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The Ensign Group, Inc. (NASDAQ:ENSG)

Q1 2014 Earnings Conference Call

May 9, 2014 12:00 ET

Executives

Chad Keetch - Executive Vice President

Christopher Christensen - President and Chief Executive Officer

Suzanne Snapper - Chief Financial Officer and Principal Accounting Officer

Greg Stapley - Chief Executive Officer, CareTrust REIT

Analysts

Rob Mains - Stifel

Dana Hambly - Stephens

Ryan Halsted - Wells Fargo

Operator

Good day, ladies and gentlemen and welcome to The Ensign Group Incorporated First Quarter Fiscal Year ‘14 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to your host for today, Mr. Chad Keetch, Executive Vice President. Thank you, sir. You may begin.

Chad Keetch - Executive Vice President

Thank you, Ben and welcome everyone and thank you for joining us today. We filed our 10-Q and accompanying press release yesterday. In addition, CareTrust REIT, Inc. filed an amended Form 10 addressing our plan to separate our healthcare business and our real estate business into two distinct publicly traded companies, which we will discuss in more detail today. All of these disclosures are available on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available there until 5:00 p.m. Pacific on Friday, May 30, 2014.

As you know, we always open with a few housekeeping matters. First, 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 the 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 the 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, any Ensign operation we may mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets, references to our consolidated company and its assets and activities, as well as the use of terms such as we, us, our and similar verbiage, are not meant to imply that The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the various operations, the service center, the real estate subsidiaries or our captive insurance subsidiaries are operated by the same entity.

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 the 10-Q. On our call today, we will be discussing Ensign’s first quarter 2014 operational results, as well as the previously disclosed spin-off transaction.

And with that, I will turn over the call to Christopher Christensen, our President and CEO. Christopher?

Christopher Christensen - President and Chief Executive Officer

Thanks, Chad. Good morning, everyone. We are pleased to report that operating results improved yet we believe we can do much better and we expect to take the additional momentum generated late in the first quarter and to the rest of the year. Together with the improvements we made at the end of 2013, we continue to head in the right direction and we expect to ramp our growth across key operating and quality metrics through 2014.

Our operating results are running on schedule and we are reaffirming our 2014 annual guidance. As we noted in the past, our results are not symmetrical on a quarter-by-quarter basis and we continue to focus on the fundamentals of our business and driving improvements and performance throughout the year and over the long-term. To that end, our talented local leaders have focused relentlessly on building exceptional clinical systems to continue to attract higher acuity patients, growing occupancy and rightsizing expenses one market at a time.

Highlights for the quarter included same-store skilled revenue grew by 300 basis points resulting in a skilled mix of 52.7%. Same-store occupancy was 81.5%, an increase of 98 basis points over the prior year quarter. Adjusted consolidated EBITDAR was $38.9 million, an increase of 5.2% over the prior year quarter. Consolidated revenues were up 9.8% to a record $239.7 million in the quarter. And transitioning facility occupancy grew for the fifth consecutive quarter to a 70.9% representing an increase of 148 basis points over that period.

I am grateful to our many leaders and key members for their tireless efforts to become great both clinically and financially. These efforts not only produced solid results for the quarter, but they laid a solid foundation for continued growth in the months and years to come. We continue to make great progress on our plan to separate our healthcare business and our real estate business into separate and independent publicly traded companies Ensign and CareTrust REIT. As we said many times before we want to be very clear that our first and most pressing priority from the beginning of our discussions has been to ensure that when the dust settles, the separation will result in two very healthy companies that will generate long-term value to our shareholders.

We are grateful that it’s had the help of many trusted advisers and a very supportive group of lenders to stay true to that principal throughout the entire process. As we said before our goal in the spinoff has never been to produce a one-time benefit to our shareholders, but rather to create a second separate platform which with the very strong one we already have in place can generate enormous value for shareholders at both resulting companies for many years to come.

Unlike other transactions that have occurred in our industry which on their surface may appear to be similar, we believe that this is the first time where a spinoff has been done in a tax free manner and where the operator and the real estate company were both left with healthy balance sheets and plenty of run way for both near-term and long-term growth. We have taken great care in structuring a transaction that would safeguard our ability to provide the highest quality healthcare services, while also finding a way to use the tremendous value we have created in our real estate to further benefit our partners and shareholders over time.

