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The Ensign Group, Inc. (NASDAQ:ENSG)

Q2 2008 Earnings Call

August 07, 2008 2:00 pm ET

Executives

Gregory K. Stapley - Vice President, General Counsel, and Secretary

Christopher R. Christensen - President, Chief Executive Office, and Director

Alan J. Norman - Chief Financial Officer

Analysts

Eric Gommel - Stifel Nicolaus

James Bellessa - D.A. Davidson & Co.

Ross Haberman - Haberman Fund

Operator

Welcome to The Ensign Group Inc. second quarter earnings results conference call. (Operator Instructions)

With us today from the company is the President and Chief Executive Officer, Mr. Christopher Christensen; Chief Financial Officer, Mr. Alan Norman; and the Vice President and General Counsel, Mr. Greg Stapley.

At this time I would like to turn the call over to Mr. Stapley.

Gregory K. Stapley

We issued a press release highlighting the quarter’s key financial results yesterday. That release is available on the Investor Relations section of our website at www.ensigngroup.net. A copy of our 10-Q which was filed yesterday is also available at the website and a replay of this call will be available there as well until 5:00 p.m. next Thursday, August 14.

Before we begin, I'd like to cover a few housekeeping items. 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. Participants should not place undue reliance on any forward-looking statements and are encouraged to review the company’s periodic SEC filings for a more complete discussion of some of the factors that could impact our results. 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 reasons.

Second, we note that each Ensign facility we may mention 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 the terms 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, the service center, or captive insurance subsidiary are operated by the same entity.

Third, we find it helpful to supplement our GAAP reporting with EBITDA and EBITDAR metrics. These measures reflect an additional way of looking at the aspects of our operations that when viewed with our GAAP results, provides a more complete understanding of our business, and should not be relied upon to the exclusion of GAAP financial measures. A more ample discussion of these non-GAAP measures as well as the reconciliation of GAAP are available in yesterday’s press release, which again can be accessed on the Investor Relations section of our website.

Now, 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 second quarter financials, and then following Alan's comments, Christopher will conclude and we will open up for questions.

Christopher R. Christensen

I’m happy to report that The Ensign Group had a record second quarter. Although seasonal factors have historically made the second quarter the most challenging of the year for our company, in the second quarter Ensign achieved the highest overall revenue, earnings and skill mix we’ve ever posted making it not only the best second quarter in our history but also our best quarter ever.

Our second quarter performance driven by a record first quarter in 2008 and with this strong start Ensign is off to an outstanding 2008. We are firmly on track not only to achieve but to exceed our previously announced financial and operational goals for the year.

Just to share a few highlights, organic revenue was $113.3 million, up 13% over the second quarter of 2007. Total revenue was a record $115.3 million, up 15% over the prior year second quarter. Skilled revenue for the quarter increased 28.5% to $52.5 million as skilled mix improved 480 basis points to a best ever of 47.7%. Census climbed with operational occupancy for the quarter increasing to 81% overall and 81.5% same-store, an increase of 80 basis points over same-store in the second quarter of 2007. In year-to-date, operational occupancy increased to 81.5% overall and 82.6% same-store, an increase of 120 basis points over same-store in the first half of 2007.

The EBITDAR improved 9.2% in the quarter to $17.7 million and year-to-date EBITDAR improved up 18.1% to $35 million versus $29.6 million in the first 6 months of 2007. EBITDA improved 14.3% in the quarter to $13.8 million and year-to-date EBITDA improved 27% to $27.0 million versus $21.3 million in the first 6 months of 2007.

Consolidated net income was a record $6.5 million for the quarter compared to $5.7 million the year before, an overall improvement of 14.5% while year-to-date consolidated net income was $12.9 million versus $9.8 million the year before, an overall improvement of 30.7% over the first 6 months of 2007.

