Oppenheimer's 34th annual healthcare conference. I am Michael Wiederhorn, a healthcare service analyst. It's my pleasure to introduce the Ensign Group. With us from the company today we have Barry Port, CEO; Suzanne Snapper, CFO; and Chad Keetch, CIO. One more note before we jump into the fireside: there's a Q&A box in the top right corner for those who want to ask questions. So, welcome, thanks for joining us. We'll start, you know, with a kind of a broad, you know, a high-level question here. You know, maybe just starting out, can you just provide us an update on the business and how do you feel coming out of Q4?
Yeah, no, thanks, Michael. We appreciate being here today. We feel really good about how we ended up the year. We, you know, you start with occupancy, and of course that's a trend we cite probably the most and a metric we worry about the most. And that was really strong through the quarter, actually really strong throughout the year in spite of some really brief seasonality, which we should expect now is more of a norm going forward, now that we're out of the kind of the COVID environment. So, you know, occupancy and skilled mix trends for us are really, really strong.
Another, I think, another pretty important thing for us that obviously has been a bit of a challenge as of, you know, the last year and a half is on the labor front. And as we look at those trends, those are also very encouraging. We're seeing our utilization of third-party agency staffing decline very consistently over the last 14 months, continuing into this year. We're seeing wage inflation moderate. We're seeing our net hires also, you know, continue to increase and improve. And also our turnover metrics have, you know, improved for the third year in a row.
And so, you know, as you look at the macro environment with labor, those things are, you know, I would say coming back into kind of normal at normal levels, which is obviously a really encouraging trend for us to see. And just again, the overall strength of our leadership in the field and at our service center is what we feel like an all-time high. We have amassed what I believe is the best group of leaders in the industry, maybe even in healthcare. They just continue to innovate and do things to create a really quality business in the post-acute space that is something we're really, really proud of.
Oh, that's a great overview. So, you know, kind of when we think about occupancy, consolidated occupancy, it's returned to in line, it seems like, with pre-pandemic levels. So should we expect further upside, or do you expect to return to normal trends based on the amount of the new business that you've completed recently?
I mean, look, there for us, there's lots of upside. I, you know, just because we are at pre-pandemic levels doesn't mean that's an artificial ceiling. As you looked at our trends going into the pandemic, you know, our occupancy was on the rise, and, you know, and we see, you know, kind of where we're at as really, kind of a non-event. You know, we've been citing, you know, this idea of getting back to pre-pandemic levels as something we've been striving for a while. But now that that's come and gone, I think really, you know, we see really strong demand across our portfolio, even, you know, the larger acquisition we took last year in North American. They're still not to our average occupancy in the state of California.
and so we see upside with our transitioning group and our same-store group of buildings and our newly acquired group of buildings, you know, being at 80% organizationally really is something that probably doesn't mean much, and we see lots and lots of upside from here.
Let's move over to reimbursement on rates on the rate side. Can you, you know, give some color of kind of where you are on the rates on the Medicaid front, you know, in key states, what type of blended increase you're expecting for the year, also on the Medicare front?
Medicare front.
On the Medicare front, you said.
Medicare front, you said.
I think I heard your question, Mike. I think you were asking just about rates and overall where reimbursement.
Yeah. Yeah, sorry. Medicaid, Medicare, and, you know, on the commercial side where you're seeing on the managed care contracting side as well. Sorry. There was a feedback.
We're really pleased with where rates are at right now. I think we had a really good transition. I think there was a lot of questions in the industry as a whole and we got a lot of questions from investors as those FMAP dollars rolled off and what was going to happen, were we going to have a cliff as we went into 2023. Obviously what we saw was a really good solid transition into having very solid state rates. A lot of the states picked up those dollars and increased our rates, as well as kind of really set up for a really solid 2024 with those rates rolling in kind of second half of 2023, really really good into 2024 and feel solid about what we're going to see this year as well.
Can you touch on the Medicare? It does. You're talking about the Medicaid front. Can you talk about the Medicare and also the commercial side on the rate side and what you're seeing?
Yeah, definitely. So on the Medicare front, what we're seeing on the Medicare front, obviously we had that rate go into effect October 1st. So that will be in effect for most of 2024. When we're looking at the new rate that we'll have in October 1st of 2024, we really think that there's a lot of opportunity to have upside on that rate. Usually that rate is based upon a look-back period and the inflation from prior years. And as we kind of look at what the opportunity is for that rate, we think it'll be solid and, you know, equal to or around the same amount that, or even potentially above. And that's all baked into our guidance of what the 2023 rate is.