We have recently announced our fourth acquisition of real estate so far this year. We also announced that Ensign will retain ownership of the real estate it acquired in all of these acquisitions. We continue to receive questions from several sources that assume that CareTrust will become the acquisition vehicle for Ensign, which is not the case as evidenced by our most recent transactions. While there may be certain opportunities to expand our relationship with CareTrust in the future, one of the Ensign’s key in the real estate assets for both well performing and struggling skilled nursing facilities across the United States. CareTrust for its part will be working hard to carry the Ensign banner into geographies without facing the operational considerations which with Ensign is confronted as a healthcare operator. In that pursuit CareTrust will be able to partner with multiple operators including Ensign to pursue larger portfolio transactions.

With that I would like to have Chad briefly discuss our outlook for growth. Chad?

Chad Keetch - Executive Vice President

Thank you, Christopher. Briefly we continued our steady growth on multiple fronts during the first quarter. In March, we acquired an outstanding skilled nursing facility in Glendale, Arizona. In May we acquired our second facility in Arizona this year a large skilled nursing operation in Tucson, Arizona bringing our total number of facilities in Arizona to 15 skilled nursing and assisted living facilities. Also in May we announced the acquisition of all the assets of a continuing care campus in Rosemead California, the skilled nursing component, which we had been operating under a lease for several years. And just a few days ago we acquired a skilled nursing facility we had been operating under a sublease arrangement with the ground lessee since 2006. As Christopher mentioned Ensign will retain ownership of the real estate it acquired in all of these acquisitions and any future acquisitions of real estate that it plans to acquire and it plans to complete.

Our home health and hospice business also grew this quarter acquiring an established home health and hospice agency and a homecare business in Boise, Idaho adding a nice compliment to our existing operations in that market. Our urgent care business acquired its second existing urgent care operation with the purchase of a clinic in North Kitsap, Washington. This acquisition also included a primary care business that we expect to add to our existing urgent care and occupational medicine businesses. Our urgent care business also opened three startup clinics in the Seattle area bringing the total number of operating urgent care clinics to 11.

As we indicated last quarter following the spin-off, Ensign will continue executing our existing business model and growth strategy, which will still include the purchase of real estate and selectively continuing to enter into long-term leases. As those of you who have been following the Ensign story for years well know in 2003 Ensign owned the real estate of only five of its 41 skilled nursing and assisted living facilities, representing a real estate ownership percentage of just 12%. In the 10 years that followed, Ensign acquired the real estate in the majority of its 122 properties, pushing the percentage of owned facilities in the portfolio to 83%. Following the spin, we will be much better equipped financially and clinically than we were in 2003 to do this all over again.

We are currently seeing a number of very attractive acquisition opportunities and we expect to complete additional facility and real estate acquisitions before the end of the second quarter of this year. In addition, we currently have a number of transactions lined up that, if successful, will include real estate that Ensign would purchase and own. As we discussed last quarter, we continue to see an increasing number of performing acquisition opportunities, some of them larger portfolios. Ensign has completed many strategic acquisitions of performing assets in the past, in both new and existing markets, and all with very positive results. Not only have these strategic purchases been accretive to earnings in a shorter amount of time than in the opportunistic setting, but we also believe that there are many things that we have learned and can continue to learn from other quality operators as we seek to become the best healthcare provider in all our markets.

Lastly, we continued working with Mainstreet Partners to develop new healthcare facilities that are carefully designed to cater to the evolving demands of the growing population of baby boomers, providing yet another lever we can pull in the near future. We recently committed to at lease another such facility in Colorado adding to the five other sites currently under development in Texas and Kansas. And we are currently on schedule to open our first facility early next year.

And with that, I will hand it back to Christopher.

Christopher Christensen - President and Chief Executive Officer

Thanks, Chad. Those of you who have followed our history know that Ensign was born in the aftermath of the post-PPS shakeout. Using the benefit of that perspective, Ensign has been built on fundamental business principles that emphasize low overhead, high service levels and talented local leaderships that are empowered to respond quickly and accurately to changing market conditions.

