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The Ensign Group, Inc. (NASDAQ:ENSG)

Q1 2008 Earnings Call Transcript

May 8, 2008 2:00 pm ET

Executives

Greg Stapley – VP and General Council

Christopher Christensen – President and CEO

Alan Norman – CFO

Analysts

Eric Gommel – Stifel Nicolaus

Travis Spitzer [ph] – Concordia Capital

James Bellessa – DA Davidson & Co.

David Butterworth [ph] – Townsend Group

Operator

Good day, everyone. Welcome to the Ensign Group first quarter 2008 earnings conference. At this time, I'd like to turn the conference over to Mr. Greg Stapley, Vice President and General Counsel. Please go ahead, sir.

Greg Stapley

Thank you, Theresa. Good morning and thank you everyone for joining us today as we discuss the Ensign Group's financial results for the first quarter of 2008. A press release highlighting key financial results for the first quarter was issued after the market closed yesterday, May 7. For those who have not yet seen the release, it's available under the press release tab on the Investor Relations section of our Web site at www.ensigngroup. Net.

In addition, we filed our 10-Q yesterday and it's also available on the Investor Relations section of our Web site. A replay of this call will be available until 5:00 pm Pacific, on Thursday, May 15. The replay can also be accessed by going to our Web site and clicking on the Events and Presentations link there.

Before we begin, I'd like to cover a few housekeeping items. First, during today's call, we'll be making forward-looking statements that relate to possible future events. These statements are based on management's current expectations, assumptions, and beliefs about our business, our financial performance, our operating results, and the industry in which we operate. Such statements are subject to risks and uncertainties which could cause our actual results to differ materially from those expressed or implied on this call.

Participants are encouraged to review the company's periodic filings with the SEC including the 10-Q that we filed yesterday for a more complete discussion of such risks and other factors that could impact any forward-looking statement. Participants should not place undue reliance on any forward-looking statements. Except as required by Federal Securities Laws, Ensign does not undertake to publicly update or revise any forward-looking statements where the changes arise as a result of new information, future events, changing circumstances, or for any other reason after the date of this call.

Second, participants should note that each Ensign facility we'll talk about today is operated by a separate wholly-owned independent operating subsidiary that has its own management, employees, and assets. References to the consolidated company and its assets and activities as well as the use of terms like 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 facilities, a service center or a captive insurance subsidiary are operated by the same entity.

Third and finally, we find it helpful to supplement our GAAP reporting with EBITDA and EBITDAR metrics, which is supplemental non-GAAP financial measures. They reflect an additional way of looking at aspects of our operations, which when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. They should not be relied upon to the exclusion of GAAP financial measures. A more ample discussion of these non-GAAP financial measures as well as the reconciliation of GAAP are available in yesterday's press release, which can also be accessed on the Investor Relations section of our Web site.

I'll first turn the call over to Christopher Christensen, our President and Chief Executive Officer. Following Christopher's comments, he'll turn the call over to Alan Norman, our Chief Financial Officer, for an overview of the first quarter financials. Following Alan's comments, Christopher will provide a brief conclusion and then we'll open up for questions. Christopher?

Christopher Christensen

Thanks, Greg. Thanks everyone for taking the time to join us on the call. I'd like to begin today with some first quarter highlights, provide a brief overview of what we've been doing operationally since our last call, and then I'll provide some additional detail on the quarter.

We are very pleased with our first quarter results. Our operations improved across the board with solid progress in virtually every key metric. These results demonstrate the strong leverage inherent in our business model and provide a solid foundation upon which to build for the remainder of 2008 and beyond.

Our organic revenue was up 13.1% over first quarter of 2007, our total revenue was up 16.1%, and our skilled revenue was up 24.1% over the prior year quarter. Furthermore, our consolidated EBITDA was $17.3 million versus $13.4 million in the first quarter of 2007, with a same-store improvement of 27% and an overall improvement of 29%. Consolidated EBITDA was $13.3 million versus $9.2 million in the first quarter of 2007, with a same-store improvement of 42% and an overall improvement of 44%. Consolidated net income was $6.3 million versus $4.1 million in the first quarter of 2007 with a same-store improvement of 48% and an overall improvement of more than 53%.

Contributing to these improvements and others outlined in our full financials were strong moves across our portfolio toward greater operational efficiency and higher occupancy. EBITDAR margins rose to 15.2% versus 13.7% in the first quarter of 2007, an improvement of 150 basis points and same-store EBITDAR margins rose to 15.6%, an improvement of 176 basis points.

