Ensign Group, Inc Q2 FY2025 Earnings Call

Thank you for joining us. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to The Ensign Group's Quarter 2 Earnings Call. I will now turn the call over to Chad Keetch, Chief Investment Officer. Please proceed.

Thank you, operator, and welcome, everyone. 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 p.m. Pacific on Friday, August 29, 2025. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, July 25, 2025, and these statements have not been or 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 independent subsidiaries 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 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 independent subsidiaries through contractual relationships. In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, Inc., which is a captive real estate investment trust that invests in health care properties and enters into lease agreements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with The Ensign Group. The words Ensign, company, we, our and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our independent subsidiaries, the Service Center, Standard Bearer Healthcare REIT and the insurance captive 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 words we, us, our and similar terms are not meant to imply nor should it be construed as meaning that The Ensign Group has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group. We also 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 is available on our Form 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry?

Thanks, Chad, and thank you all for joining us today. Our local teams have achieved another outstanding quarter, raising the bar again for what is possible even in a quarter where we historically have experienced more seasonality. The clinical results they achieved continue to be an important driver of our success. As our teams work tirelessly to gain the trust of the communities they serve and deliver consistent outcomes, our operations continue to earn the reputation as the facility of choice for thousands of patients. This trust is apparent from strong upward trends in occupancy and skilled mix during the quarter, which we believe is only achievable through dependable clinical results delivered by dedicated local leaders, caregivers and outstanding team members. As we dissect the numbers, we set second quarter records for same-store and transitioning occupancy, which increased by 2% and 4.6% to 82.1% and 84%, respectively, over the prior year quarter. We also saw skilled census increase for both our same-store and transitioning operations by 7.4% and 13.5%, respectively, over the prior year quarter. All these improvements are the result of many factors, but it could never have happened without the relentless efforts by these local teams that we mentioned earlier, who implement standard-setting practices that lead to better outcomes. We also continue to attract and develop caring and passionate partners into post-acute care who are determined to join us as we pursue our mission to dignify post-acute care. In addition, we continue to see improvements in turnover as well as lower staffing agency labor, even in the face of increased occupancy. As we've said before, our people are at the heart of our efforts and seeing these metrics consistently improve is critical to maintaining our path of success and to achieve industry-leading results. On the regulatory front, we were pleased that the skilled nursing population was carved out of provider tax reduction in the recently passed reconciliation bill, which was a big win for our industry. We feel optimistic that state and federal governments will continue to recognize the importance of properly funding the health care needs of the senior population. Now more than ever, it is essential that we elevate the voices of our patients and frontline team members. Their stories reflect the heart of what we do, and we remain unwavering in our commitment to advocate for the resources and support needed to ensure they receive what they deserve. After such a strong first half of the year, we are raising our annual 2025 earnings guidance to between $6.34 and $6.46 per diluted share, up from the previously raised guidance of $6.22 to $6.38 per diluted share. The new midpoint of this increased 2025 earnings guidance represents an increase of 16.4% over our 2024 results and is 34% higher than our 2023 results. We are also increasing our annual revenue guidance to $4.99 billion to $5.02 billion, up from $4.89 billion to $4.94 billion to account for our current quarter performance and acquisitions we anticipate closing through the third quarter. This increased guidance is due to the continued execution of our growth model with organic growth stemming from stronger occupancy and skilled mix, which is more than expected for the second quarter. Other than during the pandemic, we typically experienced a slowdown in both occupancy and skilled mix during the second quarter. However, due to the continued momentum and quality outcomes and the benefit from positive demographic trends, we were able to maintain stronger-than-expected performance in both occupancy and skilled mix without the use of increased agency or overtime, which is also helping control our cost of services. In addition, many of our new acquisitions are performing well ahead of schedule, which highlights the continued improvement in our locally driven transition strategy, but also points towards solid underwriting and investment decisions. We're also excited about our performance so far this year and are confident that our partners will continue to manage and innovate while balancing the addition of newly acquired operations. We are eager to continue to drive organic improvements and take advantage of the acquisition opportunities that we see on the horizon. The combination of improvements in occupancy and skilled mix in our more mature operations and the long-term upside in our newly acquired operations shows the enormous organic growth potential in our existing portfolio. Next, I'll ask Chad to add some additional insights into our recent growth. Chad?

