Q2 2024 Earnings Summary
- Strong occupancy momentum exceeding pre-pandemic levels, with occupancy surpassing pre-pandemic averages and reaching over 96% in some facilities. The company notes potential for further growth as many mature operations regularly achieve occupancy levels in the 90-plus percent range, indicating significant organic growth potential. Additionally, they have not seen the typical seasonal decline in occupancy, suggesting sustained strong demand. , ,
- Improved labor trends leading to cost improvements, as wage inflation has moderated to the low to mid-single-digit range from double-digit trends previously experienced. There is a sustained decrease in employee turnover and reduced use of agency labor, which, while not yet back to pre-COVID levels, is expected to positively impact margins.
- Strategic growth through acquisitions, with a very healthy pipeline and recent additions expanding presence in existing and new markets. The company has acquired 15 new operations during the year and anticipates additional growth in the third and fourth quarters. Focusing on growing in established geographies allows for better integration and operational efficiency, with clusters of 3 to 4 facilities being ideal. This expansion is expected to contribute to long-term earnings growth. , ,
- A significant portion of Ensign's operations (over 25%) are either recently acquired or transitioning facilities, which may present integration challenges and could impact financial performance. ,
- Potential variations in reimbursement systems, delays and changes in state budgets, and staffing challenges could negatively affect quarterly performance.
- Regulatory risks, such as the CMS minimum staffing rule, may pose future challenges despite not having a material impact in 2024.
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Occupancy Trends
Q: How is occupancy momentum and demand outlook?
A: Occupancy growth has been strong, surpassing pre-pandemic levels with an additional 200-plus basis point increase this quarter. Demand remains robust across the post-acute level, and despite expected seasonality, there hasn't been a decline in occupancy, indicating that strong demand will continue throughout the rest of the year. -
Investment Pipeline and M&A Activity
Q: Can you update us on the current investment pipeline?
A: The pipeline is very healthy with 15 acquisitions so far this year. More announcements are expected soon, with increased activity anticipated in Q3 and Q4 as sellers aim to close deals within the tax year. The deals range from small mom-and-pop operations to regional portfolios, and growth is distributed across multiple markets, with 7 out of 14 states seeing growth. -
Labor Trends and Wage Inflation
Q: What are the current labor trends and wage expectations?
A: Wage trends are very positive, with a massive moderation from the wage inflation of the past couple of years. Wage inflation has decreased to the low to mid-single-digit range, down from previous double-digit trends. Turnover has been improving over many quarters, and although nurse agency utilization isn't back to pre-COVID levels due to recent acquisitions with higher agency use, significant progress has been made. -
Regulatory Environment (Chevron Ruling)
Q: How does the Chevron ruling affect regulations and rate setting?
A: The Chevron ruling has increased confidence regarding challenges to overreaching regulatory mandates like the minimum staffing standards. The same attorney from the Chevron case is representing their industry lawsuit, strengthening their position. They do not anticipate changes in rate-setting processes and expect typical methodologies to continue. They have good visibility into state-by-state rates, giving confidence in overall rate stability. -
Acquisition Strategy in New Markets
Q: What is the critical mass needed in new markets for synergies?
A: An ideal cluster size is 3 to 4 buildings, with 5 being large. Beyond that, they start another cluster to maintain optimal performance oversight. In new markets like Tennessee, which currently has a cluster of 3 buildings, they plan to grow clusters and add market-specific resources. Tennessee is seen as a state that could mirror the success in Arizona, with expectations for more acquisitions throughout the year. -
Margin Outlook and Guidance
Q: What is the outlook for margins and any seasonality effects?
A: The overall guidance remains consistent, with expectations for margins to be relatively steady and Q4 being stronger as usual. The increased guidance reflects better occupancy and the realization of additional earnings from that occupancy.
Research analysts covering ENSIGN GROUP.