Our same-store occupancy climbed 147 basis points over Q1 of '07 to 79.8%. Our maturing 2006 acquisitions led the census jump with an increase of almost 400 basis points in licensed occupancy in those 11 operations. This occurred notwithstanding renovations and turnaround efforts still underway at several of these 2006 facilities and highlights the fact that those facilities still have substantial organic upside.

Our overall occupancy in our operational beds, and that's a key metric that I'll discuss in more detail in a moment, rose nearly 170 basis points to more than 83%. With helping improvements in these key measurements and others, we are pleased to be reporting fully diluted earnings of $0.31 per share versus $0.24 in the first quarter of 2007.

We believe that these results once again validate our business model, which generally focuses on acquiring underperforming facilities and by concentrating over time on business fundamentals, quality care, and local controls steadily improving those operations, one patient outcome and one key metric at a time. We're pleased with the progress being made across our operations and believe that we still have ample room for operational and overall improvement in nearly every facet of the organization. For those of you who may be new to Ensign, I want to give a brief overview of our business and growth strategy.

The Ensign Group's operating subsidiaries provide a broad range of skilled nursing, rehabilitation, and other long-term care services for the total of 62 facilities spread throughout six western states. Since 1999, we've been successfully acquiring underperforming facilities and transforming them into market leaders in clinical quality, staff competency, employee loyalty and financial performance.

Over the last five years, we've increased our revenues from roughly $100 million to over $400 million. And in that same period, we've acquired more than 36 facilities and successfully transformed many of these properties both clinically and financially. These changes don't happen overnight, but by focusing on business and clinical fundamentals daily, we're able to generate incremental improvements that add up over time.

By way of example, our Flagstone subsidiary in Southern California, which includes the portfolio of 15 of our most mature and stable operations, posted EBITDAR margins of over 19.8% and occupancy above 91% of operational bed in the first quarter of 2008. We believe that nearly all of our facilities can achieve similar or even better performance overtime as we continue to execute.

We believe also that the results from our most recent quarter are strong indications that, first, we're continuing to execute, and second, our long-term growth strategy is sound. I want to remind everyone that we acquire underperforming facilities, most have historically come to us with challenges in occupancy, skill mix, and financial performance, not to mention regulatory and clinical issues in some instances.

In 2006, we acquired 11 facilities with occupancy rates and acquisition as low as 30% in one case, as well as other problems. Having such facilities obviously has an impact on our short-term overall operating metrics which is why we also report same-store performance.

With respect to the 11 2006 acquisitions, as these facilities have began to make the turn and mature operationally, we've seen solid improvements in the group's performance. In the first quarter for instance of 2008, the group's revenue grew 18%, EBITDAR grew 52%, and net income grew 77% over Q1 of '07. Licensed occupancy grew 6%, but still stands at only 69% across the group, so we obviously still have tremendous organic upside in our 2006 acquisitions.

With this quarterly report, we have now rolled all 11 of the 2006 acquisitions into our same-store calculations for reporting purposes. We'll continue to roll acquisitions held for the entire prior-year quarter into the same-store metrics for each quarterly report going-forward.

In addition to our organic growth, our pipeline for opportunities to acquire underperforming assets remains healthy. We continue to actively seek both opportunistic and strategic acquisitions in our target market. In fact, on May 1, we acquired 120 bed skilled nursing facility in Orem, Utah, our first new facility acquisition since going public in 2007. We fully expect the Orem facility to be a strong addition to our Utah/Idaho portfolio and to move us much closer to the operational critical mass we've been striving to achieve in that market.

We not only expect this operation to be accretive to earnings out of the gate, we also expect it to be synergistic with our existing operations in that market as we expand our footprint and continue to make quality improvements across that portfolio. We believe asset pricing will continue to move toward more attractive valuations as the industry moves past some of the stratospheric seller expectations that characterize the market for skilled nursing facility just prior to last year's adjustment in the credit market.

As we've discussed before, we believe our strong balance sheet, including the significant equity we're carrying and our existing portfolio of owned real estate, puts us in an excellent position to take advantage of attractive acquisition opportunities when they arise. We're also continuing to recruit and train new leaders through our administrator and training program, which remains a core element of our overall acquisition strategy. Aggressive renovation activities in several facilities continue to impact our overall occupancy and results.

