Q3 2024 Earnings Summary
- Same-store occupancy levels have surpassed pre-pandemic highs, exceeding the previous high watermark of 80.1%, with mature operations reaching occupancy rates well into the 90% range. This indicates significant potential for continued growth in occupancy and skilled mix due to strong demand for higher acuity services.
- Ensign Group has a robust pipeline of acquisition opportunities, including distressed assets, and is expanding in existing markets like Colorado and new markets such as Tennessee and South Carolina, supported by a strong leadership program and a pipeline of over 60 Administrators in Training (AITs). This positions the company well for continued growth through strategic acquisitions.
- Positive reimbursement trends are anticipated, with Medicare rate increases effective October 1, 2024, expected to be slightly above net market basket rate increases due to the states they're in, and steady Medicaid rates. Additionally, Ensign expects higher skilled mix and continued occupancy growth in Q4, with full-quarter contributions from recent acquisitions, supporting a positive outlook for 2025.
- Integration Risks from Rapid Expansion into New Markets: Ensign Group is expanding into new states and markets where they have less experience ( , , ). Although management expresses confidence in their ability to integrate acquisitions due to their local approach and preparation, entering new geographies could carry integration risks, and the success of these acquisitions is not guaranteed. For example, they mentioned plans to grow in Tennessee, where they currently have only three buildings and are preparing for future growth ( ). They also plan to add some new states, which may present additional challenges ( ).
- Large Cash Outflow Due to Settlement Impacting Cash Flow: The CFO, Suzanne Snapper, indicated that they have a large payment going out for a settlement that was done earlier in the year, anticipated to occur at the beginning of Q4 ( ). This significant cash outflow could impact the company's cash flow and liquidity in the fourth quarter, potentially affecting financial flexibility.
- Potential Challenges with Insurer Claims Denials and Prior Authorizations: There are industry-wide concerns about increased levels of insurer claims denials and prior authorization challenges ( ). While the company feels confident in their relationships with managed care providers, they acknowledge that "sometimes it's really difficult to have those discussions because what they want and what we want for the patient are sometimes conflicting" ( ). These challenges could lead to higher administrative costs, delayed payments, or reduced reimbursement rates, potentially impacting profitability.
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Acquisition Strategy
Q: Is anything driving the acceleration in acquisitions?
A: We see several factors increasing acquisition opportunities, including smaller operators struggling with constant changes and potential minimum staffing regulations (though we feel confident that's not going to happen). Post-COVID, some sellers feel it's a good time to sell, and over-aggressive real estate deals have led to distressed opportunities. We can comfortably grow by leaning on our local teams as they transition these operations. -
Growth in New Markets
Q: Are you broadening scope into higher-acuity opportunities?
A: While our targets remain similar, we're seeing opportunities in new markets and plan to grow in states we're already in and new ones. You'll see growth in newer markets and the addition of new states soon. -
2025 Outlook
Q: Any early comments on 2025 growth opportunities?
A: We're excited about growth and acquisition opportunities and have solid preparation to handle an attractive environment for growth. Our same-store operations continue to improve nicely, and we feel good about heading into 2025. -
Q4 Modeling Considerations
Q: Any call-outs for modeling Q4 and cash flows?
A: The Medicare rate increase effective October 1 will be slightly above the net market basket rate increase due to the states we're in. Medicaid rates are steady, and we're looking consistent in margins. We anticipate higher skilled mix and continued occupancy growth. We had 12 acquisitions at the end of Q3, contributing for a full quarter in Q4. We have a large settlement payment going out in early Q4. -
Occupancy and Skilled Mix Growth
Q: What's the occupancy distribution and upside potential?
A: Our high watermark pre-COVID was 80.1%, and we're now above that. Some operations are well into the 90% range. There's great opportunity to continue driving acuity, with skilled mix gradually moving higher. -
Expansion in Colorado and Tennessee
Q: Any specifics on activity in Colorado and Tennessee?
A: Colorado is a state we love with a strong track record, and great deals have come up there. In Tennessee, we currently have three buildings and are preparing for future growth. We've developed a new market leader program and are working with experienced leaders interested in other states. Don't be surprised if you see us entering new geographies next year. -
Supplemental Payments
Q: Update on state supplemental payments and Medicaid rates?
A: We recognize supplemental payments in our Medicaid rate every quarter, estimating amounts based on days, programs, and quality performance. Last year, FMAP dollars went away and were replaced by base rate increases and supplemental rates. No real surprises, and timing of true-ups can change. -
Insurer Claims Denials
Q: Thoughts on trends in insurer claims denials?
A: The recent commentary reflects what providers deal with. There's a healthy back and forth with managed care providers on coding, length of stay, rates, and authorizations. We build trust by understanding their needs and feel confident about our relationships, with probably no meaningful impact to us.