With these healthy improvements in key measurements and others, we are pleased to be reporting fully diluted earnings of $0.32 per share for the quarter. I would also note that our operational efficiency improved by 90 basis points as overall expenses for the first half dropped to 90% of revenue. Expenses exclusive of G&A, which looks very different for us today than it did last year before we went public, dropped by a full 140 basis points. Perhaps most importantly, net cash from operations grew by more than 250% year-to-date to over $24.6 million.

We continue to seek in a disciplined fashion both opportunistic and strategic opportunities in our target markets to deploy this capital as well as the remaining funds from our IPO and funds available under our credit facilities in order to grow the company. We feel confident that compelling acquisition opportunities will be available as the market for long-term care assets continue to adjust and pricing becomes more rational.

We are also continuing to recruit and train significant number of new readers through our extensive administrator and training program or perhaps more accurately our CEO in training program which remains a foundational element of our overall acquisition strategy. We believe these are goals to once again to validate our core business model. This model focuses simply on acquiring underperforming facilities and applying sound business fundamentals, providing high quality of care, developing and following strong local leadership, and steadily improving those operations, one patient outcome at a time. I’d like to remind everyone that most of our underperforming facilities we’ve acquired have come to us with challenges in occupancy, skill mix, and financial performance, not to mention regulatory and clinical issues. In 2006 and 2007, we acquired 15 facilities with occupancy rates at acquisition as low as 30%, single-digit skilled mix and other substantial challenges. Adding such facilities obviously has a negative impact on our short-term overall operating metrics, but also represents a tremendous upside opportunity as we turn them around.

With respect to acquisitions, we’re pleased to report that our strategic 120-bed skilled nursing acquisition in Orem, Utah which was acquired during the quarter is performing in line with our expectations. This facility has enhanced our overall presence in the Utah market as expected, and is on track to be mild accreted to earnings this year. More importantly, we’re excited to report that with Orem’s acquisition, we finally reached the critical math necessary to establish our Utah-Idaho market as a fully functioning stand-alone portfolio subsidiary known as Milestone Healthcare, Inc.

On behalf of all of us here, I want to express our deep appreciation for the excellent work and dedication of our leaders of our Keystone Care portfolio subsidiary which has been supporting the Utah-Idaho market since Ensign first entered Utah in July 2006. Milestone Healthcare will not only allow us to focus more closely on the tremendous potential we see in our Utah-Idaho market, it will also allow Keystone which covers the state of Texas to focus more rigorously on operational excellence and growth in that important market as well.

I will be temporarily serving as President of Milestone as I did for the latter part of 2007 and early 2008 in our Flagstone subsidiary until a permanent leader for that market can take the helm, but I have to add that just as in the case of Flagstone, it really is dependent on those leaders in Utah, Idaho, and the many leaders that have volunteered to help from Flagstone and Touchstone that will create the improvement in that market. Resources are being deployed from other areas of the organization to provide needed support during the interim.

We expect Milestone’s transition to full stand-alone status to occur over the next several months. Aggressive renovation activities at several facilities continue to impact our overall occupancy and results. During the quarter we had a significant number of beds out of service due to renovation activities, but we are working to complete those renovations and bring them back online as we did the prior quarter.

Since the end of the second quarter, we have opened 32 brand new beds and re-activated 8 other non-operational beds at Park Manor, our outstanding skilled nursing and rehabilitation facility in Walla Walla, Washington. Those new beds are already selling faster than anticipated, and more details on that opening and the exciting transformation that is taking place there are included in our press release we issued last Friday which is available on our website. 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.

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 beds within our existing portfolio. As noted earlier, we are continuing to improve occupancy across the entire organization.

Before I conclude, I shall also note that the State and Federal Government Agencies that provide a majority of our reimbursement have once again faced significant budgetary challenges in 2008. For example, in California, where about half of our facilities are located, the state is now presently writing checks to Medical payees like us which is not an uncommon occurrence at this time of the year in California and we have plenty of cash on hand as well as our yet untapped credit facilities, all at the ready to ensure that we can weather this payment drought without any problem. In fact, we are in such a good cash position that at present we are scouring the state for opportunities to acquire attractive properties held by our more leveraged operators who do not have the resources to outlast the cash or challenges caused by the state budget delay.