As we mentioned previously, we had a significant number of beds temporarily closed for some or all of 2007 due to renovation activities and renovation closures continued into the first quarter of 2008. However, toward the end first quarter we saw several newly renovated beds come online and we expect several more to be placed in service during the second quarter. We also have 32 brand new beds including 14 new private rooms coming online later this year in Park Manor, our outstanding facility in Walla Walla, Washington.

Renovations large and small remain underway around the organization, but we're reopening affected beds as quickly as possible. We expect these newly built and newly renovated beds not only to fill up well but to attract the high percentage of skilled patients and improve our overall patient mix in those markets.

Since incremental margins improve as we move toward the higher end of the occupancy scale, we believe that we have significant opportunities to grow both revenues and earnings by filling these beds within our existing portfolio of facilities. We're continuing to increase census across the entire organization and have had significant success over the past two quarters in doing so.

In fact, during the quarter, we celebrated an all-time high in Medicare centers for the organization. Because we've acquired a number of older facilities whose original designs lacked some of the amenities we'd like to offer, we occasionally find it desirable to re-purpose selected patient rooms taking small numbers of license beds out of commission in some locations. These rooms are often devoted to patient activities, expanded therapy spaces, and other uses that enhance the overall service offerings in the facility.

In some cases, we've reduce three and four bed wards to two bedrooms for resident comfort and privacy. We seldom expect these beds to be placed back into service. In addition, in certain states like Utah, we sometimes acquire potentially valuable banked beds that we could place in service but would not find it desirable or economical to do so in the short run. Although if you bring only a few beds in a facility, we've identified approximately 350 licensed beds across the portfolio that we don't intend to actually use. For this reason, we've begun looking more closely at occupancy as a function of operational or usable beds as opposed to only looking at licensed beds.

We've developed a very narrow and well defined standard when it comes to identifying unavailable beds so that we are consistent in our comparisons and do not take valuable beds out of service without good reason. In the end, while we believe that reporting occupancy based on operational beds is consistent with industry practices and provides a more useful measure of actual occupancy performance from period to period, we still plan to also continue reporting occupancy based on licensed beds, whether they're in service or not through at least the rest of the year.

As we have previously alluded to, we're continuing efforts to improve our service offerings and shift our overall patient mix to higher acuity and higher reimbursement patients. Our skilled revenue or revenues from Medicare and Managed Care payers is generally lower in new acquisitions and has usually improved over time as we've improved the clinical performance and reputation of those facilities.

During the first quarter of 2008, we saw a significant quarter-over-quarter improvement in same-store skilled revenue per patient day, with HMO and Managed Care revenue up 9.9% and Medicare revenue up 11.5%. We expect to continue improving clinical quality and payer mix going forward and to reap the benefits that doing so normally entails.

Our quarter one included a number of other achievements I'd love to share with you, but in the interest of time, I'd like to just summarize by saying that our current fundamentals are excellent. We're grateful for the ownership that our operational leaders both clinical and financial have taken in their communities and because of them we feel confident in our ability to execute on our business strategy for the remainder of 2008.

With that overview, I'm going to turn the time over to our CFO, Alan Norman, to provide a more detailed review on the company's first quarter financial results. Alan?

Alan Norman

Thanks, Christopher, and good morning everyone. As mentioned, we released our first quarter financial results and filed our 10-Q yesterday afternoon. For the quarter ended March 31, 2008, total revenue was $113.8 million, up 16.1% compared to $98 million for the prior year quarter. This revenue increase was due to a combination of revenue generated by acquired and same-store facility growth with organic growth up 13.1% in the quarter.

The increase in total revenues was primarily due to increases in skilled mix and occupancy rates combined with higher reimbursement rates relative to the prior year quarter. Overall, skilled mix increased 277 basis points to 47%, operational occupancy increased 93 basis points to 82%, and our average daily rate for skilled residents increased 113 basis points to $424.29.

The overall revenue increase came primarily from our facilities that have been under Ensign management for more than one year, our same-store performance, and were founded on an increase in same-store skill mix of 312 basis points, the rise in same-store operational occupancy of 168 basis points, and an increase in our same-store average daily skill rate of 112 basis points.

As Christopher has noted, performance in our 11 2006 acquisitions, which are now included in the same-store metrics for the first time, is progressing nicely and the group still has ample room for additional improvement.