On the commercial front or what for us, the managed care front, we've been having great relationships with the managed care providers throughout the COVID pandemic. I think building those strong relationships allowed us to really step up the rates in 2023. Those relationships continue in 2024, and we're definitely working with them, and encompassing some of the increased costs and other things that have been passed through and just really working with them as a whole and being great partners with them on the managed care front. So they probably won't be as great; 2024 rates won't be as good as the 2023 rate increases, but we do think that there will continue to see rate increases in 2024.
Are you seeing opportunities for value-based care contracts? What do you think of the continued move into value-based care, and how do you think the industry fits into the model?
Yeah, it's really interesting. I think that's what you hear on the headlines. It's a lot of value-based care talk. I think the industry as a whole, and us specifically, we've done some pilot programs. We've worked with different, various large managed care providers to do some pilot programs in various states. I think that there's, you know, some different providers who really want to roll it out, but a lot of providers don't know exactly how to roll it out. And so as we look and work with those managed care plans, just there's opportunity but not as much as one might think.
Got it. And going to continue with the rates, you know, California there's always been a lot of movement there on the California at the state level, the Medicaid rate environment, rebasing, supplemental program. Can you give us any more color or any more clarity what's going on with in California, specifically?
So in California, as you mentioned, we are rebasing the rates effective January 1st, 2024. When the rebase is, it doesn't actually apply to every single one. There's a rate increase and a rebase and a supplemental. So it's a very convoluted program that exists out there. And so what we've done is really try to simplify it for you guys and really look at it as a whole. When we kind of break all those various things down, we think that will be neutral from the rate increase perspective of what's happening with the rebasing, what's happening with the roll-off of FMAP because California was the only state that didn't actually put an increase in 2023. So we had a 10% increase that had happened in 2023 that we would expect to continue to see in 2024.
Okay. One of the hot buttons or hot issues we keep getting asked from investors is, you know, about the minimum staffing regs. You know, what are your thoughts on the proposed minimum staffing ratio? What are you hearing? How do you expect this to play out? Timing, if you can, you know, kind of start with that, and then we'll dig into it.
Yeah. Yeah, there is not a whole lot of clarity yet on that. We haven't really seen, you know, CMS has played their cards pretty close to the vest, so we haven't really seen anything definitive that gives us comfort or fear one way or the other. You know, our hope always, you know, along through this process with providing all the thousands of comments that we and the rest of the industry provided was that to, you know, to give CMS a really clear indication that the rule needed to be moderated, if not, you know, thrown out altogether. I, you know, we know it won't be thrown out. Obviously, it's at the OMB now and, will likely be released, you know, could be anytime.
But that said, our foot is also not off the gas in terms of, you know, what we plan to do, you know, to continue to fight it. We do think it's a horrible precedent for the industry. We have really good pathway both legislatively and legally that we're working towards. There's a bill that just came out of the Ways and Means Committee in Congress that probably won't be kind of put up for a vote until the lame duck session, but calls for kind of the, you know, the rule to go away. There's also another bill in the Senate that they're working on, that would do the same thing.
And then at the same time, you know, legally, we're also preparing as an industry to challenge the whatever the final rule might end up being. That all said, you know, just important to remember, once the final rule is out, we'll have at least two years to, that part we've heard has not changed, two years to, you know, be in compliance with whatever it ends up being.
And, you know, again, there will be several elections between now and that time that could impact whether or not the rule will go into effect, but it also gives us time to figure out, you know, what the rule really means, how we actually can comply with it or not, and then, you know, what changes we need and adjustments we need to make operationally. I think it's probably important to note too, Michael, that, you know, if the rule is drastic and extreme and somehow ends up, you know, being something that the industry has to come around to, it's important to remember that there's a great chunk of the industry that's hanging on by its fingernails operationally and financially.
And, you know, we're certainly fortunate not to be in that kind of a situation. But this would more than likely bring to pass a great deal of churn that could represent some pretty significant opportunity for us. We, you know, our organization was born at a time of kind of, you know, massive industry upheaval. And so if there was a company that was made for times of, you know, stress and headwind for the industry, that has typically been the times where we have the most growth, whenever we see nuances and challenges, whether they be regulatory or reimbursement related.
