Ensign Group, Inc Q1 FY2022 Earnings Call

Good day, and thank you for being here. Welcome to the Ensign Group, Inc. First Quarter Fiscal Year 2022 Earnings Conference Call. I would now like to turn the call over to Chad Keetch, Chief Investment Officer. Please proceed.

Thank you, operator. Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. on Friday, May 27, 2022. We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, April 29, 2022, and these statements have not been nor will 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, 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, including our captive real estate investment trust, Standard Bearer, which owns and manages our real estate business. In addition, our wholly owned captive insurance subsidiary, which provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as worker’s compensation insurance liabilities. The words Ensign, company, we, our, and us refer to the Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center, Standard Bearer, and our captive insurance subsidiary, are operated by separate, wholly owned 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 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 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 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 Form 10-Q. And with that, I’ll turn the call back over to Barry, our CEO.

Thanks, Chad, and thank you all for joining us today. Our local leaders and their teams continue to be the examples of excellence in health care services as they navigate through the constant changes in each of their markets. The record results they achieved this quarter are particularly impressive given the continued disruption in the labor markets and the impact of Omicron early in the quarter. Despite all of that, our locally driven strategy led to continued improvement in occupancies, skilled revenue, and managed care revenue. We were particularly pleased that our operational leaders achieved sequential growth in overall occupancy for the fifth consecutive quarter, and managed care census has now grown sequentially for seven quarters in a row. We are inspired by the commitment of our caregivers and their continued endurance and strength. During the quarter, our operators drove impressive growth in skilled mix. With same-store and transitioning operations, combining for a skilled mix of 34.3% and same-store reaching a skilled mix of 35.2%. We also saw continued momentum in occupancy during the quarter with same-store and transitioning occupancy increasing by 2.9% and 6.2%, respectively, over the prior year quarter. This growth in occupancy is particularly impressive given it occurred in the face of a surge of the Omicron variant, which typically results in lower patient volumes. This simultaneous progress in skilled mix and occupancy gives us tremendous confidence that we’re in an excellent position to continue to return to pre-pandemic levels over time. As we get closer to what we hope will soon be the end of the pandemic, our leaders’ focus has shifted to sound operating fundamentals. Each operation is looking ahead and developing comprehensive strategies to thrive in spite of an evolving reimbursement environment, staffing challenges, and inflationary pressures. As general economic conditions have continued to put pressure on labor markets, our operators have discovered new methods for attracting health care professionals into our workforce while also strengthening their ability to retain and develop existing staff as we have focused on being the employer of choice in each of our communities. This gives us assurance that we are in a very good position to continue on this path of strong clinical and financial performance. We continue to benefit from improved Medicaid funding in several states. We are grateful that the federal government has extended the state of emergency to July 2022, which keeps in place many of the regulatory and other forms of assistance helpful to patient care. While we certainly don’t know for sure what the COVID future looks like, it’s very possible that this initial funding will not be extended past July. But regardless of COVID trends, government waivers, or political climates, we are confident in our ability to make operational adjustments, take advantage of an attractive acquisition environment, and lean on our overall health to continue our long-term path of performance. As those that have been following us for a long time know, Ensign was born at a time when the post-acute care industry was undergoing a complete transformation, moving from a cost-plus reimbursement system to a fee-for-service model. We went public in 2007 at a time when the U.S. economy was entering a recession. In 2011, RUGS IV was introduced and a major correction was made the following year. Even now, we emerged from perhaps the most challenging time in our industry’s history with the COVID-19 pandemic. Yet in spite of these industry-altering events, since our IPO in 2007, we have achieved an adjusted EBITDA CAGR of 21% and a revenue CAGR of 14% for that same period. We’ve also formed multiple new businesses, spun off two public companies, and most recently established a $1 billion real estate company, all the while, we’ve been acquiring both struggling and performing skilled nursing assets and have grown from 58 buildings when we went public in 2007 to 251 operations today. Once again, we are reaffirming our annual 2022 earnings guidance to $4.01 to $4.13 per diluted share and annual revenue guidance of $2.93 billion to $2.98 billion. As a reminder, the new midpoint of this 2022 earnings guidance represents an increase of 12% over our 2021 results and is 30% higher than our 2020 results. Our organization is extremely healthy, and our local operational and clinical leadership has never been stronger. Our culture and our local approach give us confidence that we can and will continue to innovate and grow this year. While change could lead to some near-term quarterly fluctuations, we remind you that our model is built for times like these. We have seen and fully expect to see continued growth throughout 2022 and beyond. I just want to take a minute to thank our incredible team members, facility leaders, field resources, clinical partners, and Service Center support staff. I can’t emphasize enough how incredibly honored and grateful we are to work alongside them and witness their amazing sacrifice, effort, and outcomes. Many of them have picked up extra workloads in the face of staffing challenges and have made other sacrifices for the benefit of their coworkers, patients, and their operations. Their commitment to serving their communities has blessed the lives of so many. It’s absolutely astounding to witness and an honor to be a part of that effort. Just as we’ve seen in the past, we most certainly expect some challenges ahead, and we’ll lean on the lessons that we have learned and will continue to build on our foundational strength. We are excited about our future and look forward to continuing to show our dedication to all those that have entrusted us with the care of their loved ones. Next, I’ll ask Chad to discuss our recent growth.