EBITDAR, our earnings before interest, taxes, depreciation and amortization, and facility rent costs of services was $17.3 million for the quarter which improved by 28.9% from $13.4 million for the prior year quarter. EBITDAR margins grew 150 basis points to 15.2% overall and 176 basis points to 15.6% same store. The operational improvement was partially offset by higher G&A costs, which increased as we have continued our post IPO transition to the public environment.

The company reported net income for the first quarter of 2008 of $6.3 million or $0.31 per diluted share compared to $4.1 million or $0.24 per diluted share for the first quarter of 2007. This represents a growth of net income of 53.1% from the prior year quarter.

Quarter-over-quarter net income was impacted by increased depreciation expense, provision for employee health insurance, cost of being a public company, including higher professional fees and wages, higher stock based compensation expense, and cost of our internal investigation which was concluded in the first quarter of 2008. Overall net income, as a percentage of revenue, increased from 4.2% to 5.6%, an increase of 135 basis points or 32%.

In the past, we have stated that as revenue growth continues to be solid, we believe we will grow our operating margins further as the facilities mature. This was evidenced this quarter. This margin expansion has happened in part because of the ongoing operating improvement in the 2006 acquisition facilities. As of March 31, 2008, cash and cash equivalents were $54.4 million.

In reviewing the cash activity for the quarter, net cash provided from operations was $9.5 million, of which $6.3 million was attributed to earnings, $3.3 million related to non-cash items, including depreciation and amortization, provision for doubtful accounts and stock based compensation. These were offset by $0.1 million increase in net operating assets.

Net cash used in investing activity for the quarter was $5.8 million, which was primarily related to the purchase of property and equipment of $5.6 million. Net cash used in financing activity for the quarter was $1 million, of which $800,000 related to the payment of our quarterly dividends, which equated to $0.04 per share, and $300,000 resulted from debt financing fees. These fees were paid in connection with the February 2008 expansion and extension of our credit facility with GE Healthcare Financial Services to a five year $50 million revolving credit line based on eligible accounts receivable.

We believe that with this credit facility and the proceeds of our recent IPO and strong cash continuing to improve our already strong balance sheet, we are well positioned to continue executing on our disciplined growth strategy going forward. In addition, as Christopher mentioned, we have the opportunity to leverage a substantial equity in our existing portfolio, which includes 16 facilities which we own outright. Our cash and availability to capital puts us in an excellent position to take advantage of the track of acquisition opportunities as they arise.

We are updating revenue guidance for his remainder of fiscal 2008. We now expect consolidated revenues of $454 million to $458 million and reaffirm guidance for the fully diluted net earnings per share of $1.27 to $1.32 for the year. The revision primarily reflects the Utah acquisition completed on May 1, 2008. This guidance assumes, among other things, no additional acquisitions or dispositions, a continued stable Medicare reimbursement environment, and no net changes in the Medicaid environment.

That concludes the financial comments and I will turn the call back to Christopher to wrap up.

Christopher Christensen

Thanks, Alan. Just to conclude, we believe our strong first quarter bodes well for the remainder of 2008. We expect that 2008 will bring attractive acquisition opportunities and we believe that Ensign is poised to take advantage of compelling growth opportunities as they arise, and we expect to continue growing organically through higher occupancy rates and a shift in patient mix to higher reimbursement rates.

Before I close, I'd like to thank our stockholders for your support and confidence. We can assure you that we will strive to deliver against the objective we've set for ourselves, for our employees, stockholders, and residents in 2008.

At this time, Theresa, I'll turn the call back over to you for questions and you can instruct the audience on the Q&A procedure.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first to Eric Gommel with Stifel Nicolaus.

Eric Gommel – Stifel Nicolaus

Good afternoon.

Christopher Christensen

Hi, Eric.

Eric Gommel – Stifel Nicolaus

Just on the guidance, I'm curious what assumptions relative to Medicare rate increases you have in there. Do you have the – are you assuming some of the proposed adjustments that just came out from CMS?

Alan Norman

We are not changing the assumptions, Eric. So, the revenue reimbursement increases that we are assuming were less than 2% on the Medicare.

Eric Gommel – Stifel Nicolaus

Okay.

Alan Norman

We didn't adjust just because it's still is tentative.

Eric Gommel – Stifel Nicolaus

Okay. And then on Medicaid rate increases, is that also less than 2% in your numbers?

Christopher Christensen

It is overall. We were – we thought pretty conservative in looking at 2008.

Eric Gommel – Stifel Nicolaus

Okay.

Christopher Christensen

And didn't adjust that at all.