At the risk of oversimplifying what can be a very complicated business, these leaders while developing brilliant community focused strategies have focused relentlessly on three fundamental things: first, building exceptional clinical systems to care for higher acuity patients; second, growing occupancy; and third, rightsizing expenses. By doing these things, our local leaders have been steadily converting their resident basis from a traditional long-term convalescent population to a short stay skilled population also known as growing skilled mix. This model has consistently produced growth in key operating metrics year-after-year even in years when we have had very few acquisitions.

We are pleased to report continued improvements in compliance and quality of care across the organization. And as we always remind you, compliance and quality outcomes are precursors to outstanding financial performance. In the first quarter alone, eight more of our skilled nursing facilities achieved 4-star and 5-star CMS ratings during the quarter and with those additions, 64% of our facilities carry that designation at quarter end. And this is particularly a large accomplishment for us, because nearly all of these facilities were 1-star and 2-star operations at the time of acquisition.

As we discussed the last quarter, we have substantial organic upside within the company’s existing portfolio. Many of the improvements we began to see last year continued in this quarter as we experienced growth in occupancy for the fifth consecutive quarter in our transitioning facilities to 70.9% for the quarter, representing an increase of 148 basis points over that period. We are also pleased to report that our home health and hospice business continues to mature and our investment is starting to produce significant returns in 2014. As we expected, many of the improvements made in 2013 are paying out both from a financial and clinical perspective. And we saw dramatic improvements in these operations in the first quarter.

After taking a much needed breather from pursuing new acquisitions, our home health and hospice operations are well-positioned to begin selectively pursuing new agencies in our existing markets. As we see a shift from traditional Medicare patients to managed care, we have focused heavily on an effort to enhance our managed care admissions and our managed care contracting team, especially in anticipation of the implementation of California’s dual eligible program that has already started to take effect in some of our markets. As a result of these efforts, we are pleased to report that our same-store managed care days were up 87 basis points and same-store managed care revenue was up over 446 basis points as compared to the prior year quarter.

As we have said many times before, we value these managed care relationships and we plan to continue growing this business as we seek to grow our skilled mix. We also want to remind you that we do not provide annual guidance due to the fact that our results are not symmetrical on a quarter-by-quarter basis, actually I think I said that wrong. So we want to remind you that we only provide annual guidance due to the fact that our results are not symmetrical on a quarter-by-quarter basis. With that understanding our focus is on the fundamentals of our business and driving improvements and performance over – throughout the year and over the long-term. We also note that we continue to see many positive developments and opportunities on the horizon including improving Medicaid reimbursement in key states and the recently announced 2% market basket update to Medicare reimbursement that will go into effect later this year.

Let me just share a couple of examples of individual operational teams who have begun to see the effect of our efforts this quarter. In May 2013 we completed a strategic acquisition of well performing 200 beds skilled nursing facility memory care and assisted living campus in Redmond, Washington. In it’s first full quarter of operation under Ensign, Redmond’s census was a respectable 74% with skilled mix revenue and the SNF was 40% and EBITDA was a healthy 19% led by Executive Directors David Walter and Nathan Boyle and Director of Nursing and Services Rebecca Brewer leveraged the staff and the facilities reputation in the greater Seattle medical community to propel performance forward even more. As a result of their efforts they improved skilled mix revenue by 28% to 52% of revenue as compared to the third quarter of 2013.

At Emblem Hospice located in Chandler, Arizona, the team has worked diligently to make their agency one of the most recognized in the greater Phoenix market under the leadership of Executive Director, Reg Simmons and Director of Patient Care Services, Jenna Priest. Emblem has improved EBIT performance by 18 times over the same quarter in 2013, which was then our first quarter under Ensign leadership. Even though the hospice market in Phoenix is one of the most competitive markets in the Southwest, Reg, Jenna and their team of care givers set themselves apart from the competition by improving their relationships in the medical community and partnering with their sister SNF facilities in the greater Phoenix area to strengthen those relationships with their existing referral sources throughout the Phoenix market.