I just read today that Illinois, Rhode Island, and New York are pausing, I guess, the fines on the nursing homes for violating the state mandates. How do you think that affects what's going on in Washington? Do you think that will have any impact on it? It seems like there's definitely concern in these states worried about access or, you know, nursing homes shutting their doors as you're implying. So do you think this is something that could have, you know, some impact on CMS?
I mean, I certainly know they're aware, and I, you know, we've not been shy about bringing things like that to their attention. The challenge with this rule is it's not really being driven by CMS. It's being driven by the unions and the White House. And the CMS, you know, is effectively having to kind of follow orders on this one. You know, you saw that kind of conflict, when the study was released that indicated that there was no real tie to changes in quality with staffing that they commissioned from a third party to study. And the, you know, within 72 hours, the preliminary rule was pushed out.
So you see this kind of, you know, indication of conflict between what CMS thinks is enforceable and what the White House wants to do to cater to the unions. So, you know, in the end, this is why we feel like, you know, another indication of why we feel like that there's going to be good grounds, whether it be legislatively or legally, to have this rule changed or thrown out altogether.
Just, you know, kind of continuing on this, one more question. Operationally, you know, what do you think you could do to mitigate this or, you know, take off, you know, offset some of the impact? You know, I'm sure you guys are thinking strategically and, like, and operating next steps.
Sure. Yeah, I mean, look, other than trying to be the employer of choice and really focus on turnover and the other things that I mentioned earlier, you know, there, you know, the one thing that wasn't clear in the preliminary rule was how do you utilize LVNs, right, and LPNs. And that's certainly a giant pool of talent that we use heavily in our facilities that, you know, if they couldn't necessarily count as a nurse, maybe they count towards the CNA ratio. And so that's one area where I'm sure there's some opportunity. Now, we expect there'll be some more clarity on that in the final rule.
And, if we had to guess, there's probably going to be, instead of a position-specific mandate, it might be an overall, you know, hours per patient day mandate, which gives us a lot more flexibility on how, you know, we could certainly you can pull levers within that overall PPD to decide on how you're going to staff and try to pull in, you know, LVNs or LPNs versus RNs. And the bigger challenge with that rule, as it's been written so far, though, is that 24-hour RN nursing requirement. And that one, you know, we've heard that they had been considering doing a telehealth option for that. That would be probably more tenable.
But, you know, if that went into effect, there's some markets where a 24-hour nursing RN nursing staffing model, it just doesn't. The nurses don't exist to do that. So it'll be interesting to see how it all plays out. But, you know, look, two years gives us plenty of time to kind of, you know, strategize and plan and figure out how we're going to adjust. I mean, you know, with the use of third-party nursing agency moderating, that gives us, you know, some hope that we're heading at least towards a more normal labor environment where we could make more significant progress in hiring more staff. But we'll just have to wait and see.
Okay. So let's continue on the labor side. You know, let's just kind of drill down, you know, kind of discuss the labor market, you know, kind of specifically where the inflation is currently running. You know, and where's agency usage at this point? Do you see more downside from here?
Yeah, agency, there's, you know, we've had 14 straight months in a row of improvement. We're now, you know, probably, you know, within, you know, 20%-30% of where we were pre-pandemic. And that, you know, given where we were just, you know, again, a year ago even, that's really, really encouraging, to feel like we're more, you know, you know, trending towards a more stable and normal environment from that perspective. You want to talk about wage inflation, Suzanne?
Yeah. I mean, I think what we've seen over the last year is that, you know, in 2023, and I would say in 2022, probably hit us the hardest with huge jumps. I think we started to see it moderate, towards the latter half of 2023. And in 2024, we're continuing to see it moderate. It's still above historical norms, but kind of in that mid-single-digit inflationary number, which is a lot better than what we were seeing during the height of the pandemic when we were in kind of high single-digit, even in low double-digits in most of our markets.
What are you seeing? Are you seeing any changes at the unions, and what's your exposure there? Obviously, there's been a lot of noise and a lot of discussions around the unions, obviously, with the regs. It's in general in California. And so kind of, you know, kind of where you guys stand and kind of what are you, like I said, what are you seeing?