Eric Gommel – Stifel Nicolaus

Okay. And then, on the Orem, Utah facility, I was wondering if it's at all possible that you could share some of the operating metrics of that facility like, you talk about the improvement in some of the acquisitions that you've made and stuff, and I'm just curious kind of where you're starting with this facility? Is this an underperformer from a clinical standpoint or is there financial issues or is it actually really a good performing facility? I'm just curious if you could talk a little bit about that.

Christopher Christensen

That's a good question, Eric. As a matter of fact, if you took it and compared it to our acquisition historically, this would be on the good side. It doesn't have the challenges, clinically, that some of the acquisitions we've taken in the past have had. It has a bit better occupancy than a lot of the – particularly, the Rocky Mountain and Texas acquisition that we've taken over. The past 15 acquisition, almost all of those have been in Texas and Utah and Idaho. This one has a better occupancy rate. It's somewhere in the high 70% rate which is very good for us as we take an acquisition. Has a better skill mix. Generally, the skill mix that we take on is in the low teens and this is substantially higher than that. So, it's in better shape than the acquisitions that we've taken on over the past two years.

Eric Gommel – Stifel Nicolaus

And is there a lease purchase option on this facility?

Christopher Christensen

There is not.

Eric Gommel – Stifel Nicolaus

Okay. Because, I mean it was a pretty attractive per bed valuation when you look at what you paid for, I was just curious about that.

Christopher Christensen

We tried, Eric. But, landlord wanted to be a landlord.

Eric Gommel – Stifel Nicolaus

I understand. And just another – on the occupancy for the quarter, I think it was – it trended a little lower than I expected but certainly your quality mix and rates were much better than I expected. So, just wanted to be clear, because I think you commented on this last quarter the dynamic of – I mean the buildings that you are turning around, you're still able to drive some pretty attractive quality mix even though the occupancy may not be as high. So, I'm just curious how you're doing that? What are the strategies that are driving that or is it again, you just go back to sort of an active decision to maybe not trade the mix for the occupancy, if you could just talk about that a little bit?

Christopher Christensen

Well, yes and yes. I mean, one of the reasons that occupancy didn't take up faster than we'd – and even though it did pick up substantially in our newer acquisitions, it didn't pick up as quickly as we'd hoped because our rentals took a little bit longer – renovations took a little longer than we thought they would take in some cases, impacting probably around a 100 beds or more, actually more than that. I don't know why I said 100 beds, probably more like 350 beds.

On the flip side, your right, I mean we haven't started to fill beds with folks that maybe we can't provide for appropriately. And more importantly, we still focus on the skilled mix to get our reputation improved in each market that we're in. So, it takes a little bit longer for us to grow our overall census because as you all know coming from the industry, your skilled mix is rotating through your facility quite rapidly, isn't the same as the long-term mix that we could fill our beds up with, but we feel like it's a better way to enhance our skill mix while at the same time enhancing our occupancy, again a little slower than maybe some people would like but we feel very comfortable with our deliberate growth on the overall occupancy especially given the substantial growth we're seeing in our skill mix.

Eric Gommel – Stifel Nicolaus

And then, actually I missed the question – a follow-up I wanted to ask on the Orem, Utah acquisition, it's a bit of surprise for me. I mean, you're actively looking at I assume some acquisition targets out there and I was just curious, is this the kind of – is this an example of an opportunistic one, a strategic one? It sounds like maybe more strategic because it fits within your Utah sort of operating footprint. And what should we expect or think about going forward on the acquisition side, are we still looking at maybe one or two facilities here or there, or something bigger?

Christopher Christensen

You asked a few questions there. I would say that the Orem facility was more of a strategic acquisition, although we feel like we paid a fair price given the lease rate that we'll be paying there. On your second or third question, we feel very comfortable, and maybe I'll let Greg comment after I say a few words, but we feel very comfortable with the opportunities that have been placed before us and we feel confident that we're going to have additional opportunities close in the coming months but don't want to commit to anything until we see signatures on the bottom line.

Greg Stapley

Eric, just to add to that, I would tell you that we're still seeing some adjustment in the market as the seller expectations and buyer capabilities move closer to each other, and that gives us room to hope that there are going to be more acquisitions in 2008. We're certainly working hard to fill the pipeline and to move things through it. But you know that our strategy has always been that whether those acquisitions occur or not, we're still heavily focused on the organic upside in our existing operations and we'll – we expect to be able to grow one way or the other.