Thank you, Barry. We maintained our steady growth by adding eight new operations, including three real estate assets this quarter. These operations comprise four in California, three in Idaho, and one in Washington. In total, we've added 710 new skilled nursing beds and 68 senior living units across these three states. This growth brings the total number of operations acquired in 2024 and beyond to 52. We are pleased to enhance our presence in some of our mature markets, and each new acquisition reflects our commitment to the healthcare communities in key states. Our growth this quarter emphasizes our focus on increasing bed capacity in established areas, which enables our clusters to meet the healthcare needs of those markets comprehensively. Additionally, the distribution of our growth over recent quarters spans many states and markets, giving us ample room to expand almost everywhere. While we aim to grow in new regions, we see significant opportunities to increase density in our most familiar markets. Our local leaders are actively recruiting future CEOs for Ensign-affiliated operations, and we have a strong pool of CEOs in training who are preparing to take on leadership roles. This quarter, we reached an all-time high for our Administrator-in-Training program candidates in our pipeline. This influx of strong local leadership talent, combined with our decentralized transition model, allows us to grow without facing typical corporate constraints. Our unique acquisition and transition strategy positions us well for sustainable growth. Currently, we anticipate opportunities that range from small to midsized owner-operated portfolios, landlords seeking to replace current tenants, nonprofits wishing to divest from their post-acute assets, and a consistent flow of smaller acquisitions. We expect the current pace of acquisitions to continue this year, with several deals set to close or transition in the upcoming weeks and months. Given our near and long-term growth outlook, we want to update you on some of the larger portfolios we have recently acquired. In the past, Ensign has been perceived as not being aligned with larger deals. While our primary growth model focuses on aggregating numerous smaller deals, our method of transitioning operations as complex healthcare businesses also applies to larger acquisitions. This is especially relevant for larger deals that cover multiple markets and regions. For instance, in 2023, we transitioned a portfolio of 17 operations in California under a master lease with Sabra. To clarify, transitioning numerous operations simultaneously, especially in a single attempt like traditional centralized companies may do, is indeed a significant challenge. However, by leveraging lessons learned from previous large deals, particularly one in Texas, our local leaders in California treated this transaction like several smaller deals. As they prepared for the transition, they collectively took responsibility for two or three buildings, integrating the new operations into existing clusters of Ensign-operated facilities. This allowed each operation to receive the same level of attention and resources as an individual acquisition. As a result, the new operations benefited from their cluster partners in nearly all aspects of the transition, including training on new clinical systems and compliance standards, support in understanding Ensign's unique culture, and access to expertise from their new Service Center partners. Instead of viewing this as a merger into a larger company, our teams approached it as akin to acquiring a single asset from a small business owner or family. Now, looking at that portfolio, which represents the bulk of our transitioning budget, we can clearly see the positive clinical and financial impact it has on our organization. Out of the 17 operations, 12 have achieved 4- or 5-star ratings from CMS, occupancy rates are over 92%, skilled mix days stand at 47%, and all are making significant contributions to our overall earnings before interest and taxes. Recently, we've completed a few larger portfolios, some spanning multiple states. Each deal has its own unique characteristics, but we are satisfied with the progress made in these newly acquired operations. In the near future, we expect to announce the addition of a similar portfolio, and we foresee continued opportunities for large and midsized portfolios over the long term. While we consistently strive to enhance the performance of our acquisitions within the portfolio framework, we are confident in the scalability of our locally-led approach in both new and existing markets. Nonetheless, we must remain committed to the principles that have driven our sustained success, including ensuring we pay prices that provide enough resources to invest in buildings and clinical systems aimed at achieving the best possible clinical outcomes. Lastly, we are pleased to report continued growth at Standard Bearer, which added five new assets this quarter and now encompasses 140 owned properties. Of these, 106 are leased to Ensign-affiliated operators and 35 to third-party operators. We are excited to expand our relationships with unaffiliated operators, diversifying our tenant base and advancing our mission through collaboration with like-minded operators. Moving forward, Standard Bearer will continue to engage with existing and new partners to acquire portfolios that Ensign will operate and facilities that third parties may wish to operate under lease. Collectively, Standard Bearer generated $31.5 million in rental revenue for the quarter, with $26.8 million coming from Ensign-affiliated operations. For the quarter, Standard Bearer reported $18.4 million in funds from operations and had an EBITDAR to rent coverage ratio of 2.5 times by the end of the quarter. Now, I'll turn the call over to Spencer, our COO, for further insights into operations.