Given the opportunities, we will gladly add such facilities to the Ensign fold. In addition, just last week, CMS announced that instead of a recently proposed net reduction in Medicare payments to skilled nursing operators, a 3.4% market basket update will go into effect on October 1st without the previously proposed recalibration of drug traits.

Assuming no change in our occupancy, skilled mix, or acuity levels, we estimate that this update will increase revenue by approximately $1.8 million in the fourth quarter of 2008 alone and about $7.2 million in fiscal 2009.

To sum-up, our current fundamentals were excellent and we’re executing well. We’re pleased with the progress being made across our operations. We believe that we still have ample room for operational improvement in nearly every facet of the organization. As always, we’re grateful for the ownership to the operational leaders both clinical and financial, many of whom are actually significant shareholders of the company have taken in their facilities and their communities. Because of them, we feel confident in our ability to execute on our business strategy for the remainder of 2008 and into the future.

With that overview, I’d like to turn the time over to our CFO, Alan Norman, to provide a more detailed review of the company’s second quarter financial results.

Alan J. Norman

As mentioned, we released our second quarter financial results and filed our 10-Q yesterday afternoon. For the quarter ended June 2008, total revenue was $115.3 million, up 15% compared to $100.3 million for the prior year quarter with organic revenue up 13% in the quarter. As Christopher mentioned, the increase in total revenue for the quarter was primarily due to increases in skilled mix combined with higher average reimbursement rates as well as the inclusion of two recently acquired facilities.

Overall, skilled mix for the quarter increased 480 basis points to 47.7%. Operational occupancy which has historically been weakest in the second quarter actually increased 30 basis points to 81% despite the overall occupancy in the two recently acquired facilities of less than 59%. Our average daily rate for skilled resident increased by 12.9% to $432.11 per patient day, which is an increase of more than $49 per patient day on average as we continue to shift our patient base to a higher acuity mix.

EBITDAR jumped from $16.2 million in the second quarter of 2007 to $17.7 million in 2008. This was an increase of 9.2%, and the operational improvement was actually more dramatic than that percentage suggests, the reasons I’ll discuss in a moment. EBITDA grew from $12 million to $13.8 million, an increase of 14.3% over Q2 2007. As Christopher also mentioned with a record second quarter building off the record first quarter, we’re also pleased to report on our year-to-date performance.

Overall for the six-month ended June 2008, total revenue was $229.1 million, up 15.6% compared to $198.2 million for the prior year with organic revenue up 13.2% for the six months. Skilled mix for the 6 months increased 381 basis points to 47.3%. EBITDAR climbed from $29.6 million in the first half of 2007 to $35 million in 2008, an increase of 18.1% and EBITDAR margins increased from 14.9% to 15.3% overall. EBITDA grew from $21.3 million to $27 million, an increase of 27% over the first half of 2007.

The changes in our same-store measures for the 6 months were uniformly positive with an increase of 410 basis points in skilled mix to 47.9% and an increase in operational occupancy of 130 basis points to 82.6%. Overall net income for the 6 months as a percentage of revenue increased from 5% to 5.6% and we believe we can continue to steadily expand our operating margins as the facilities continue to mature.

The company reported net income for the second quarter of 2008 of $6.5 million or $0.32 per diluted share compared to $5.7 million or $0.34 per diluted share for the second quarter of 2007 which represents a growth in net income of 14.5% from the prior year quarter, and for comparison purposes, the 2007 EPS adjusted for the new shares issued at the IPO was $0.27 per share.