Eric Gommel – Stifel Nicolaus

Great. Now, just one more question, I'll jump out of the – back into the queue. On your – some of those facilities that your – from a clinical standpoint that you are turning around and stuff, I mean any updates on survey results, recent surveys or anything that you might want to update us on or how are those trending in your portfolio?

Christopher Christensen

That's a good question. I'm not sure I'm prepared to answer it right now, Eric, but we feel comfortable with our survey results. We've had some positive results in the market and we have our challenges every once in a while. But I don't – I guess I don't know how to answer that question except to say that we're very comfortable with the improvement overall that we're making in our survey performance, particularly in our newer acquisitions that have had historically challenging surveys.

Eric Gommel – Stifel Nicolaus

Yes, that's kind of what I was looking for. Thanks.

Operator

And we'll go next to Travis Spitzer [ph] with Concordia Capital.

Christopher Christensen

Hey, Travis.

Travis Spitzer – Concordia Capital

Hi, guys. I just wanted to – I don't have any specific questions. I've been out of loop, but I just want to say congratulations and well done on building and running a fabulous company.

Christopher Christensen

Thank you, Travis. Good to hear from you again.

Operator

And we'll go next to James Bellessa with DA Davidson & Co.

James Bellessa – DA Davidson & Co.

Good afternoon. Hello, good afternoon. Are you there?

Christopher Christensen

Jim, how are you?

Alan Norman

We're here.

James Bellessa – DA Davidson & Co.

Good, hi. A couple of questions, a follow-up on the Orem acquisition, in that narrative you said that you paid for what is called operations transfer agreement, is that a de minimis amount, small amount?

Greg Stapley

Jim, it's Greg. We always enter into an operations transfer agreement when we take over facility just to handle incidental assets and just the mechanics of moving the employees and operations from the prior operator to us. There's really never any material value assigned to those operations transfer agreement, so the amount that we paid to purchase the leasehold there at Orem really is attributable to the favorable lease rate that we got there.

James Bellessa – DA Davidson & Co.

During the IPO process, you talked about some seasonality in your business and I think there were some identification of the second quarter, it could be lower quarter than others, could you repeat or go through that seasonality?

Christopher Christensen

Yes, I appreciate bringing that up, Jim. Generally we have seen the second quarter drop off in terms of skill mix and occupancy. And I'll even tell everybody on this call that we've seen a slight drop the second quarter over first quarter, but very pleased to tell you that our second quarter is still significantly higher than our fourth quarter of '07, which we're pleased to see that we have stayed stronger in what has historically been a most challenging quarter.

I'm not sure that I can explain that, I've actually talked to many physicians about that, but I guess because the second quarter is traditionally the best weather time, you just don't have as many folks getting sick. And so, there is historically a drop there, but again I'm pleased to say the drop has been much less this year than in prior years.

And I should mention also, in case you're looking at '07, Jim, that if you recall in second quarter of '07 last year, we had a pretty significant positive insurance adjustment. So, as we compared this year to last year, we're going to have that hurdle overcome but we feel very, very comfortable, obviously it's May 8 today, we're almost halfway through the quarter and we feel very positive about the quarter.

James Bellessa – DA Davidson & Co.

Do you recall the magnitude of the insurance adjustment?

Christopher Christensen

No.

Alan Norman

(inaudible) Jim, but we will certainly be explaining that in the next quarter results. I don't have that in my finger tips.

James Bellessa – DA Davidson & Co.

Today, you told us about a new occupancy metric that you've designed to help to describe your business. Are we going to see the historical numbers here or do we have to wait for them to be dribbled out quarter-after-quarter until we have a picture after nine months?

Christopher Christensen

I'm not sure what you mean by dribbling out. We'll see – as I think I mentioned, we'll see both numbers. We're not just going to abandon the past numbers for the new number, we're going to show both.

James Bellessa – DA Davidson & Co.

Understood, but how about – is there a possibility for us to see the historical pattern of this new metric, so that we don't have to wait for nine months just to have the picture.

Christopher Christensen

We can probably put that together. We actually didn't think about until now. That's a good comment. I don't think it will be too difficult for us to put that number together. So, we'll do that, and how do we get that out to you, so that everybody has access to it.

Alan Norman

We're not sure. But we'll have to look at how we distribute that information, Jim. But it's readily available ...

Christopher Christensen

As soon as it is practical and as soon as it's okay to do so, so everybody has access to that. We'll show you so you can see how that number compares to the past many quarters.

