased in wage rates and overtime over the prior comparable periods. Key metrics for the full year and three months ended December 31, 2021 include $53.5 million drawn on our revolving line of credit, and $5.2 million cash on hand at quarter end, 1.75 times net debt to adjusted EBITDA, and 2.06 times if Medicare advance payments had been paid back as of the quarter end. Automatic recoupment of the advance payments began in April 2021, on which we have repaid $25 million through February 25, 2022, and we expect to repay the remaining $3 million over time within the payback period. Cash flows provided from operations of $3.6 million, excluding the impact of the automatic recoupment of advance payments, and $2.8 million impairment included in cost of service, primarily related to the five senior living communities we are transferring to Ensign affiliates. As Danny mentioned, yesterday in our press release, we provided full year 2022 guidance of revenue of $450 million to $460 million, and adjusted earnings per share of $0.60 to $0.72. Our guidance is based on diluted weighted average shares outstanding of approximately $31.6 million and a 26.1% effective tax rate. In addition, the guidance assumes, among other things, anticipated reimbursement rate adjustments, sequestration restarting July 1st, no unannounced acquisitions, and the estimated effect of COVID-19. It excludes costs at startup operations, share-based compensation, acquisition-related costs, impairment and losses associated with the senior living communities being transferred to Ensign's affiliates. At the midpoints, our revised 2022 annual guidance reflects an increase of 7.5% in revenue, and a 34.7% increase in EPS when 2021 and 2022 results are adjusted as if the disposition of the five senior living communities had occurred on January 1st of 2021. Our 2022 guidance also includes our read of the current operating environment and considers the lingering headwinds that arose during the fourth quarter which we are seeing in the first quarter of 2022. While census staffing and other operating challenges may continue to affect our first half results, we are confident in our leaders. We are anticipating a 7% to 10% increase in our home health and hospice revenue, some as a result in the rates from the home health final rule and some from improved hospice census, and a 4% to 6% increase in senior living. Across our organization, our leaders are stronger and more capable of confronting these headwinds than ever before. Our revised guidance reflects confidence that the actions we are taking to emphasize our core opportunities in both lines of business and strengthen the principles of our unique operating model will lead to improvement in our recently acquired agencies, growth in our same-store operations, and healthier performance in our senior living business. While incorporating the impacts of increased wage rates and staffing challenges experienced during the latter half of 2021, the midpoint of our guidance anticipates the improvement from our ability to manage costs, improving cost of service rates by approximately 20 to 50 basis points. We are excited for 2022 to return to our historical revenue TAGR of 16%, at EBITDA CAGR of 15% plus, which we have experienced and we know is achievable by executing with discipline, persistence, and operational excellence. And with that, I'll hand it back to Brett to highlight a couple of our local leaders. Brett?

Thanks, Jen. As we typically do, I'd like to highlight a few leaders that have gone above and beyond in their operations and in supporting their partners throughout the organization. It's my pleasure to share these stories. At Puget Sound Home Health in Pierce and King Counties in Washington, CEO Devin Rothwell and CCO Shalonda Morton are achieving exceptional results across the board by building a culture focused on our core values of customer second, ownership, and intelligent risk-taking. This team first invested in the right individuals that would accelerate the agency's growth trajectory. and then methodically focused on producing quality care outcomes and strategically investing in expanding the service offerings available to the community. Their foundation of clinical quality has led to a 4.5 CMS star rating. The investments in the right people, culture, and providing quality clinical care have helped them achieve revenue growth of 9% and EBIT growth of 46.3% in 2021, over the prior year, which continued a compound annual growth rate of 17.3% since we purchased the agency in 2013. Because of the extraordinary impact on the Puget Sound community, the agency was awarded three hospice certificates of need in 2020 and 21. The results of Puget Sound Home Health and Hospice are typical of what talented local leaders can achieve through the application of best practices in our operating model. At Pleasant Point Senior Living in Racine, Wisconsin, CEO Tiffany Morth, COO Heather Gillis, and Director of Business Development Christine Gomez have led the remarkable turnaround of an operation that had a difficult time finding traction in their community during the first several years following acquisition. From the time they arrived, Tiff, Heather, Christine, and their partners in the cluster in Wisconsin market immediately went to work to change the vision for what Pleasant Point represents. They strategically invested in the community, built a strong local team, added additional talented marketing and sales professionals, some of whom are now supporting sister communities in Wisconsin and elsewhere, and instilled a culture centered on our core values of customer second, ownership, accountability, and celebration. The combined impact of these and many other actions helped this team drive occupancy from 63.6% in the fourth quarter of 2020 to 96.1% in the fourth quarter of 2021. a remarkable increase of 32.5% during a year, which saw many other communities lose residents. This translated into revenue growth of 97% and EBITDA growth of 348% each in the fourth quarter over the prior year quarter. This incredible transformation is emblematic of what is possible at newly acquired and same store operations under the stewardship of the right leaders. With that, I'll turn it back to Daniel.