Thank you, Barry. To start, I wanted to provide a brief update on Standard Bearer, our captive REIT. As we’ve discussed before, this new real estate company will enable us to build upon our established real estate investment platform of high-quality assets. We couldn’t be more excited about this new organizational structure, which allows us to take the next step with our already thriving real estate business, which generated $11.9 million in FFO during the quarter, and sits in an EBITDAR to rent coverage ratio of 2.31x as of the end of the quarter. We were also pleased to add two assets to our portfolio during the quarter, both of which are operated by Ensign affiliates, bringing the asset value of our portfolio of 95 assets to approximately $1.02 billion. We have already begun evaluating several transactions, which include health care properties that will be operated by Ensign affiliates and other third-party operators. We have also had very productive strategy sessions with several like-minded operators and look forward to establishing new partnerships with them. As we’ve always said, we will remain disciplined and will not compromise the health of an operation in order to win a deal. We have already passed on several opportunities where the pricing became unrealistic. However, we are finding plenty of deals to execute on and are excited about the additions to our real estate portfolio during the quarter and the many more additions that we expect to add this spring and summer. As we said last quarter, Standard Bearer adds an additional pathway to growth and does not alter our proven method of acquiring both struggling and strong-performing skilled nursing assets, which will often be the subject of long-term leases with other real estate partners. During the quarter and since, we have added nine new operations in some of our most mature markets, including one skilled nursing operation in Arizona; two skilled nursing operations in California; one skilled nursing operation in Texas; one senior living operation in Washington; two senior living operations in California; and two senior living operations in Arizona. Several of these acquisitions involve senior living operations that were once part of the spinout of certain assets to the Pennant Group. After several years of operating independently of Ensign, we, together with the Pennant team, determined that due to the nature of these buildings, most of which are part of a health care campus that already includes an Ensign-affiliated skilled nursing operation, the operational efficiencies and other strategic advantages justified returning these operations to Ensign. In total, these additions include two new real estate operations acquired by Standard Bearer, which will be leased to an Ensign-affiliated tenant and six long-term leases with third-party landlords. As this recent activity illustrates, the ratio between leased and owned will vary depending on the circumstances. We are, first and foremost, focused on the operational health of acquisitions. So when it makes sense and the pricing is right, we will opportunistically purchase the real estate. At the same time, if attractive leases come our way, we’ll sign those too. As we’ve shown over our 22-year history, there will be many opportunities to do both. We are very excited about the nine new operations we added during the quarter and since and look forward to seeing them contribute to the success of their clusters and their markets as they implement proven Ensign operational clinical principles. This growth should illustrate our confidence in our ability to continue to perform in the short run and most importantly over the long run. We’ve been extra diligent to ensure that each new addition had the full support of a healthy market, a proven leadership plan, and a clear pathway to strong clinical and financial performance. Looking forward, we have another busy spring and summer ahead of us. The pipeline for our typical turnaround opportunities, including real estate acquisitions and leases, continues to be strong. We have a dozen or more new additions that we are working towards closing in the coming months and are working through the transaction documents and related due diligence on several more. Lastly, during the quarter, we paid a quarterly cash dividend of $0.055 per share. Given our strength, we plan to continue our 20-year history of paying dividends into the future. We also continue to delever our portfolio, achieving a lease-adjusted net debt-to-EBITDA ratio of 2.1x, a decrease of 0.21x from the prior year quarter. Currently, we have $593.3 million of available capacity under our line of credit, which was recently increased by $250 million to $600 million in April, which, when combined with the cash on our balance sheet gives us nearly $800 million in dry powder for future investments. We also own 102 assets, of which 95 are held by Standard Bearer and 78 of which are owned completely debt-free and are gaining significant value over time, adding even more liquidity to help us with our future growth. And with that, I’ll turn the call back over to Barry.