Thanks, Chad, and hello, everyone. As always, we’d like to share a few examples of how operations in various stages of their maturity are contributing to our outstanding results. It’s the aggregation of achievements like these that comprise Ensign's story, and we believe that these examples are the best way to explain how we produce consistent results over time. The first operation I’ll highlight exemplifies what we hope to see in operations as they transfer from our transitioning bucket into our same-store bucket. Sedona Trace Health & Wellness is a 119-bed skilled nursing facility located in Austin, Texas. It is led by Rachael Hurley, CEO, and Tiana Roland, RM and COO. Sedona was acquired as part of a multi-facility deal back in Q3 of 2021. Despite being constructed in 2017 and having a beautiful physical plant, the operation was consistently losing money and struggled with a poor clinical reputation. Compounding matters, the facility was in a staffing crisis with a large percentage of nursing labor coming from registry. Despite the challenges, the local team went to work. They focused on building a culture of high expectations and celebration, which started with hiring the right interdisciplinary leaders, who in turn focused on getting and training high-caliber frontline staff. As a result, the team was able to completely eliminate registry labor, and they have stayed fully staffed since 2023. As we consistently see with most transitioning operations, this formula methodically improved clinical results. CMS overall star ratings have jumped from 2 stars to 4 stars and the facility currently has a 5-star rating for quality measures. Sedona is now an attractive continuum partner for hospitals, and it has earned preferred provider status with Austin’s major hospital system as well as managed care networks. The result has been steady growth in overall occupancy, which is up 6.8%, and skilled managed and Medicare days, which have increased 34.3% over the prior year quarter. For the same period, revenues grew by 21%, while cost of services have remained stable. As a result, EBIT increased by an impressive 130% in Q2 over the prior year quarter. We’re proud of the transformation that has occurred at Sedona Trace. But as their team would be quick to point out, there is still so much more work to be done. It will be exciting to see the growth continue for years to come as the facility continues to contribute as part of our same-store operations bucket. For the second facility example, I’d like to highlight an exciting niche where we have been able to apply our post-acute expertise to help a local acute hospital elevate the performance of their skilled nursing operation. On a larger scale, we see a trend of hospitals choosing to focus on their core acute services, and we expect to have more and more opportunities to grow in this unique and important part of the continuum. Valley of the Moon Post Acute is a 27-bed hospital-based skilled nursing facility located in Sonoma, California. It became an Ensign affiliate in 2019 when our Northern California company contracted with Sonoma Valley Hospital to take management and financial risk for the skilled nursing facility that they operated as part of their acute campus. Prior to this arrangement, this county-owned operation was underperforming clinically and was losing significant amounts of money. The hospital leadership was faced with either closing the facility or looking for help. The hospital was under significant pressure to find a solution as the community did not want to lose the SNF services in their hospital. After many months of interviews and the public hearing, the hospital and county leadership selected our Northern California team to manage the SNF for them. Under this arrangement, our team maintains a close affiliation with the hospital management and Board, including sharing certain services like nonclinical services such as laundry and housekeeping. The partnership has been an enormous success. Valley of the Moon CEO, Ryan Goldbarg; COO, Christina Ferrar; and their interdisciplinary team have established post-acute systems and elevated clinical outcomes while simultaneously bringing financial solvency to the operation. While running a small skilled nursing operation can be challenging, the Valley of the Moon team has embraced flexibility, teamwork and an attitude of care without silos, and the results have been remarkable. Valley of the Moon uses no nursing registry, has consistently low turnover and maintains one of the lowest overtime wage percentages in all of California. They also produce incredible health care outcomes, including one of the lowest return to acute rates in the state and a CMS 5-star rating for quality measures. The partnership has been beneficial for everyone. The Sonoma community is benefiting from greater health care access. For example, an acquisition, the SNF was serving an average daily census of just 10 residents, whereas now census consistently runs over 95% or 25-plus patients. The hospital is benefiting from improved bed management and length of stay as they can now confidently discharge appropriate patients to a step-down level of care more easily. Payers benefit because more of their members can receive care in the most appropriate setting and cost-effective care setting. And residents, including some with challenging and complex medical cases, can receive skilled nursing level care without having to transfer off the hospital campus, while remaining under the care of the same physician providers. We are excited about the impact Valley of the Moon Post Acute is having, and we look forward to continuing to find ways to help acute hospital partners throughout our footprint meet their communities’ full continuum of health care needs. With that, I’ll turn the time over to Suzanne to provide more detail on the company’s financial performance and our guidance.