The second quarter 2008 earnings per share figure takes into account both the dilutive effect of the November 2007 issuance of 4 million additional shares at our IPO as well as the effects of the change in the timing of actuarial adjustments for insurance expense. This change resulted in a reduction in favorable actuarial adjustments compared to the prior year quarter. Our periodic insurance valuations were handled on a semi-annual basis through the second quarter of 2007, but have been calculated and taken on a quarterly basis since the third quarter of 2007. As a result of the change in insurance credit covering multiple quarters, it was taken in the second quarter of 2007, but only a single quarter credit was taken in the second quarter of 2008.

As such, as we stand at the 6-month mark in 2008, year-to-date results provide a more accurate comparison of operating performance. Quarter-over-quarter and year-to-date net income are also impacted by also being a public company including higher professional fees, wages, accrual for expenses, increased depreciation expense, higher provision for insurance, and higher stock-based compensation expense.

As of June 30, 2008, cash and cash equivalents were $50.9 million, and in reviewing the cash activities for the 6 months, net cash provided from operations were $24.6 million of which $12.9 million was attributed to earnings, $6.6 million related to non-cash items including depreciation, amortization, provision for doubtful accounts, and stock-based compensation, and $5.1 million related to the decrease in net operating assets. Net cash used in investing activity for the period was $21.4 million, which was primarily related to the purchases of property and equipment and acquisitions which combine total $29.2 million. Net cash used in financing activity for the period was $4 million of which $2.1 related to the repayment of one of our long-term mortgages with an additional $400,000 paying down other long-term debt and $1.6 million related to the payment of our quarterly dividends which equated to $0.04 per share.

Although we have not had a need to use it yet this year, we continue to maintain our 5-year $50 million revolving credit facility with GE Healthcare Financial Services. We believe that with this credit facility, the proceeds of our recent IPO and strong cash flow continuing to improve our already strong balance sheet, we are well positioned to continue executing on our disciplined growth strategy going forward. In addition, we continue to have the opportunities of leverage with substantial equity in our existing portfolio which was the acquisition of the underlying real estate of our Scottsdale Arizona and Draper Utah facilities in the second quarter bringing the number of facilities which we own free and clear to 17.

As noted earlier, our cash position in excess to capital puts us in an excellent position to take advantage of the attractive acquisition opportunities as they arrive. With a strong year-to-date operating performance and recently announced Medicare market basket update mentioned by Christopher, we are updating revenue guidance for the remainder of fiscal 2008. We now expect consolidated revenues of $463 million to $467 million, up from the $454 to $458 million previously announced, and we are increasing our guidance for fully diluted net earnings per share for 2008 with the previous range of $1.27 to $1.32 to a new range of $1.30 to $1.35 per share. This guidance is based upon diluted weighted average common shares outstanding of $21 million and assumes among other things no additional acquisitions or dispositions, any continued stable reimbursement environment.

While we are pleased with the strong progress made in the first half of the year and particularly in the second quarter with occupancy at 81%, we are more excited about the fact that there remains ample room for additional improvement for profitability across the portfolio. That concludes my comments and I’ll turn the call back to Christopher.

Christopher R. Christensen

Again, I just want to reiterate our gratitude to the many strong operators and their teams for a strong second quarter and a great start to 2008. We expect that the remainder of ’08 will begin to 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 we close, we’d like to again thank our stockholders for your support and for your confidence, and at this time, I’ll turn the call back over to the operator for any questions that any stockholders may have. Can you instruct the audience on the Q&A procedure?

Question-and-Answer Session

Operator

(Operator Instructions) And for our first question we got to Eric Gommel with Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

Just a couple questions, on the occupancy versus the skilled mix, occupancy was a little lower than we expected but the skilled mix was much better, rates were much higher, more than offsetting the occupancy; what I’m curious about is how do you see the occupancy trending for the rest of the year; I know you have beds out of service for renovations and you’ve also brought on a couple of facilities, how should I think about that?