From the first quarter of 2013 to the first quarter of this year Emblem’s average census has risen from 14 patients per day to over 61, an increase of 435% over the prior quarter. They grew their EBITDAR margin by over 21% on the face of changes in the hospice coding requirements and other regulatory hurdles that have confronted hospice operators over the past year, truly a remarkable turnaround for a fledging operation that was losing money when we took it over in January of 2013. But and this is important, some of our best stories of improvement are still coming from some of our most mature facilities.

For example at Village Care Center in McAllen Texas one of our very first operations, the Executive Director, Michael Leinweber along with Director of nursing Joe Perales and Director of Marketing, Alex (indiscernible) reached out to their community in a way we have never seen before. Their team secured a strategic partnership with the premier physician group in the Rio Grande Valley leading one of Ensign’s first acquired operations to levels of clinical and financial performance never seen before. As a result in the first quarter their occupancy was up almost 19% total skilled mix days were up 55%, EBITDAR was up 120% and managed care days were up 39% and this in our 14th year of operation. In addition, to solid financial performance they have been able to show tremendous readmission rates, statistics and clinical outcomes at the same time and what was once one of the most challenged facilities in that market.

We think these examples say volumes about the incredible strength inherent in our unique business model. These stories and the extraordinary people who create them are neither infrequent nor atypical at Ensign. By pushing the constantly provide outstanding clinical outcomes and minding the bottom line and all of the other moving parts of these complex operations at the same time. These leaders and our teams are making each operation the provider of choice in the market it serves. And we believe we can scale this model far beyond where we are today with similar and even superior results.

With that I will hand it to Suzanne to provide more detail on the company’s financial performance. Suzanne?

Suzanne Snapper - Chief Financial Officer and Principal Accounting Officer

Thank you, Christopher and good morning everyone. Detailed financials for the first quarter are contained in Q1 press release filed yesterday. Highlights for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013 included record quarterly revenue of $239.7 million on a GAAP basis or 9.8% increase. Same store facility overall revenues increased $5.5 million or 2.8%. Same store skilled mix days increased 89 basis points to 29.7%. Same-store occupancy increased 89 basis points to 81.5%, which resulted in overall earnings per share on a non-GAAP basis of $0.65.

As for other key data points at March 31, cash and cash equivalents were $57.5 million and net cash from operations was $21.4 million. And looking at our GAAP results, the DoJ settlement impacted several other expense items that were affected comparisons of earnings for the first quarter of last year. These includes increased wages and benefits, enhancement in them made to its internal compliance team and the absence of other related negative adjustments that were made in the first quarter of 2013.

As always, we provide a reconciliation of GAAP to non-GAAP results in yesterday’s release. We are reaffirming our annual guidance of $1.01 billion to $1.025 billion in revenues with $2.74 and $2.81 in diluted adjusted earnings per share. These projections are based on diluted weighted average common shares outstanding of approximately 22.7 million. Acquisitions anticipated to be closed by the end of the second quarter. Exclusion of acquisition-related costs and amortization costs related to intangible assets acquired the exclusion of startup losses at newly acquired or created operations. The exclusion of expenses related to the separation of the healthcare and real estate businesses, a tax rate at a historical average of approximately 38.5%, and including anticipated Medicare and Medicaid rate reimbursement increases, net of provider tax.

We also anticipate that we will update our earnings per share guidance following the spin transaction, but revenue will not be materially affected. And given these numbers, I would like to remind you again that our business is not symmetrical from quarter-to-quarter. This is largely attributable to variations in reimbursement system, delays and changes in state budgets, seasonality in occupancy and skilled mix, the incidents of our general accounting on census and staffing, the short-term impact of our acquisition activities and other factors. We would be happy to answer any specific questions you might have later in the call.

And now, I will turn it back over to Christopher. Christopher?

Christopher Christensen - President and Chief Executive Officer

Thanks, Suzanne. We’ll spend an additional few minutes to give you an update on our plan to separate our healthcare business and our real estate business into two separate publicly traded companies. As we have said many times before, we want to be very clear that our first and most pressing priority from the beginning of our discussions has been to ensure that when the dust settles, the separation will result in two very healthy companies that will generate long-term value to our shareholders. We are grateful to have the help of many trusted advisors and a very supportive group of lenders, who have been true to that principles.