Thank you, Spencer, and good morning, everyone. Detailed financial statements for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include the following: GAAP diluted earnings per share was $1.44, an increase of 18%. Adjusted diluted earnings per share was $1.59, an increase of 20.5%. Consolidated GAAP revenue and adjusted revenue were both $1.2 billion, an increase of 18.5%. GAAP net income was $84.4 million, an increase of 18.9%. And adjusted net income was $93.3 million, an increase of 22.1%. Other key metrics as of June 30, 2025, include cash and cash equivalents of $364 million and cash flow from operations of $228 million. During the first half of 2025, we spent more than $210 million to execute on our strategic growth plan, most of which have been in the works for months. We made this investment from a position of strength as shown by our lease adjusted net debt-to-EBITDAR ratio of 1.97x, which is after taking these investments into consideration. Our continued ability to maintain low leverage even during periods of significant growth is particularly noteworthy and demonstrates our commitment to disciplined growth as well as our belief that we can continue to achieve sustainable growth in the long run. In addition, we have approximately $593 million of available capacity on our line of credit, which when combined with our cash on the balance sheet gives us over $1 billion in dry powder for future investments. We own 146 assets, of which 140 are held by Standard Bearer and 122 are owned completely debt-free and have gained significant value over time, adding even more liquidity to help with future growth. Company paid a quarterly cash dividend of $0.0625 per share. We have a long history of paying dividends and have increased the annual dividend for 22 consecutive years. In addition, we currently have a stock repurchase program in place. As Barry mentioned, we are increasing our annual 2025 earnings guidance to between $6.34 to $6.46 per diluted share. And our annual revenue guidance between $4.99 billion and $5.02 billion. We have evaluated multiple scenarios and based upon the strength in our performance and positive momentum we have seen in our occupancy and skill mix as well as our continued progress on labor, agency management and other operational initiatives, we have confidence that we can achieve these results. Our 2025 guidance is based on diluted weighted average common stock outstanding of approximately $59 million, a tax rate of 25%, the inclusion of acquisitions closed and expected to be closed during the third quarter of 2025, including a smaller portfolio that we expect to transition in the next few weeks, the inclusion of management’s expectations on Medicare and Medicaid reimbursement rates net of provider tax, with the primary exclusion coming from stock-based compensation. Additionally, other factors that could impact our quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals and other factors. And with that, I’ll turn it back over to Barry.

Thanks, Suzanne. As we wrap up, we are as positive as ever about this industry that we collectively love and are committed to. It's hard not to be excited about our occupancy trends, our labor trends and our growth opportunities. But I can't emphasize enough how incredibly honored and grateful we all are to work alongside our operational leaders, field resources, clinical partners, and Service Center team. They are behind these record-setting results, and it's their commitment that has blessed the lives of so many, including our own. And we're as excited about our future as ever because of them. And with that, we'll turn it now over to the Q&A portion of our call. Kate, will you please provide instructions for the Q&A?

Your first question comes from the line of Tao Qiu with Macquarie Capital.

Chad, I think you highlighted the success of the North American portfolio integration. Now I recollect that deal with more of an opportunistic transaction. So based on the prepared comments, I get a sense that there is a strategy shift as you are more open to those larger multistate portfolio deals. I'm curious if you could highlight any changes you made in your system, personnel, operating model, lessons learned that give you more confidence in consistently executing those larger deals? And then what is the pipeline like for these larger transactions? And whether Ensign has more of a competitive advantage given your scale and balance sheet conditions?

Thank you for the question, Tao. I wouldn’t say there has been a strategy shift. Instead, we are highlighting that we've completed several portfolio-type deals, including a recent one in Tennessee and another in the Northwest with Providence Hospital systems. We certainly see a pipeline for more deals like these. In my prepared remarks, I mentioned that we have large, midsized, and smaller portfolios available. What we've learned is that when evaluating a portfolio, we consider how it fits geographically into our existing structure. We prefer taking a larger deal and breaking it down into smaller pieces, focusing on local markets. For example, we looked at 17 buildings across six or seven markets, resulting in just two to three acquisitions per market or cluster, which is much more manageable than trying to handle a merger-style acquisition all at once. We've learned from our experience in Texas in 2015 that attempting to integrate a large organization at once is not effective, and it took time to transition that deal successfully. Today, we want to emphasize that we have gained valuable experience from various portfolio deals that are performing well. The key for us is to maintain our established approach. Each building is a complex business that requires considerable time and attention, especially at the transition stage. We must remain disciplined in this regard, regardless of the deal's size. If we can manage this across multiple markets and states, we believe it provides a scalable growth strategy that we can effectively implement.