I mean, yeah, I as you know, we're with over 300 skilled nursing operations and campuses, we're still union-free. You know, that that's a good thing operationally, for sure. But certainly, you know, we know the unions want a foothold in our organization and our individual facilities. I wouldn't say it's caused us really any challenges that we haven't been able to overcome just yet. It certainly makes for an environment where there's some really challenging policies that are being put forth, by governments and states that in certain states that have tight relationships. And as you mentioned, in California, there's, you know, certainly this push for a different minimum wage standard.
There's this push for the rebasing that, you know, if you're part of a labor management group led by the SEIU, you have this chance to have a rebasing that's kind of a different pathway than the non-union providers, which, you know, bears some question, you know, in terms of legality. But it's created some certainly some hurdles and some distractions, but it really hasn't affected us operationally yet in a negative way financially. There have been some minor headwinds here and there, but nothing that I think structurally has created us any major challenges that we haven't been able to overcome.
Perfect. Let's shift gears here. Capital allocation. You guys have a clean balance sheet, amass significant cash levels. Can you talk about how you're going to plan to deploy the capital, going forward? And then we can, you know, kind of drill down on what you're seeing in the M&A market as well.
Yeah, sure. I mean, we've been very intentional about making sure we have a extremely healthy balance sheet, as Barry talked about. There's lots of reasons to do that in an industry that is changing all the time. So, you know, obviously, our number one, you know, use of capital is acquisitions, and we can talk about that. But, you know, that that's our primary, primary, you know, investment criteria, you know, objective is to find and acquire really really accretive acquisitions. You know, we also, you know, as a for 300 buildings, there's obviously a lot of physical assets that need to be taken care of. But we also, you know, deploy a lot of capital just to maintain and remodel and, you know, everything involved with a real estate-based business that costs us money.
You know, we do have a very modest stock repurchase program from time to time that we'll implement. And, you know, we've done that strategically to, you know, to buoy the stock in times when we think the price is not what it should be. We have a, you know, modest dividend program. But for the most part, you know, we want to maintain that balance sheet and keep our capital healthy to, to allow us to acquire in times when others are not and do it in a very efficient way without, you know, having financing contingencies and those kinds of things.
So you're specifically on the M&A market. What are you seeing? Are the sellers more motivated? And how are the sustained higher interest rates challenging the landscape at this point?
Yeah. So I think, you know, the thing that impacts, you know, us the most, obviously, is availability for acquisitions and then, you know, just sort of the market dynamics in terms of pricing and, you know, how that plays out. So, you know, recently, we've seen probably more deal opportunities than I can remember. I feel like I've been saying that for a long time. But this time, you know, the last three or four months, it really has been uniquely, just, I guess, there's been a lot of deals that they're coming through the door. I will say that we, you know, in times past, that's been true. But recently, we found that a lot of our offers are being accepted.
And the hit rate is probably a little higher than maybe it's been in, like, last year, for example. So we have a really good set of buildings that were down the road, you know, in terms of negotiation that you'll see us acquire here in the next few months. I'm very excited about all of those and excited to, you know, put those releases out and, you know, really attractive set of opportunities there. You know, and in terms of, just kind of this year, I think, you know, it could be a busier than normal year. And so far, it's felt that way. But we're also – I always want to remind people that, you know, we're not just growing to grow.
You know, to the extent there's a portfolio that comes our way, that's attractive, you know, we want to participate in that. But if prices get unreasonable, we don't have to chase, you know, any particular deal. So, we're going to remain disciplined. You know, if the star's going to line and the opportunities come at a price that's reasonable, we'll do it. If not, we'll wait. Oftentimes, we see those come back around, by the way. That's North American, an example of that where we, you know, someone wanted us to overpay. We didn't. Then it ended up coming back around at a much more reasonable and sustainable price. So that's always going to drive, you know, how many deals we do will be based, you know, in large part on that.
So in your opinion, what's driving this uptick, this recent, you know, flow of, you know, deal flow?
I would say it's the operational dynamics that Barry talked about. I mean, I think there's just a lot of operators that are really struggling. You know, just when you look at the landscape of just changes and things on the horizon, I think a lot of operators are just, you know, sort of deciding that this is the time they want to get out. I think that's probably the primary driver. You know, there obviously are sort of the capital markets and interest rates and all that in the background too. We don't focus too much on that. I mean, we've got just amazing, you know, partners in capital markets that help us there.