Thank you, Brent. Now we'll open it up for questions. Valerie, could you please instruct the audience on the Q&A procedure?

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, if you would like to ask a question, please press star then 1. One moment, please. Our first question comes from Talke of Stiefel. Your line is open.

Hi, good morning. First of all, thank you for providing more disclosure on the same agency and new agency statistics. I think last quarter you called out the lagging performance of the recently acquired home health agencies that kind of contributed to the admission decline there. I think this quarter we've seen some relative poor performance in the home health news, but the now same agency pool was a drag on the hospice side. So could you maybe provide some more context on the bifurcating performance between the two buckets and the unique challenges in scaling up new agencies through the Omicron wave and how fast you expect to get performance back on track? Is it a matter of improving labor environment and less rely on agency labor or maybe making some more investment in the development of field leadership, just trying to understand what would be some of the positive drivers short-term and medium-term and how quickly you can get there?

Good. Yeah, thanks for the question, Tal. You know, on these transitioning agencies, we aren't, first to make it clear, we're not relying heavily on external labor through agency services. The issues are more related to how we're swaying the market from other referral sources to ours at our normal rate. and other subtle things related to our implementation of systems. And so we've had more difficulty and a little bit more elongated process of taking our bread and butter, which is smaller, you know, well-regarded clinical operations that need more infrastructure into them. And so... You know, we've seen significant improvement in those during the fourth quarter, and our rate of improvement we feel like is continuing into the first quarter, and so we feel like we're mostly through that. I don't know if Brent wants to add a little perspective or John Gochner on that, but we don't see them continuing to be a significant drag in the in 2022. Having said that, you mentioned the differences between home health volumes and hospice ADC pressures. We are seeing success on the home health volume side. We're excited about that. Many of these new acquisitions, but also our existing operations, have weathered a fairly challenging hospice ADC environment where we've seen a shift in acuity of the patients coming on service, coming on later in their disease process, more referrals from acute care settings, all of which are positive, but with the absence of longer-term residents that maybe are living in senior housing properties or skilled nursing facilities has made for a little bit of pressure on the hospice ADC front. We're seeing that persist, as Jen mentioned, in the first quarter. We're anticipating that we'll be able to recover well from that. John or Brent, any color to add there?

I'll just add, Danny, I think what you're seeing, Tao, is our same store operations, those that have been with us for an extended period of time, those where we've established culture and a place in the community, they performed really well throughout the course of the year. And there was softness in the fourth quarter, but you look across the year and you see really strong expense management. You see strong growth. With those newer acquisitions, we're still formulating our place in the community. We are often entering into new geographies, and so it just takes a little longer to become the employer of choice, to become the place where referral sources turn. And so you see a little bit more of that margin pressure. I think where you have seen the margin pressure in the fourth quarter is really on account of some changes in the labor environment. where I think everyone has seen the impact that COVID has had from that standpoint. And then there's softening in the hospice ADC, which is traditionally for us a little higher margin business. And so that's kind of where that softening is impacting our results. But as Danny mentioned, we couldn't be more optimistic. We have a group of really talented CEOs across our home health and hospice organizations. organizations who are weathering a pretty significant Omicron surge, where we saw a lot of people out with illness, both COVID-related and not, and we feel like we're back at full capacity and able to take those referrals in the volume that's out there.