Thanks, Chad. Over the past two years, our nation and industry have grappled with the COVID pandemic and associated staffing shortages, and our affiliated facilities have not been immune to these challenges but it has been inspiring to see how our high-caliber local leaders have repeatedly used these challenges as opportunities to refine their systems, refocus their efforts, and improve their clinical outcomes and financial performance. Today, I’d like to share two examples: one from a large suburban operation and another from a small rural facility that highlight how our model continues to thrive regardless of circumstances. The first highlight comes from Willow Bend Nursing and Rehabilitation located in the Dallas Metro area. This 162-bed facility led by CEO, Kevin Reese; and COO, Valerie Kosanovich, has achieved five-star ratings in quality measures, health inspections, and overall excellence and earned a reputation for being the provider of choice that can meet the changing needs of health plans and hospital systems. For years, Willow Bend has been one of our strongest performing affiliates in Texas. But in the first quarter, they managed to grow overall occupancy by more than 8% and managed care occupancy by more than 17% compared to the prior year quarter. And as a result, their pretax earnings increased by 28%. These incredible results were made possible because of the team at Willow Bend’s relentless focus on hiring and retaining high-caliber staff. In fact, during the first quarter, the team’s recruiting efforts resulted in a growth of their care staff by more than 8% in spite of one of the most competitive hiring environments we’ve seen in decades in the Dallas-Fort Worth area. The second example we’d like to highlight is Owyhee Health and Rehab, an award-winning 58-bed facility in Homedale, Idaho, a town with a population of 2,600 in Western Idaho. While hiring is difficult everywhere, it has become nearly impossible in small rural communities. Nonetheless, CEO, Melissa Truesdell; and COO, Georgia Nelson, have found a way to thrive by creating a family environment where staff feel valued and where turnover rates are less than a quarter of the industry average. Retaining quality staff has allowed Owyhee to meet their community’s growing demand and increase occupancy to 92% in the first quarter, which represents a 9% improvement from the prior year quarter. As you would expect, Medicare skilled census also skyrocketed and EBIT improved by 47%. In the same way that COVID required our facilities to improve their infection control and clinical systems early in the pandemic, the staffing shortage has pushed our facilities to innovate and improve their systems around recruiting and retaining staff. The progress demonstrated by Willow Bend and Owyhee is reflective of progress that we are seeing globally across our organization. In the first quarter alone, while the industry was experiencing unprecedented staffing challenges, we grew our frontline workforce by 3%. This incredible progress is the culmination of hundreds of local leaders relentlessly focused on recruiting and retention. We are confident that our model of peer-to-peer best practice sharing will only accelerate this improvement in the coming months. We hope that these examples are helpful in illustrating some of the many different levers our local operators are pulling in order to meet the needs of their health care continuum partners. With that, I’ll turn the time over to Suzanne to provide some more detail on the company’s financial performance and our guidance, and then we’ll open it up for questions.