Great. And to follow up on that topic, as you take on these larger deals, there may be assets that would fit a third-party operator better. I know that you added another third-party operator this quarter. Just curious how large you think you can ramp up the exposure there, given what you consider qualified operator pool in your targeted markets? And also, if you could talk about the rent coverage you are underwriting these assets at, that would be much appreciated.

Yes, that's a great question. A good example is the portfolio we recently closed in the Northwest, which included eight buildings. We retained six of the buildings and leased two to a third party. This transaction exemplifies the type of acquisitions that we believe Standard Bearer enables us to successfully pursue. It's important that the price we pay is appropriate, ensuring we don't ask a third-party tenant to commit to a lease payment that we wouldn't agree to ourselves. Regarding coverage, we aim for robust coverages, generally targeting a ratio of around 1.5, though it might not be exactly 1.5 right off the bat, but we expect to reach that level quickly. The critical factor is identifying sellers who are willing to negotiate at the right prices, allowing us to secure coverage afterward. Our discipline in this respect remains a strong focus for us. As for relationships with third-party tenants, we are seeing growing interest; each time we announce one of these transactions, we attract more inquiries from those wanting to learn about our operations and potential collaborations. As larger portfolios emerge, this approach provides another avenue for us to manage deals in smaller, more manageable segments.

This is Michael Murray on for Ben. The skilled nursing industry appears to have dodged direct impacts of the One Big Beautiful Bill, but there still seems to be some potential for potentially some indirect impacts related to smaller Medicaid budgets. So we'd love to hear your thoughts on the OBBB generally. And how are you sizing any indirect risks as a result of it?

Yes, that's a good question. Thank you for bringing it up. It's important to note that lawmakers were clear in their intent to protect skilled nursing from any significant direct impacts to Medicaid. Instead, they focused their efforts on reforms related to workforce requirements, eligibility criteria, and targeted payments that were not necessarily aligned with standard practices but aimed to provide benefits where they were most needed. The decision to exclude the provider tax from these changes signals legislators' commitment to safeguarding funding for seniors. This sets a precedent for how states should approach funding going forward. Fortunately, we maintain strong relationships with state legislators and governors in all the states where we operate. With a couple of years before these changes take effect, we have the opportunity to engage with them and emphasize the importance of funding for seniors in skilled nursing. I anticipate that as budgets become more constrained, there may be some shifts in funding priorities. However, in every state we operate in, lawmakers recognize the need for improved funding rather than viewing skilled nursing as overfunded. Remembering the purpose behind Medicaid's creation—to assist the elderly, disabled, and low-income children—we can have meaningful discussions about ensuring that funding effectively reaches those who need it most. I believe that skilled nursing and senior funding will remain a priority for most states in which we operate, and we are confident in our ability to have these conversations in the coming years. We do not expect any further significant changes to Medicaid during this presidential term, and we feel that the toughest challenges are behind us. This allows us to engage in constructive discussions at the state level to secure long-term stability in funding. This advocacy for adequate funding in skilled nursing is consistent with our historical approach and does not fundamentally change our strategy.

Okay. That's helpful color. Just shifting to M&A. We've gotten some questions from investors recently on valuation of acquisitions over the past few years. It's hard to parse out just because you're doing more and more real estate transactions and geography also plays a big role in this. But to the extent you can normalize for this, how are valuations trending generally? And do you continue to see attractive opportunities and valuations in your current markets?

Thank you for your question. We anticipate that valuations will likely increase moderately over time. The post-COVID rate environment has contributed to a gradual rise in pricing. When it comes to leasing versus buying buildings, the evaluation process differs, which can make it challenging to understand our perspective from the outside. The key factor in how we evaluate deals is that it is driven by local conditions. Our local teams in the areas where we aim to grow guide us in determining the appropriate price to pay, whether for rent or purchase. We analyze the target opportunities carefully and consider the projected Delivery Asset Returns (DAR). Since rent is related to the price we pay, our operators are very attentive to what the expected DAR will be, which informs what we believe is a reasonable price for that market. This fundamental, facility-level approach helps us make decisions rather than simply following macro trends. We are conscious of market trends, and if prices reach unsustainable levels, we choose to pass on those opportunities, maintaining our discipline. However, when pricing aligns with our expectations and allows for a sustainable DAR, we move forward with those deals. The current environment has been favorable, and our growth track record over the past few years indicates that numerous viable transactions are available. Our pipeline remains strong and healthy. We don’t set specific growth targets for the year; if pricing becomes unfavorable, we will slow down, and conversely, we will be active when pricing is favorable. I hope this information is helpful.