Christopher R. Christensen

Yeah it’s a good question Eric. Candidly, occupancy was a little bit lower than I had even anticipated. I think with the strong growth in skilled mix, you do have more turnover residents than I had anticipated, but the second thing which you pointed out is true also; we did add two facilities since the second quarter of last year and obviously one during the quarter, the average occupancy in those two facilities is somewhere in the 50% range, one is in the 30% plus range and the other one is in the 60% range, I think 63% range. So, that’s brought our occupancy down a little bit. I do think that totally as an organization, again being very candid with you; we probably have some of the folks who are focused on developing greater talents, greater capability, greater clinical confidence, moving toward that higher skilled mix, but we probably haven’t focused enough and also continuing to serve the other residents who also need our help, but maybe aren’t quite the higher acuity; it isn’t that we turn them, I just think that there needs to be some marketing for those residents as well, and we probably need to refocus, but at the same time, I think I told this on the last quarter call, I think you’ll see that what follows a rather dramatic increase in skilled mix is generally a rather dramatic increase in occupancy.

Eric Gommel - Stifel Nicolaus

And going to the expense side, I’m curious what you’re seeing; food cost, utility cost, I know there’s been some increases in food cost that people have talked about and then obviously utility costs; are you a member of a group purchasing organization, how do you control some of those line items?

Alan J. Norman

I think the first part Eric, we have not seen a substantial increase in either the foot cost or things you would expect like utility cost; both of those on a year-to-date comparison on a per patient day basis, they are up about 5%, but we don’t track the specific items, to look at CPI in that depth, we just haven’t seen anything that makes us alarmed. I understand that there certainly are some utility challenges with states like Texas, but we’re looking closely at what’s going to happen there, but to-date there hasn’t been anything that has been alarming to us at all. Many of our operators independent of us have joined together in group purchasing because it made sense in certain markets. But as you recall, we have found a lot of people, but we have found it much better in each market that we’re in to allow the individual leaders to determine, “Am I better off buying through this group purchasing deal or am I better off buying from this local vendor?,” because there are a lot of occasions where they do better with the local vendor and other cases where they don’t and that’s when they choose to join into the group purchasing that has been set up by some of the fellow operators, and we do, we just found we do better, we get better quality, we get better service, and frankly, because we’re not compelled to buy a certain volume, we probably buy correct amounts, better than a lot of our competitors do.

Eric Gommel - Stifel Nicolaus

And then another expense item, I just want to understand sort of how this worrying because you are buying in leases on some of these properties and things; how should I think about rent expense trending out here over maybe the next 12 months? It obviously is going to decrease or are rent increases or the step-up in rents going to offset some of the buy-in’s?

Christopher R. Christensen

I think looking over that length of time Eric, I think your second statement is exactly right. I think that the normal rent escalators that we see over that period will keep us relatively flat.

Operator

And for our next question, we go to James Bellessa with D.A. Davidson & Co.

James Bellessa - DA Davidson & Co.

My first question is about this new portfolio subsidiary Milestone and you’re looking for a permanent leader there and you’re going to be taking over temporary duties, wasn’t there somebody who set up that business originally, won’t they be qualified to be the leader of that organization or have they stepped out of the picture?

Christopher R. Christensen

It’s a great question. The person who actually assembled that group of facilities or most of those facilities did a marvelous job bringing them together, but by his own admission, we feel like there are some capabilities he doesn’t have to lead the operations there, and so, actually voluntarily asked that we do something differently there. So, sometimes people discover that their strengths are elsewhere and he’s still an important part of our organization, contributing in a huge way for the company, but that’s not perfectly suited his skill set right now.

James Bellessa - DA Davidson & Co.

You said that during this purchase hiatus that you are scouring the state of California for opportunity; can somebody be put into a major jeopardy after 3 weeks of maybe not getting payments?

Gregory K. Stapley

I will tell you that we’ve already seen one facility that’s gone into bankruptcy by their reports as a result of the cessation of cash flow; we don’t know if that facility is going to be a candidate for us and we won’t know for a while as it went its way through the bankruptcy process, but depending on how long this budgeting paths go, we would expect to see a number of operators across the state to either over-leverage or don’t have the ability to leverage looking for active strategies and we’d love to be it for the ones of them that have good quality assets that we’d like to have.