Greg Stapley

Yes, but Jim, obviously we have given you the delta on those. We do have the numbers and we have given the delta on those this time. So, you should have a pretty good idea of what those are.

James Bellessa – DA Davidson & Co.

The occupancy rate for the most recent quarter using the former definition with 78.3%, I'm a little perplexed because on last call two months ago, you indicated that you closed the year out at 79.2% and then by February, you were approximately 80%?

Christopher Christensen

You're right, those were dates and time. If you recall, that was the occupancy at that time and when we talked about February, that was the occupancy on that date. So, shouldn't be any reason to be perplexed I hope.

James Bellessa – DA Davidson & Co.

For the 91 days, therefore, the average was below those two points of time?

Christopher Christensen

The average was below those two points of time. If I understand your question correctly, yes, I believe the average was below those two points in time.

James Bellessa – DA Davidson & Co.

Does the 78.3% surprise you? You talked about 350 bed renovations took longer. Did you think that the 78.3% was lower than you would have anticipated?

Christopher Christensen

Yes, I guess I'd say, the same-store was 79.8% which includes all of our facilities except four. The 2007 acquisitions have dragged a little bit and so the number has been brought down substantially by just four acquisitions. Two of those four, we acquired at less than 40% occupancy. So, when those facilities pick up, you're going to see a pretty good movement in our overall occupancy.

James Bellessa – DA Davidson & Co.

Previously, you were talking about perhaps getting to an 84% occupancy rate with existing stores or existing portfolio by the fourth quarter. You still view that that's achievable or would you back off on that?

Christopher Christensen

Still shooting for that number on the same-store basis. We feel like we can make great strides in the third and fourth and hopefully get to that number in the fourth quarter.

James Bellessa – DA Davidson & Co.

Now, in your most recent quarter, the G&A expense ticked up I believe partly explained by I guess distribution of stock to employees. Would you go over that please?

Alan Norman

Actually, when we looking at the increases in G&A, if we look at quarter-on-quarter, we had an increased of $1.3 million and primarily that was the cost of that being public, including the professional fees and wages which constituted about $1 million of that $1.3 million increase. We also had in the stock comp about $200,000 increased expense.

James Bellessa – DA Davidson & Co.

Is that less than you were expected earlier, that stock comp?

Alan Norman

No, that was not less than we expected.

James Bellessa – DA Davidson & Co.

Is it because the stock was down at price that perhaps it wasn't as large of a number? I thought we're again talking about a significant amount in the first quarter.

Alan Norman

I think when we talked about that, we were talking about the issue of the new options. And our references in the last call was that because we had been unable issue options during our IPO process, we were going to have a significant number of options issued in that first quarter.

James Bellessa – DA Davidson & Co.

Yes. Did that have a cost to it?

Alan Norman

That did and I don't have the specific amount of that. It's all blended in to what we've got there.

James Bellessa – DA Davidson & Co.

Does it get into the G&A line or does it get into some other line?

Alan Norman

It is a combination between G&A and Ops, operating expenses. But, going forward, that issuance of options in the first quarter at the rate that you did then will not reoccur in the future quarters that you anticipate.

Christopher Christensen

That's correct. It'll be much less than that.

James Bellessa – DA Davidson & Co.

The basic shares that you had outstanding were almost exactly what I anticipated, but the number of diluted shares was significantly less, only about a 150,000 more than the basic number of shares outstanding. Can you give us any guidance going forward what that additional diluted shares might be above the basic number of shares?

Alan Norman

That is a function of the stock price and the anti-dilutive options that we had in the first quarter were really a function of where that price is. So, hopefully that will move up and we'll get more dilution.

James Bellessa – DA Davidson & Co.

At what price do those options become dilutive and therefore you'd include them?

Alan Norman

A combination of depending on when the options were issued and it'll range anywhere from around $11.5 up to $13 in a quarter.

James Bellessa – DA Davidson & Co.

That's helpful. You have a term loan you talked about and the narrative in the Q talked about being fully drawn at $54.7 million that happen just by coincidence there. There's another number close to that in the same paragraph. So, I don't if it's $54.7 million or $55.7 million but you're fully drawn. What are your sources of capital for your activities now?

Alan Norman

Well, as we said, we have our new revolver in place, on which we have no borrowings. So, our $50 million credit line, we have no borrowings against that. And as I mentioned, a significant source of capital to us is our owned facilities, of which we have 16 that carry no debt. That combined with the IPO proceeds and cash on hand, we think give us ample resources to take advantage of any acquisitions that we would anticipate.