First question, just kind of thinking about Medicaid reimbursement and more particularly on the California Workforce & Quality Incentive Program, which is set to end by 2025. Can you speak to the current contribution Ensign receives from this program? And then maybe what are some of the conversations you or the industry are kind of having at the state level in order to kind of maintain adequate funding in California?

To start, I want to clarify how we have been recording that program. We expect funding to continue through 2026 as we evaluate how the state year and our revenue recognition function. Consequently, it will be applicable for both 2025 and 2026 due to the recent changes. This situation is not unique to California; it applies to every statewide program. We collaborate with the state regarding their overall budget, and many of these quality programs initially stemmed from the base rate, designed to encourage providers to deliver better quality care. As we engage with them about how the program will evolve over time, our objective is to remind them that the original funding came from the base rate. As we continue these discussions, we are starting to hear that there may be a shift back to the base rate.

Got it. And then just as a follow-up, kind of speaking to you had strong skilled mix in the quarter and just thinking about as you guys kind of continue to add density in your market and kind of just the dynamics of managed care reimbursement and the typical discount versus fee-for-service, are kind of any of your clusters or at the cluster level kind of participating or having engagements with payers around participating in like value-based care oriented reimbursement models to maybe close that gap further?

Certainly. This is an ongoing discussion we've had over the past several years. As we consider value-based care and value-based modeling, our involvement with managed care organizations in this area is strong. We aim to create value-added offerings for both ourselves and the managed care organizations, ensuring we deliver excellent quality of care to our residents. While the volume of these value-based programs has historically been modest, we remain committed partners with the managed care organizations in every market. We develop tailored programs that address local market needs, benefiting the challenges the managed care organizations face in those areas.

Maybe a couple of questions. First, I think the company mentioned that some of the recent deals started from a more challenging position regarding their performance before the acquisition. However, it seems these deals are generally performing well. I'm trying to understand whether you're seeing improvements faster than in the past or if you took a more cautious stance on how these would affect your financials.

It's a great question. There are a couple of factors involved. Our assumptions and projections remain consistent. We always aim to align with what we believe is achievable while being open to making aggressive changes when necessary. Recently, we've noticed a somewhat improved environment in certain areas where we've expanded, particularly concerning agency labor. A year or two ago, many of our acquisitions relied heavily on agency labor, constituting 50% to 60% of their workforce. Reconstructing a healthcare operation from the ground up requires additional time in those cases. However, the environment has seen slight improvements. The significant change we’ve observed is that with higher density and stronger clusters developed around our acquisitions, we can act more swiftly. We can fill some staff roles from our cluster partner buildings and have instituted a better talent development program, allowing employees to take on leadership roles in other facilities without requiring them to relocate. There are numerous factors at play here. Additionally, with every acquisition, we gain valuable insights. Even though these are locally executed, we have an effective system for sharing knowledge and experiences. We are continuously learning from both our mistakes and successes. As we continue this process, we can expect improvement over time, and I believe we are beginning to see that.

Let me ask about the One Big Beautiful Bill. How is it influencing market activity, particularly in two areas? Have you noticed any changes in the pipeline? Are there more or fewer sellers due to the discussions around it, or have people's pricing expectations shifted in any way? Also, when you talk with states regarding rate updates, have you observed any effects so far? I know it might be early, but is it affecting composite rate expectations for this year or next?

I’ll address the pipeline question. The short answer is that we’ve observed some stability. Last year, there was the minimum staffing bill, which demonstrates that our industry constantly deals with regulatory changes, whether related to rates, staffing requirements, or other factors. I can’t definitively say we’ve seen a surge in deals, but the flow has been steady. The reasons for this are always evolving, yet we are receiving more deals than we can handle, allowing us to be very selective.

On the rate front, we are consistently engaged in discussions at the state level, as Barry mentioned and as we noted in our prepared remarks. Currently, we don't see any shifts in that direction, but being actively involved in local discussions regarding state rates is part of our approach. Additionally, if a state does lower its rate, it doesn't automatically mean it will impact our bottom line. We've experienced this repeatedly, where our operational response to a rate decrease can take many forms. Even when rates are projected to decrease, we have successfully navigated these changes by adjusting our operational performance.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.