I’d like to turn the time over to Greg Stapley who will serve as the CEO for CareTrust REIT to discuss some of the details of this transaction from the real estate company’s perspective. Greg?

Greg Stapley - Chief Executive Officer, CareTrust REIT

Thanks, Christopher and hi, everyone. During our last call in February, we were hopeful that we would be down to the spin by now. Obviously, we haven’t quite crossed that finish line yet, but we are pleased with our progress to-date and certainly have plenty to show for our efforts and the efforts of all those who are helping us. We can confirm the spin still looks very good for Q2 and we can also tell you that we are working very hard to make sure that CareTrust will be ready to hit the ground running when the smoke clears.

With that, we would like to give you a brief update on the process to-date. First, as we noted in February, we do have our private letter ruling in hand from the IRS. Second, we are pleased to report that since February we have filed amendments to our Form 10 registration statement with the SEC responding to each of their comments. At the last amendment, the SEC had no material comments but only have to see our Q1 financials dropped in before issuing their final approval.

We filed our fourth amendment containing those Q1 financials yesterday and we expect to receive final approval shortly. We are also pleased to announce the addition of John Cline as the final member of our Board of Directors. John joins David Lindahl and Gary Sabin rounding out the independent membership of our board. Mr. Cline is a former CEO and CFO of Sunstone Hotels, a publicly traded hospitality REIT based here in Northern County. And he currently serves as a CEO of Clearview Hotel Capital, a private real estate investment company focused in the hotel space. You can read more about Mr. Cline in our updated Form 10 that we filed yesterday.

Also, both our new revolving credit agreement and Ensign’s have been fully negotiated to lead arrangers and final commitments are coming in from the syndicate banks as we speak. These credit facilities will provide each entity with $150 million of committed credit that we can each use to execute our separate business plans and grow our respective businesses.

Also, the one secured term note that we had here at Ensign that was not pre-payable has been expanded and extended to enhance CareTrust’s overall capital structure and provide us with a full value for the untapped equity in the assets covered by that note. We also anticipate receiving any credit ratings from both Standard & Poor’s and Moody’s over the next few days which will allow us to begin marketing the bond issue, documentation for which is nearly complete. And we are currently tying off a host of other loose ends as we get all the many moving parts of this complex transaction done and in place.

As we complete these and the many other tasks that go into a complicated transaction like this one, we are anxious to begin turning our focus to the actual business of CareTrust. We are very excited about the many exciting growth opportunities we are seeing throughout the country and even more excited about the team of outstanding business leaders who have joined or who have committed to join us. We are grateful to be leveraging our solid platform for growth that Ensign is providing for us and I believe we can as two independent companies drive far greater values as CareTrust and Ensign both grow and drive and return value to shareholders over the long haul.

And again as a final and personal note it appears that this really will be my last earnings call here at Ensign. And as before I really can’t do it justice to a brief earnings call, I just want to say again what a pleasure and honor it’s been to work with my colleagues here and with the analysts and investors we have been privileged to have follow us. These relationships have been tremendously rewarding for me and I hope you all will continue to follow and invest in CareTrust and Ensign and that my association with each of you will continue for many years to come.

And with that I think we turn it back to Ben for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Rob Mains of Stifel. Your line is open. Please go ahead.

Rob Mains - Stifel

Yes. Thanks. Suzanne I have a number of questions, there are some expenses I think migrated from the cost of services line to the G&A line, can you discuss that a little bit?

Suzanne Snapper

So when you say migrated I think you are just talking about the cost of service was down and the G&A was up?

Rob Mains - Stifel

Yes.

Suzanne Snapper

Yes, and maybe Christopher can also chime in on this. With regards to G&A what we saw is that last year we had a couple of different segments that we didn’t have in this year, so one of the items that we had hit in G&A last year is that we have the DoJ charge, which impacted obviously how our plans are set up are impacted the incentive that the company have. And then other things that also related to that increase was the complaints team enhancements that we had during the quarter, quarter-over-quarter as well as the marketing service enhancements that we have had during the quarter and then additional other facility growth items that we had during the quarter.