Got you. Yeah. The second question is about guidance. Given the lingering headwinds in the first quarter you mentioned, when we look at the guidance, if you exclude the $16 million from the five senior housing attributes sold, revenue is essentially flat from the last guidance. I think there are also some positive developments since the last guidance, either from the facing of the sequester or the increase of the Medicaid rates in a few states, Given the low run rate of 4Q and the softness in 1Q, what assumptions may have changed since the last update to give you this kind of the flat guidance versus the last one?

Yeah. I'll let Jen give you some specifics. As I noted in my prepared remarks, we repeatedly – tried to not get in the game of projecting what a surge was going to do to us when those surges of COVID were going to come. And it's led to a difficult environment for people to understand where we think we're actually going to end up. And so we've made an attempt with this guidance to draw things back and build in some our view of kind of an endemic view of COVID in this 2022. Now, we've kind of taken our view of how COVID actually affected us in 2021, and we've assumed that we're going to have some periodic surges, hopefully nothing like what we've seen with Delta or Omicron, but still we're baking that in. so that we ideally don't find ourselves in a situation where we've set expectations that are above what we can realistically achieve.

So just to speak to some specifics, as you mentioned, the revenue is impacted by the transfer of the senior living entities to Ensign. That's about $16 million in revenue and slightly accretive on the bottom line. So I just want to make sure that that is So, as in 2021, those entities operated in that loss, slight net loss. So, when you adjust 2021, that's part of the adjustment there on the guidance. And then, as I talked about, we also incorporated, as Danny just mentioned, the impacts that we've seen in our wage increases and other impacts in So, while we are incorporating that, we're also looking at an improvement of, as I mentioned in the prepared remarks, about 20 to 50 basis point improvement in our cost of service as a percentage of revenue. And just keep in mind that our cost of service as a percentage of revenue in the fourth quarter is impacted by the 2.8 million accounting impairment loss that we took. in the fourth quarter related to those five communities. Hopefully that helps to bridge the gap. The other piece of it is just as we mentioned, the hospice census and the lingering effects on hospice related to Omicron carried forward into the first quarter.

Thanks for the clarification. Thank you.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1. Our next question comes from Scott Fidel of Stephen. Your line is open.

Hi, everyone. Good morning or afternoon. I actually just wanted to say, just wanted to actually sort of just continue on that last line of discussion. And, you know, I think it may be helpful in, you know, knowing that you don't provide quarterly guidance, but just given – all the curveballs that have been thrown at you around the pandemic and relative to the reset guidance, to the extent that you're comfortable just providing us maybe with some more visibility into how you're forecasting the first quarter, you know, from a revenue and EPS perspective, really just to give us, you know, some more insight into the base, you know, sort of starting off point for the first quarter and then how the guidance anticipates sort of building upon that.

Yeah, Jen can provide maybe some specific info, but generally speaking, Scott, we've tried to make a deliberate step to be more conservative in our guidance and try to estimate more significant ongoing kind of cost pressure and revenue pressure from the current operating environment. So we've really kind of looked at, you know, a pretty tough Q4 and used that kind of as our starting point of where we, you know, can go in Q1, Q2 with some mild improvement in the second half. Now, we know that we have, you know, we've missed our guidance this, you know, the last couple of quarters and it's concerning to us that we're not providing more clarity on where we're at and where we think we can go. So this is an attempt to be conservative and try to build into the contingencies for some of the unknowns with how quickly hospice census will recover how we'll be able to navigate through some of the labor items. Now, we have internal plans that we feel really good about in terms of our ability to optimize labor, even if we're paying elevated rates, to optimize revenue structures appropriately based on patient need. And there's areas of opportunity there that we feel we can offset some of those pressures But our approach in the past had been to kind of try not to project those types of costs, but we've used the prior year and we've looked at exactly what these waves have looked like, how it's affected our staffing, how it's affected our revenue cycle, and we've You know, there's been a lot going on in this last year. We think the weather and sort of operating environment in 2022 will be better, and we can, you know, hopefully get ahead of these expectations that we're setting. But the reality is this is where we're at, and we've tried to take a more conservative approach. When we sit in a room and look at it and say, do we think we can achieve, you know, a lot of success in rebounding from a tough 2021 without all the moving parts that we've had internally, even before you get to Omicron. Yeah. We feel really excited about that. And I think, I think in the past we've kind of baked a lot of that in and assumed that the operating environment wouldn't be quite as, as messy. And, and so we're, we're, we're attempting to not repeat that from, from 2021. Yeah. I don't know. Jen, do you have anything to add there?