Thank you, Barry, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include GAAP diluted earnings per share was $0.89. Adjusted diluted earnings per share was $0.99, an increase of 13.8%. Consolidated GAAP revenue and adjusted revenues were both $713.4 million, an increase of over 13%. Total skilled services segment income increased 10.5% to $98.3 million. GAAP net income was $50.3 million, an increase of 2.3%, and adjusted net income was $56.4 million, an increase of 13.7%. Other key metrics as of March 31 include cash and cash equivalents of $248.5 million and cash flow from operations of $45.9 million. As of March 31, 2022, we repurchased 133,000 shares of our common stock for approximately $10 million, completing the October 2021 stock repurchase program. Given the stock’s recent performance, our liquidity, and our confidence in near and long-term results, we have established an additional share buyback program of $20 million, and we believe this to be a very wise use of our capital. As we said before, share buybacks are one of the many levers we have to deploy capital to benefit our shareholders. We also wanted to address the current status of the state of emergency and reimbursement matters. Recently, HHS extended the public health emergency for another 90 days. With this extension, the federal government will continue to provide various waivers and enhanced FMAP funding to July 14, 2022. Additionally, as a reminder, the suspension of a 2% sequestration continued through April 1, 2022, at which time the suspension amount was adjusted to 1% through June 30. Starting July 1, the full 2% sequestration will be back in place. The suspension had and will continue to have a positive impact on our revenue, depending upon how the pandemic affects our Medicare census. As you all know, a new billing system was implemented in October 2019 called PDPM. When finalizing PDPM, CMS stated that the new case mix model will be implemented in a budget-neutral manner, meaning that the transition from RUGS to PDPM should not result in a payment reduction or increase. Subsequently, COVID hit the industry, resulting in higher acuity patients and had a direct impact on the PDPM rates. When evaluating PDPM last year, CMS acknowledged that COVID affected their PDPM analysis and decided to take a step back to further study the impact. CMS recently issued a proposed rule regarding Medicare rates and PDPM. Under the proposed rule, which asked for commentary from providers, CMS would make a parity adjustment that will reduce Medicare rates downward by 4.6%, with the goal of making PDPM budget neutral. The ultimate timing and the amount of the proposed adjustment will be subject to much discussion during the next several months before the rule is finalized. Additionally, CMS announced a larger-than-normal payment rate increase of 3.9%, which includes adjustments for the annual market basket, the positive forecast error, and productivity. Depending upon CMS’ parity adjustment for PDPM, the net rate in the final rule could either be a negative 0.7% or could be less or even could be a net positive change depending upon the timing and the amount of the final adjustment. Despite these announcements by CMS, we are reaffirming our 2022 annual earnings guidance of $4.01 to $4.13 per diluted share and annual revenue guidance at $2.93 billion to $2.98 billion. We have evaluated multiple scenarios and based upon our solid performance and positive momentum we’ve seen in occupancy and skilled mix as well as some additional strength for Medicaid programs, we remain confident that we can achieve our earnings and revenue projections within these ranges. Our 2022 guidance is based on diluted weighted average common shares outstanding of approximately 57.3 million, a tax rate of 25%, the inclusion of the acquisitions closed in the first half of 2022, the exclusion of losses associated with start-up operations, which are not yet stabilized; the inclusion of management’s expectations of Medicare and Medicaid and reimbursement rates net of provider tax and with the primary exclusions coming from a one-time legal fee and stock-based compensation. Additionally, other factors that could impact the quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy and skilled mix; the influence of the general economy in census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals, surges in COVID-19 and other factors. And with that, I’ll turn the call back over to Barry.