Christopher Christensen

Rob, in essence, this is Christopher, it’s a combination of one we took a pretty big hit amongst our large group of leaders for the DoJ settlement on reimbursement last year. So comparable apples-to-apples that’s going to make last year’s costs look a lot lower. We also geared up, we beefed up our managed care team and also our compliance team, not just for our existing portfolio, but also in preparation for what we think is going to be a meaningful growth here throughout the remainder of the year. And those are probably the two largest pieces of that increase on G&A.

Rob Mains - Stifel

Okay. So and I would look forward the G&A run rate that we saw, there is not very much any unusual that I should be pulling out and modeling for similarly the improvements in costs and services should be pretty durable?

Christopher Christensen

Yes, we hope you will see that decline as we grow.

Rob Mains - Stifel

Okay, great. And then I had a question about sort of the line of demarcation between Ensign and CareTrust and that if there is a operator that you are looking at or facility that you are looking at where the operator wants to leave wants to get out, how is the determination going to be made between whether it’s a facility that Ensign would buy or one that CareTrust would buy and lease to Ensign, is there a sort of a blueprint of which type of facility would fall into which category?

Greg Stapley

Rob, this is Greg. For the first quarter we have an agreement between us that we will serve each other, most of our acquisition opportunities. And Ensign will have the opportunity if it’s a small acquisition to the market therein to go in and kind of have in essence a first refusal right on that operation, which is okay with us, because we are going to be able to look nationwide for opportunities, while Ensign will be more constrained by its sort of business model that focused on its cluster concepts. At the same time, there is some of the things that they see and I think the best opportunities for us to work together going forward will be in those cases where we see large portfolios, where an operator wants to exit we have to divide them up amongst multiple operators and we will be able to come to Ensign and have them look at the portions of those portfolios that fit within their target geographies. So, I think there is an opportunity to work together. After that year is over, we really are transitioned in truly separate independent in all respects, but I don’t anticipate any real overlap attributing over each other in the short run.

Rob Mains - Stifel

Okay, great. In the situation that you described first, where you CareTrust sees something and it’s shown to Ensign, is it shown to Ensign and then Ensign has the opportunity to buy it or that Ensign has the opportunity to be the operator?

Greg Stapley

They have the opportunity to buy it. And by the same token, if they see something that they want to finance and they didn’t really have a chance to look at that and offer them financing. I doubt that they will do any of that, because their cost of capital is good, but we do have an agreement to that effect.

Christopher Christensen

And Rob, just a follow-up to that, remember that we are in a – we are larger, but we are in a limited geography and chances are that CareTrust is going to span their footprint a whole lot faster than we are in terms of geography. And we won’t be interested in growing all over the place, whereas if CareTrust finds five, six, seven, eight great operators, 10, 12 whatever in those geographies, I just don’t think there will be as Greg said much tripping over one another. It may happen on one or two deals, but our charts that each of those have is quite different from one another.

Greg Stapley

Rob, one other thing I would add, Chris is right, but also remember that we tend to kind of look at different kinds of deals that were more Ensign, it looks largely not exclusively, but largely at distressed asset and turnaround opportunities and more opportunistic acquirer. CareTrust is going to be looking for more stabilized opportunities. And it’s going to be willing to pay stabilized prices for those assets, which is not something Ensign historically has done very much of.

Rob Mains - Stifel

Right, okay. And then I actually have one question related to the geography, am I correct in surmising that given where Ensign is located, you didn’t see as much of a weather impact in the winter as some of your peers on the other side of the Mississippi did?

Christopher Christensen

Yes. We didn’t talk about that much. There was some impact, but it – I think we are not that this (indiscernible), that we probably wouldn’t use it as an excuse. I think it happened to us in Texas. It happened to us in Iowa, Nebraska. That represents 20% of our portfolio.

Rob Mains - Stifel

Okay, that’s about all I need. Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Dana Hambly of Stephens. Your line is open.

Dana Hambly - Stephens

Thank you. Greg, this is a naive question. I am sure, but just looking at the pro formas in the most recent Form 10, there is a $5.2 million or so property tax item I am just wondering why the REIT would be paying the property taxes, I thought that would be borne by the operator?