I don't think so, Danny. I think you've covered it. When we took our approach for Q1 specifically, we looked at how we were running in Q4 of 2021 and incorporated modest increases as we're seeing things start to settle as far as the wage rates go, but also making sure that we're incorporating all of what we experienced in 2021, especially in the fourth quarter into our first quarter results. I think it's also important to note that in Q4, we had one of our best quarters in senior living. Brett, you want to add some to that and our trajectory there?

Yeah, I mean, we're making progress. It's not anywhere close to where we expect to be in the near term. But the investments that we've made on the senior living side, especially when you're turning over leadership and you're building a foundation, it just takes time. And navigating that in a pandemic just adds some of the complexity. And we're just starting to realize some of the fruits of those efforts. And 2022 is going to be an opportunity for us to build out of that. And, you know, we're optimistic, but realistic in the timeframe that it's going to take. But it was encouraging to see a step forward in Q4 relative to the prior quarter. optimism, but realism all at the same time.

So just to kind of close this out on that point, Scott, you know, we looked at it and we're expecting a pretty flat sort of quarter by quarter is how we did it, is we said, all right, where should we be in the first quarter? And without assuming aggressive improvements, which could materialize, right, if COVID lets up a little bit and and our teams continue their progress in becoming more effective at navigating surges or flare ups. Um, you know, but, but that's kind of where we're expecting is to take that and evenly spread it out throughout the year. And, um, and that's our, you know, our, our best view of, of where we're at right now and assuming an endemic view of, of COVID, um, You know, we're obviously going to seek to find every avenue of improvement, and there's a lot going into that, but hopefully that helps.

Yeah, that does. I appreciate all the qualitative feedback, and most importantly, just the comment you made about sort of thinking directionally about 1Q versus 1Q. the fourth quarter and then, you know, sort of being relatively stable and then sort of building upon that. I think that it's just important to help, you know, at least get the first quarter level set appropriately around the expectations. If I can just move on to a second question and did want to ask about, you know, the balance sheet and cash flow dynamics. You know, obviously the Medicare advance, you know, payment recoupments have, have affected the optics of cash flows, you know, quite meaningfully in the last couple of quarters. I just wanted to confirm around, you know, sort of, I guess, fully settling up for, you know, the Medicare advance payments and then the deferred payroll, you know, that normalization relative to the CARES. Jen, I think you had mentioned, did you just want to confirm, you said $3 million left to go on the Medicare advance payments. payments, just want to confirm that. And then also, if you could just update us on the deferred payroll piece of that. And then just to sort of close the loop on the cash flows, in the press release, you did mention how relatively soon you're expecting to start to show improved cash flows. I'm assuming that's as you lap these issues relating to CARES. Maybe just give us a little more insight into that in terms of you know, how you're thinking about cash flows, you know, sort of showing up in the reports as we move through 2021. So really the question is just around sort of your thoughts on the cash flow trajectory here over the course of the year.

Yes, so definitely improved cash flow over the course of the year. I think as our acquired operations also become more stable, we'll see them producing cash flows that we are accustomed to as we take on new businesses. So that's one. Two, we do have $3 million left in the advanced payments we do expect. To pay that back, I would say at the outer limit by the end of June, the recoupments go sort of full on through the end of March, and then you get a smaller amount being taken out starting April. We will pay that back within the timeframe easily. So that will affect mostly the first quarter cash flow in those recoupments. And then we do have, as a part of this settlement with the Ensign Group, the $6.5 million that will come out for that for cash flow. We will be holding our assets for sale, and so we'll see that cash. That's a one-time payment out. And then for the end of the year, we have approximately $4.5 million that's due at the end of 2022 for the deferral and the social security payments so those are the big items that will be affecting us of course um we'll have some that's all on the operating side so we'll have cash flows out for acquisitions and things like that as well yeah a high level though scott we're we're really pleased with the rate of paying back all of that there's the one thing we took advantage of uh you know in all the money that was available

And so we've had good, strong cash flow. We've been able to do the deals that we've wanted to do. The interruption on collections is built into every new acquisition. There's always this dead period where we don't collect. And then we've coupled that with the elimination of the wrap. And so overall, there's been a lot going on in our collections. But to have paid a little over $21 million $25 million back through our regular cash flow processes. We're pleased with the overall kind of trajectory we're on from a cash standpoint.