But certainly, I think, you know, rising interest rates and, you know, maybe has taken some of those, I guess, buyers that are looking at more of an arbitrage, maybe it's a little less attractive to them. So there might be a little bit less in terms of competition, from our end. But, yeah, it's mostly just the dynamics of skilled nursing that I think are driving sellers to put their operations up for sale.
You know, we're seeing, you know, financial statements for literally, you know, dozens and dozens of facilities and portfolios all the time. And, you know, so we see. I mean, and even in the case where it's not a completely distressed or insolvent asset or group of assets, we're seeing portions of portfolios of larger companies that are divesting in certain states or REITs that are trying to divest in certain geographies, not necessarily because, you know, they're losing money financially, but it's just they're so far off where they used to be that there's a reset that needs to happen or just a complete departure from certain markets or getting out of the business altogether.
That's a lot of what we see, just either lackluster performance or just our traditional kind of bread and butter underperforming, you know, insolvent operations.
One last question, you know, in light of the time here, you know, just kind of piggybacking on this. You know, how should we think about the opportunities on the Standard Bearer side, you know, what's going on there kind of? And strategically, how are you thinking about that outside of the business?
Yeah, it's a great question. I mean, you know, you'll see us announce more real estate acquisitions. You know, I guess strategically, I think I've said this before, but just for maybe some that are new, you know, our number one choice would always be to acquire the real estate and operate it ourselves. That's kind of what we try to do most. And, you know, I know in, you know, standard kind of REIT parlance, you want diversification and all of that's not a focus of ours. We feel like we're a really strong operator. And, you know, we, you know, we want to operate to the extent we can. The second thing would be, you know, probably a really attractive lease where we don't own the real estate, but we're just a tenant.
You know, we're really still operators primarily. And then the third strategy would be to buy the real estate and lease to a third party. And, you know, that part, I think, is, you know, first of all, we think there's a lot of great operators out there that are doing things the right way. We'd love to partner with them, work together. And we're finding that there's a lot of folks that are very interested in working with us. So, you know, we're continuing to develop those relationships and looking for the right opportunities to work together. We've already done it a few times in a few different ways. You know, I think in some environments, we see portfolios that are, you know, several buildings, and maybe we only want a portion of them.
And by having this sort of third option, it allows us to maybe buy the whole portfolio and operate the ones we want and then lease to another the building that wasn't a fit geographically or for whatever reason. We did that in Washington last year and a really great deal. You know, it also helped us close the North American transaction. So, that's kind of how we see the world. You know, there are certainly opportunities that have come to us that are just real estate investments. You know, maybe the operations aren't for sale or there is a partnership there. You know, for us, it you know, we're going to focus on the fundamentals. I mean, no surprise, right?
I mean, it's really going to be important that the operator is healthy, that the price we pay will lead to a lease rate that gives them plenty of coverage to, you know, manage through the ups and downs of the business. And so, you know, again, if we were just going to grow for growth's sake, there's probably a lot of real estate deals we could have closed. But, you know, we want, you know, to have that partnership with the operators be such that, you know, they're not just beholden to us and paying rent that doesn't make sense. And so that's kind of that discipline is, probably, you know, prevented us from maybe doing a deal here and there.
but we're not going to depart from those principles in making those decisions and still think there's a lot of upside, out there in Standard Bearer, you know, obviously, with the existing portfolio, the ones we acquire, ones we operate, and the ones we'll lease to third parties.
Oh, sorry, one last question. I'll let you go. Sorry, guys. Change Healthcare. Obviously, it's having a lot of impact across the healthcare, you know, system. You know, kind of what's your thoughts? Are you being impacted by this? And if so, you know, what are you guys doing? What, you know, what's your?
Yeah. So we're very fortunate. We didn't use Change as our clearinghouse. So we use a different system to actually process all of our invoices and billings. And so that's very fortunate. And then all the partners that we work with, for the most part, have found alternatives to actually transmit the payments on and get the payments for. And so, you know, there is going to be some delays that happen as a result of it. And so a little bit slowly in the collection cycle for us, but for the most part, everyone, most of them are back online, and really we're kind of back up to speed probably by the end of this week is what we're looking at with the last couple that aren't back up online.
But, yeah, we weren't impacted as much as I think most were in the space.
Okay. Well, we're out of time. I appreciate it. It's always great talking to you guys. And hopefully have a great rest of the conference. And I really appreciate your participation.