Christopher Christensen

Thanks, Dana. That’s a great question. And I appreciate you highlighting it for us. It was one of the strangest things that sort of the (indiscernible) came out and made us do. We have always historically just shown. We were trying to show these just as net leases. And since there is apparently some – there is some possibility, remote though it maybe that CareTrust as the owner of the properties could end up paying property taxes if a tenant did not under the triple net lease, we have to show that as a liability, but we also show revenues.

Suzanne Snapper

If you look at the line items, you will see that there is a tenant reimbursement from parent, which is mirrored by on the expense side, the property expense. And so it’s really just growth coming up of P&L and the net impact of that is zero, so it doesn’t impact our financial statements per se it’s just grossing up revenue and grossing up expenses.

Dana Hambly - Stephens

Okay. Alright. Thank you. I mean someone else fed me the question, I can’t take credit for it. And then on the dividend policy for (indiscernible) going forward Christopher where actually and that goes away?

Christopher Christensen

Don’t worry we will remain the same.

Dana Hambly - Stephens

You will, okay.

Christopher Christensen

Yes, we expect to continue to be what it’s been across the last I think 11 years or so.

Dana Hambly - Stephens

Okay. And then on the acquisition front for Ensign going forward you have talked in the past about you are looking at these portfolio transactions and then you never really do them and you just go back to the very successful one-off building, so anything changed with those comments or kind of what you are seeing?

Christopher Christensen

I think you and Chad can correct me here, but I think you have heard us talk a little more about that on this call than we have in the past and I think it’s because we have seen some portfolios that fit well into our existing organization and they seem to be fairly priced and it’s more than one of them. And so we feel like our chances of getting one or two of these are pretty good and obviously we don’t have as much control over this part as we do our operations. But we have good confidence that we will close them one or two of these.

Dana Hambly - Stephens

Okay. I know last year you did a bunch of acquisitions in the beginning of the year, you called that out as being a bit disruptive on operations having closed a handful, so far this year should we not be worried about that in the second half of the year?

Christopher Christensen

You should not be. We if I wasn’t clear about that I think there were some things we didn’t do as well last year in transitions as we have done in the past. And I think we have learned some things and maybe even relearned some things to be candid and I feel confident that that was a 2013 thing.

Dana Hambly - Stephens

Okay, very good. And then just last one can you talk a little bit more about the new Main Street relationship, how that evolved what you are expecting and just the structure of the partnership where that will show up in the financials?

Chad Keetch

Yes, so this Chad. Thanks for the question. I think Main Street is an organization based out of Indiana. And they have a really nice product it’s essentially they are acquiring the sites and completing the development of the sites and the relationship between us and them is really a lease arrangement where we will – we have entered into leases that will sort of commence once the construction is completed and they hand us the keys to operate the facility. The relationship there is a strong one. We continued to look at various sites that we have identified certain sites that they have identified. It is something new for the organization. We have done a few of these similar type projects in the past namely the Sloan’s Lake facility and Colorado. So we have signed six leases and expect to start opening those in 2015.

Dana Hambly - Stephens

Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of Ryan Halsted of Wells Fargo. Your line is open. Please go ahead.

Ryan Halsted - Wells Fargo

Thanks. Good morning. It’s just a question on your core business, it looks like if I looked at the transitioning facilities bucket over the past couple of quarters, it looks like skilled mix has not necessarily been increasing at the rate you guys have been able to in past in fact it looks it was kind of declining, was there anything different about these facilities or any changes in your operations or anything you would call out?

Christopher Christensen

No, I think it’s frankly along the lines I mentioned when I answered Dana’s call or a question, I think that we had some transitional issues, not just with the transitioning facilities, but with the new acquisitions, both of those buckets. And I feel like we have corrected our course and are back to the same path that we were on for the prior 13 years. So, I don’t think that one year a trend makes, I think that there were some things that we actually don’t talk about a month at a time here, but in that particular bucket, we had a tremendous March. And we think that, that trend will continue into the second quarter. And so we feel confident that, that pattern will end.