Understood. And then just one last one for me just on senior living. And actually it was interesting in the fourth quarter, actually at least relative to my model, you know, we did certainly see that. that improvement in XL, even though occupancy, you know, did show the pressure in terms of having the better pricing and having that drop to the margin a bit. I think Brett had said during the prepared remarks that you actually have seen some improvement in occupancy in the 1Q, you know, even despite the Omicron effects. If possible, would you maybe be able to give us sort of a spot update on where XL occupancy is trending now in the first quarter and then then how the guidance is anticipating that occupancy for SL will trend over the course of the year.

Yeah, I can't give you a specific number. Maybe Jen can look at some of that detail. But yeah, we have continued to experience really from the middle of December. We got hit pretty hard from an Omicron standpoint. And then right in the middle of December, we started to see a a continual incline in our occupancy numbers. And that hasn't slowed down through January and into February. And now that we're hit March, we're pretty excited about that trend. And it's something that we experienced over the course of 2021. And this was part of our challenges, you know, even from providing guidance, you'd see these episodes of improvement, and then you'd have another wave that would impact staffing, impact sort of customer confidence in going into buildings. And so as we weather those, we've learned a little bit about ourselves in that process. And as we've seen a lessening of the Omicron impact, we're starting to build out of that again. And so we feel confident that that growth will continue. I mean, and it's not just because of the lessening of the COVID impact. We have spent a significant amount of time focusing our efforts on building the local teams, making a concerted effort to improve our relationships in the community, strengthening our marketing and business development teams, and changing our strategies so that we can go out and fill those empty beds. We're confident, we're moving forward, and we anticipate that we'll continue to see occupancy improvement throughout the year.

So the improvement's been about 100 basis points since mid-December. So that's what we've seen. You know, I'd be lying, Scott, if I didn't say, you know, we've provided updates on occupancy just to see them get wiped out by another surge of Omicron or the next thing. And so, again, coming kind of back to the guidance approach is, you know, we are assuming we're going to feel pressure even though we've made those gains, right? And so... If the pressures don't materialize, we should be in a really good position. And what we're focused on is those things that we can control that Brent's mentioned, making sure that, you know, as we emerge from a tough 2021 where we've implemented, you know, we've done our SOX compliance, we've cut our systems over, can finish that process, we've dealt with pretty extreme operating challenges in the COVID environment. One thing that we're all really excited about is that kind of our adherence to our culture and our team kind of morale across the organization is really, really strong. Even having lost team members to COVID and others that we care deeply about, But there's this growing sense of confidence that kind of the worst is behind us. And our ability to navigate future difficulties related to COVID is increasing. And so that's the picture on the occupancy front work side. We're hopeful that some of the neglected preventative care that's been driven may lead to improvements even further from where we're at. But, again, until we see those things materialize, we're taking a cautious and kind of a conservative approach.

Okay. Appreciate the feedback.

I'll get back to Jim. Thanks. Okay. Thanks, Scott.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, to ask a question, please press star then 1. I'm showing no further questions at this time. I'd like to turn the call back over to Danny Walker for any closing remarks.

Thank you, Valerie. And we just want to thank our stakeholders, both inside the organization and outside the organization, shareholders, friends of the organization. for supporting us through a very challenging 2021. We've only had a couple of years like this. I remember 2013 that wasn't in a public view, but in 2021 in our 12-year history, and so it's unusual for us to come up short of our expectations, and we look forward to restoring and building confidence in the organization as we move forward into 2022 and beyond. So thank you for joining us today, and thank you to everyone who's involved in helping Pennant be what it is. Take care.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.