Thanks, Suzanne. We again want to thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We know that this year will continue to present us with several unique challenges, but we’re encouraged by our operational strength in our core business. We’re also thrilled to have an additional growth lever in Standard Bearer, which will help us accelerate our mission to change post-acute care. With Ensign affiliated operations as its primary tenant, it’s a perfect launching pad to create significant real estate value as we follow our proven model while we align with others in our industry. As Chad pointed out earlier, we believe little to no value is being assigned to our real estate by investors, but in fact, the values are more than $1 billion. We’re eager to grow that value and take advantage of opportunities we previously would have passed on and leverage our best-in-class field leadership team to help attract and partner with other great providers in our space. And speaking of talented field leaders, we want to recognize them for their heroic efforts, along with those of our nurses, therapists, and other frontline care providers who continue to provide industry-leading examples of life-enriching service to our residents, coworkers, and their communities. We’re also appreciative of our colleagues here at the Service Center who are working tirelessly to support our operations enabling us to succeed in spite of the challenges we faced. Thank you for making us better every single day. We’ll now turn the Q&A portion over to our call. Victor, can you please instruct the audience on the Q&A procedure?

Our first question will come from Tao Qiu from Stifel.

Barry, I really appreciate the details you provided on labor management initiatives to improve recruiting and reduce turnover. And certainly, your performance has surpassed many of your peers. I wanted to ask about another staffing matter that could have long-term implications for the industry. I think the federal government is trying to implement a minimum staffing requirement that could be implemented by next spring. We know that CMS is engaging in the industry to formulate their guideline. Obviously, some of the states already pushed out their own rules. Could you maybe talk about the staffing level today in your facilities and the mix of new RNs, CNAs, etc. and where you think the outcome may shake out to give us an idea on the kind of potential impact?

That's a good question. The answer could be lengthy, but I'll summarize it simply. First, we don't have a lot of information, but there is a general push to examine this issue. It will start with a long-term study that will take a full year to complete as outlined. They're certainly asking for feedback from the operator community, which is a positive sign, and we are engaged in that through our federal association and will continue to be involved. However, in light of a possible federal staffing mandate, we see ourselves differently. We are distinct from most providers in the post-acute skilled nursing space, as we already care for a higher acuity type of patient that requires a higher staffing level. Therefore, considering the overall effort for a federal staffing mandate, it should reflect all types of providers, with most having a lower acuity level than we typically manage. This means that a federal staffing minimum based on average operators would likely set a threshold lower than what our current acuity levels necessitate. Consequently, we aren’t overly concerned about it. We try not to dwell on the specifics, especially when there is limited detail available. Overall, we feel confident; while we don’t necessarily agree with the model, believing it's not the best way to ensure quality, we are not too worried about any regulatory mandate on staffing due to our care model and the patient types we handle.

Got you. My second question is for Chad on Standard Bearer. In the prepared remarks, I think you mentioned you are in active discussions with like-minded operators. Could you talk about any quality or traits that you’re looking for in your operator partners? Are these going to be smaller, regional operators? Or would you consider partnering with larger multistate operators as well? And in terms of the opportunities you’re looking at, what is the current breakdown of mature versus turnaround opportunities? Are there any new markets you’re contemplating getting into?