Ryan Halsted - Wells Fargo

Okay. As far as guidance, you seem to express some visibility into your M&A pipeline. Just wanted to be clear, so do you see decent – some sizable transactions that’s going to help get you to your revenue guidance or it sounds like you are alluding to sticking with the one at a time?

Christopher Christensen

No, listen some of the onesies and twosies that we have done will help us get to that guidance. The sizable ones will take us beyond that guidance. So that we are not acquiring them to hit our guidance, although as we – I think we have said in the past, some of our new – our early acquisitions are counted in our guidance, but the bigger transactions that we are hoping will happen are not, are accretive to that guidance.

Suzanne Snapper

Yes. I think what we have said is the guidance is only through acquisitions for the end of the second quarter, so…

Ryan Halsted - Wells Fargo

Okay. Any sort of expectations on the new home health hospice business you acquired, anyway to just size out what that might contribute?

Suzanne Snapper

Yes. I mean, that’s the business that we acquired is relatively small. So, it’s not going to be a huge impact on the overall projections that was included in the original guidance.

Christopher Christensen

You are talking about just the brand new acquisitions?

Ryan Halsted - Wells Fargo

Yes.

Christopher Christensen

Yes, it’s very small.

Ryan Halsted - Wells Fargo

Okay. Then this might be kind of a random question, but given you guys – you did highlight sort of the quality ratings. I am just curious if there is any way to put that into context of value-based reimbursement, how do you think that achieving 64% of your facilities with greater than or equal to four stars? How does that sort of put Ensign as a whole on the value-based purchasing scale? Would you be receiving sort of bonus payments or would it be kind of net neutral, I don’t know anything sort of along those lines might be useful?

Christopher Christensen

So, it’s more of – again at this point in time it’s more of a marketing plus, but there are some alignments being made between reimbursement in certain states and items, it’s not necessarily the 4-star and 5-star rating, but items that are similar to that are being used to determine, whether there are extra add-ons to payments. That’s beginning in a few states. Very soon, it already started other criteria, but in California and so yes, there are some add-ons that we think will be given to the better clinical or qualitative operators in the future, but for now, it helps us on the marketing front more than it does on the reimbursement front.

Ryan Halsted - Wells Fargo

Sure, I can appreciate that. How about, I mean, do you feel then that the remaining 36% of your facilities might have sort of penalties assessed to them or do you think you are getting close to maybe bringing them up to par?

Christopher Christensen

Well, remember that roughly 25% of our facilities have only been in the portfolio for a year and a half, so maybe two years, but so a lot of those, not all of them, but a lot of that percentage that you mentioned that came we said 36%, 38% is – are newer operations. And I don’t think, look I don’t know what they might decide to do with new acquisitions, but obviously, if there are penalties we will just build that into the price when we go to make acquisitions that have 1 and 2-star ratings by the time we take them.

Ryan Halsted - Wells Fargo

Okay.

Christopher Christensen

Yes, that’s a good comment though. We should look at what percentage we have in same-store that are more mature versus the newer acquisitions and we will try to do something like that one more statistic I am sure Suzanne is happy to provide.

Ryan Halsted - Wells Fargo

You are welcome Suzanne, so.

Suzanne Snapper

Thanks Ryan.

Ryan Halsted - Wells Fargo

The two real estate acquisitions were they based on exercising the purchase option or do you still own the purchase option on two leases?

Chad Keetch

So the two in Arizona were not leased facilities and then the one in Utah was not actually one of our lease facilities that we would include in sort of our, it is…

Suzanne Snapper

Yes, so we had two purchase options left and that was one of the two purchase options.

Ryan Halsted - Wells Fargo

Okay. That’s all I got. Thanks.

Operator

Thank you. And with no further questions in queue I would like to turn the conference back over to management for any closing remarks.

Christopher Christensen - President and Chief Executive Officer

Thanks Ben. Appreciate it. Again we want to thank all of our colleagues throughout the organization for what they give and what they do every single day it’s an honor to work with them. And we thank our shareholders as well and those that have taken time to participate in this call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may all disconnect. Have a great rest of your day.

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Source: The Ensign Group's (ENSG) CEO Christopher Christensen on Q1 2014 Results - Earnings Call Transcript
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