James Bellessa – DA Davidson & Co.

You haven't mentioned much about the probe. In the narrative of the Q, there isn't additional information other than to say that it is ongoing. Do you have anything you'd like to mention here on this call?

Christopher Christensen

Are you asking about the probe reviews or the DOJ investigation?

James Bellessa – DA Davidson & Co.

DOJ. And I don't know what the other one was. So, may be you need to talk about both.

Christopher Christensen

There is really no news on the DOJ investigations and no contacts from the DOJ since the last time we talked to you all and we're still standing ready to cooperate with them in anyway they'd like us to resolve whatever issues they might have, if they have any. As far as the probe reviews go, those normal audits that we undergo with our fiscal intermediary, we had one probe review that was completed recently. The report just came in, I think it was completed in the first quarter, the report came in subsequent to the first quarter and we were very pleased with the outcome of that probe review. I believe, we still have one probe under way in two facilities on pre-payment review.

Alan Norman

As he said, the one probe that we did have concluded in the first quarter, so we still have two that had been in place since 2006 actually.

James Bellessa – DA Davidson & Co.

Thanks for your answers.

Operator

And we have a follow-up from Eric Gommel with Stifel Nicolaus.

Eric Gommel – Stifel Nicolaus

Yes, thanks. Just one other additional question that I forgot to ask. On your purchase options for your leased facilities, I mean how many more do you have here in the near term that you can execute on?

Christopher Christensen

Actually, we have one that we expect to execute on very soon in our Draper, Utah facility. And then, we have another that is open at the moment that we've not yet decided what to do with timing-wise. I think we will exercise that option. As in the next options that open after that, I don't think open until 2010 or 2011.

Eric Gommel – Stifel Nicolaus

Okay, great. Thank you.

Operator

And we'll go next to David Butterworth [ph] with the Townsend Group.

David Butterworth – Townsend Group

Hello Christopher and everyone else. Congratulations on a great quarter.

Christopher Christensen

Thank you.

David Butterworth – Townsend Group

My question is, can you give me an idea, what would the optimal, achievable occupancy rate be for a firm like yours?

Christopher Christensen

I think with our existing portfolio, excluding the new acquisitions we continue to bring on, I think when all of these stabilize and are performing the way we anticipate them to perform, around 92% is where we'd like to end up. That's not going to happen this year or next year or in the year after that. But, I think I've mentioned in my presentation, our most stable company which consists of 15 facilities and has an average – I think the average time we've had those facilities is about five years. Their occupancy currently is a little over 91% and we expect that to continue to improve.

David Butterworth – Townsend Group

That's great. I have one additional question and that is, it's sort of hard to ask this because I know you don't forecast many years into the future, but I'm trying to get an idea, what is sort of the kind of growth rate you envision for the firm? Meaning that if you look back five years from now and you are looking back and let's say the number, I'll just pick one, was 15% on the revenue side, would you consider that a success? A good number? Or a bad number? I just don't know sort of what you're trying to be in long term.

Christopher Christensen

It's a good question. I know this probably doesn't please too many people though we continue to say this but it's something we've built ourselves on. And I know the way you asked is what would we be pleased with? I think we'll be pleased if we maintained our discipline, if we continue to acquire the facilities that we ought to acquire given the talent that we have and the (inaudible) and given the markets that we feel are appropriate for us to be a part of, and – I'm not trying to dodge the question at all David. We just feel very passionately that we've got to maintain discipline. Some years we'll probably grow faster than people anticipate; in other years, we'll probably grow slower. But, that's the answer. I hope that sort of satisfies you.

David Butterworth – Townsend Group

I acknowledge, it's not an easy or possibly even fair question, but thanks. Once again, congratulations.

Christopher Christensen

Thanks a lot, David.

Operator

(Operator instructions) And it appears there are no further questions at this time. Mr. Stapley, I'd like to turn the conference back to you for any additional or closing remarks.

Greg Stapley

We really have nothing else to give you today. We hope everyone is pleased with the results as we are and we look forward to providing another report, another update to you, another quarter away. Thanks everyone for being on the call.

Christopher Christensen

Thank you very much.

Operator

And that does conclude today’s conference. Thank you for your participation. You may now disconnect.

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Source: The Ensign Group, Inc. Q1 2008 Earnings Call Transcript
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