Christopher R. Christensen

Jim you’re correct, and they do have to show evidence that they can provide, but the state checks on that when you first license a facility. I’m not sure that they have the resource to check on that consistently, so a facility can try to continue to survive for a lengthy period of time before the folks recognize that they don’t have the means to do so.

James Bellessa - DA Davidson & Co.

Legislators can be hard to predict, but what is the build in your forecast for Medicare reimbursement rates going forward?

Alan J. Norman

We had the same thing, we had built in when we first introduced this year’s budget and that’s right around 2%.

James Bellessa - DA Davidson & Co.

And in the CapEx narrative in the 10-Q you say that you have budgeted $14.4 million for all year, but then when I look at the expenditures years-to-date, you’ve already expended more than that…

Alan J. Norman

Let me give you a breakdown of that Jim, because it does get confusing. When we acquire a facility that we’ve been previously operating, that is considered to be an acquisition of fixed assets, not a business, because we were the ones in the business, and out of that $21.2 million, $8.2 million of that was the purchase of Draper and the Scottsdale Arizona Buildings, so that was our real estate purchase. Included in that is the $2 million that we paid for Orem in that business combination. So, out of the remainder, we had maintenance CapEx of $3 million and refurbishment projects took up $8 million of that cash. So, we still have about $6 million left in our budget for the remainder of the year for those refurbishment projects.

James Bellessa - DA Davidson & Co.

And of the CapEx that you’ve already incurred in renovator refurbished, are you essentially done there or are you still going to be blowing around the horn and doing more of that?

Alan J. Norman

I think as Christopher mentioned, the biggest one we’re done with is the major project that we had in Walla Walla that did come online in July. The other ones are still progressing and they come on at various times and it is a continual process doing that, and Christopher is going to address that…

Christopher R. Christensen

We expect that to continue across several years.

James Bellessa - DA Davidson & Co.

And when you have this major Walla Walla project, most of all that expense has already hit the income statement, has it not?

Alan J. Norman

Anything related to that, Jim, is capital and it will result in higher depreciation going forward, but the expense you see in these things is something that is measured, but it is the disruption in our business operations as we go through these refurbishments, so we’re thrilled to see them have it finished and behind and where they can focus right back on the operations, but there isn’t anything actually that we can say that measures additional expense related to these refurbishment projects.

James Bellessa - DA Davidson & Co.

In the narrative of the press release, you talked about an assumption for the year of 21 million shares, is that just a rounded figure; it’s written out 21,0000…

Alan J. Norman

It definitely is a rounded figure or we should have spelled it. The weighted average does, as you are aware, move with the share price and the dilutive measures and things like that, so that’s our best guess.

Christopher R. Christensen

Jim, because I am also concerned; does that make sense, I mean it’s very difficult to predict when shares are added to the fully diluted number of shares based on the movement of the share price.

James Bellessa - DA Davidson & Co.

Just to keep my numbers down, I’ll up my target for your…

Operator

We go next to Ross Haberman with Haberman Fund.

Ross Haberman - Haberman Fund

I was wondering, you in the verbiage you talked about buying a couple of new facilities and I was wondering, some of them were under your long-term management, could you tell me given what you’re paying for them, could you run through them, how quickly that will be accreted to you bottom-line?

Christopher R. Christensen

Are you talking about these two in particular?

Ross Haberman - Haberman Fund

Yeah.

Christopher R. Christensen

The two that we’ve added since the second quarter of last year will be mildly accretive immediately. The one already has been because we’ve had it for a little while, and Orem which is the most recent will be mildly accretive through the rest of the year and we expect those earnings only to grow over time.

Ross Haberman - Haberman Fund

And the other final question, if my recollection is right, you had some sort of SEC inquiry, I heard about it for a quarter or two and then sort of never heard anymore about it, was it settled, did you get any sort of closure there, or from your understanding where does it stand today if it stands anywhere?