Yes, thank you for the question. The size of the operator isn't necessarily a key factor for us. We're looking for operators who share our perspective on the post-acute space and have a cultural alignment with our focus on quality and being a solution for hospitals and managed care partners. While we have our model, we understand there are various effective approaches, and we're open to learning from others. Our primary goal is to operate in markets where we already have a presence, but there are times when opportunities arise that may not fit us for different reasons. One of the first things we consider is the leadership team in each market. Often, we are presented with facilities in new or unexplored areas, and we’ve sometimes missed chances because we restrict ourselves to our existing markets. Sellers often prefer to engage a single buyer, and there can be areas within a state where we aren’t currently active. In response to your second question, our initial priority is to operate in markets we’re already familiar with. If that’s not possible, we may consider new markets, and lastly, we look at partnerships when operational fit isn’t feasible. Entering new states requires a significant amount of time to adapt to the regulatory environment, establish relationships with managed care partners, and build a reputation. Therefore, aligning with operators who share our vision in these new states is essential, and that will create numerous opportunities for us. Overall, we’re quite enthusiastic about these discussions, and the feedback has been overwhelmingly positive. There’s a genuine excitement for collaboration, not just in terms of financing or real estate ownership, but through various partnerships as fellow operators, which is quite promising.

I think the other thing we’re looking for is people who want to be in it for the long haul. We want to have very successful operations. They aren’t trying to offload every dollar into the real estate and look at it as a one-time transaction for them. But someone here really is excited about being the best-in-class operator themselves, and so that we can have that great partnership that Chad just talked about.

Our next question will come from the line of Scott Fidel from Stephens.

I would like to start with the first question regarding the proposed CMS Medicare rule for fiscal year 2023. I'm curious about your assessment of the likely outcome. It seems feasible that we could see a two-year phase-in of the PDPM recalibration as one potential scenario. I would also like to hear how you are weighing the opportunities against the associated risks, particularly concerning M&A prospects and the challenge of managing margins amid potentially tighter pricing. I'm interested in your insights on this matter.

Yes, Scott. I want to clarify that it can sometimes be confusing when discussing the new year starting. This rate begins on October 1, 2022. We’re mainly focusing on two key components: the 3.9% increase and the proposed 4.6% cut, which leads to an overall decrease of 0.7%. The positive aspect is promising, given all these elements. However, it's important to note that there’s typically a missing piece due to inflation from the current year not being immediately reflected, as there is about a year lag. Therefore, if this is what we expect for this year, there might be an opportunity for an adjustment next year that could result in another significant positive outlook. Regarding the parity adjustment, as mentioned in our prepared remarks, we've incorporated the entire aspect into our overall guidance. We are optimistic and see several pathways that could allow for this cut to be spread over a potential two to three-year period, effectively reducing it by half. If this cut happens, it aligns us closely with our original guidance assumptions, which anticipated an overall increase of around 1.5% to 1.6%. I’ll let Barry provide further details on this.

Yes. The reality is whether it happens fully this year or not, if it does, we see an exciting opportunity for growth. If it happens over two years, we still see a clear path forward and have no need to adjust our guidance or any concerns about being on the trajectory we anticipated for the year.

So long story short, that either way, we feel like it’s going to be within the range of guidance that we put out. I think the other thing that we’ve been talking about is that there’s an opportunity for us to continue to see acquisitions out there. And maybe Chad can give some color on that.

It has been an interesting time as we have observed many deals, completing nine in the last quarter alone. We are finding opportunities that are priced right, but we have also faced competition from others willing to pay prices that seem unreasonable. Additionally, some sellers are entering the market with very high expectations. Despite this, we remain disciplined, believing that the market will eventually correct itself. The pipeline remains strong, and we are currently working on about a dozen potential deals. Everything unfolded rapidly in the fall, which may lead to quicker adjustments in pricing expectations. This is why we have updated our revolver and maintain sufficient liquidity.

Understood. And then maybe just as my follow-up question, it could be helpful if just on the staffing dynamics if you’re able to give us any insight on how the sequencing of hires and turnover sort of played out over the course of the quarter? And any early observations you can give us on the staffing dynamics that you’re seeing so far in the second quarter through April?

Yes, that's a great question. We monitor this closely from various perspectives, including agency usage and what we refer to as net hires. The winter period has been particularly challenging, peaking for us in January. Since then, we've observed positive momentum in our net hires. In terms of full-time equivalents, we have increased our workforce by 3%. Our agency usage has also started to decline, and we anticipate that this trend will continue as we move forward. All these trends are encouraging and indicate a positive direction for us.

Great. I would like to ask about your current thoughts on occupancy and how you're planning for it in your outlook. Should we anticipate a steady improvement in occupancy throughout the year, barring any new severe variants? Or do you expect to see traditional seasonality affecting the various quarters?

Yes, thank you for the question, Scott. Regarding seasonality, we anticipated some effects last year, but that didn’t occur. Instead, we experienced steady improvement throughout the summer, which is quite unusual for us. We are currently on our fifth consecutive quarter of improved occupancy. Looking at managed care, we are optimistic about our progress. Typically, we would expect a slowdown as we approach the summer months, but that hasn’t happened yet, so we remain hopeful for continued improvement. This outlook makes sense since we are still recovering from previous occupancy levels. We recognize that demand exists, and while we have faced some temporary challenges due to surges, variants, and staffing issues, we have continued to see improvement in occupancy. This gives us confidence that the positive trend will persist at the current pace.

Our next question will come from Ben Hendrix from RBC Capital Markets.

On your managed care revenue growing and that becoming a larger piece of the skilled mix. Can you talk a little bit about your managed care contracting and how that’s progressing and the willingness of your managed care payers to acknowledge the higher staffing costs you’re seeing?

Yes, I can start and then Barry can provide additional insights. We've been focused on this effort for quite some time. Our relationships exist both on a national level and more significantly at the local level, where local operators, clinicians, and managed care resources collaborate closely with their teams to develop solutions and address issues. This collaborative environment has gained traction. During the pandemic, we observed increased discussions regarding patient acuity and how it influenced decisions about care settings, such as skilled nursing facilities versus other locations. This situation fostered greater trust between us and our managed care partners, and we’re pleased to see this trust persist beyond the pandemic. Initially, we were optimistic, but it feels like we are now fully engaged in this process. Regarding price increases, managed care organizations aim to maximize their revenue, and so do we. This leads to ongoing healthy discussions about appropriate compensation levels. We continuously engage with them at both local and national levels to ensure recognition of the additional costs tied to our direct labor, which is currently a significant challenge. It's not a one-time conversation, but an ongoing dialogue, as we manage hundreds of contracts with our team and the managed care providers daily.

With the expectations of rising interest rates, are there any changes in your growth strategy, particularly regarding your triple net lease term rates or your ability to leverage your unencumbered real estate assets despite having strong liquidity?

Yes, it’s a great question, Ben. I mean, we certainly keep a close eye on it. And I would just say we’re going to just make sure that we’re in line with where the market is, especially from kind of the real estate side of things. But really happy with the terms of our new credit agreement; there is kind of a, I guess, a floating kind of SOFR-based element to that. But we’re so healthy and our debt levels are so attractive, our banking partners gave us really good terms. So we’re really excited about that. We obviously have a bunch of unlevered real estate assets that we could get some fixed financing if we want to do that, too. All of it, though, at the end of the day, it comes down to the prices that you’re paying. And so long as you’re doing that and everything we do, we make sure there’s a forward-looking element to how we think we can perform. And obviously, real estate expenses are a big part of that. But as long as you can make sure you’re paying a proper price and that there’s enough cushion there to give the operators room, it doesn’t impact our sort of growth path. It just kind of affects the terms of the deal, so to speak.

I want to emphasize that Chad and his team have worked hard over the years to make sure all of our leases include a cap on inflation regarding the rate increases. Our average cap on escalators for all our triple net leases is about 2.5%, which provides a solid hedge against future challenges. This gives us a reliable safety net to maintain the stability of our leases.

And I’m not showing any further questions in the queue. I’d like to turn the call back over to Barry for any closing remarks.

Thank you, Victor, and thank you, everyone, for joining us today.

And this concludes today’s conference call. Thank you for participating. You may all disconnect. Everyone, have a great weekend. Thank you.