Christopher R. Christensen

I’ll let Greg address that. I’m not aware of any SEC investigation, but there is a DOJ investigation that we’ve discussed for many quarters and I think it’s even in our press release again, but go ahead Greg.

Gregory K. Stapley

It is referenced in the Q. It really seems that last quarter nothing new to tell. We’ve continued to reach out to the DOJ office to cooperate, talk to them, haven’t talked to us about whatever it is they’re concerned about, they’ve not expressed any concerns, they’ve not filed any formal charge we know of, they’ve not done anything or taken any action that we’re aware of. We continue to give report so that their investigator continues to explore through the ranks of some of our former employees; we had another former employee call us the last month and say that she had been asked for an interview. We encouraged her to go give that interview, talked to her about whether she had anything to say that might be injurious to the company, she didn’t think she did, she was very positive about her experience here, and so, we’ve had those kinds of reports throughout the course of this thing which have now known about it for something like 18 to 20 months, and so nothing new to tell.

Ross Haberman - Haberman Fund

Okay, alright again I know it’s been mentioned a number of times but just to know if it was settled or you were still working through it.

Gregory K. Stapley

These things based on what we’ve been told by the regulatory counsel, these things take lots and lots of time, and we’ll just deal with it as it comes.

Ross Haberman - Haberman Fund

You’ve never set aside any reserve or allowance or anything like that for this at all.

Gregory K. Stapley

We least think we don’t have any basis on which to do that. We don’t have any idea what the nature of the concerns are or where they would be coming from, no way to quantify any kind of an issue or whether there is even a real issue that is going to be pressed when the time comes.

Ross Haberman - Haberman Fund

Just one followup question on a different topic, you mentioned you have been looking around for other facilities to purchase; can you give us a sense of what prices are today or what were the last couple of deal prices per bed, I guess that’s how they’re priced, I think, based on what you know today?

Gregory K. Stapley

Sure we have to tell you what we know. The market through 2006 and 2007’s loose credit standards really made their way in our industry, but very much in our opinion overheated, and we have as a result of that sort of taken a step back and decided we wait, be disciplined, and wait for the market to sort of readjust and it is taking some time to do that as it is in most of the real estate markets where sellers are sort of slow to understand what has happened and what pricing really has become. In terms of the kinds of deals we’re seeing in the markets we’re in, we are starting to see again some deals that are dropping down in the 30,000 to 40,000 bed range, that’s kind of where we saw our rates back in 2004, 2003. Those would be for underperforming assets, in some cases seriously underperforming assets. The performing assets are still priced pretty high. I think there is, they still have some, money out there to the extent they are locked in their credit lines before last August, and it’s probably going to take at least through the rest of the year for the market to continue to re-adjust and get back down to where we’re seeing lots and lots opportunities like we did in 2002, 2003, 2004.

Ross Haberman - Haberman Fund

And the prices on a good performing facility is what?

Gregory K. Stapley

I think you can see a good performing facility, depending on who the buyer is and what their motivations are, going for anywhere from 60,000 to 70,000 a bed although I can’t point you to a specific deal. I’ve been told that by some investment bankers and others that are out pedaling portfolios, but I haven’t seen any of those portfolios. I can’t think of one that’s closed lately. There have been a number of sale portfolio options since the spring and we think that that’s going to contribute to the market sort of readjusting here over time.

Christopher R. Christensen

Ross, just to give you an idea in late ’06, mid ’07, that time period we saw many well performing assets going for as much as $100,000 to $130,000 a bed. It really did get what we think was over-heated.

Alan J. Norman

And by the way Ross, we’re talking about skilled nursing, not assisted living, that’s a completely different marketing business.

Operator

And with a followup question, we’ll return to Eric Gommel with Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

Just a followup, can you talk a little bit about the operating environment in the Texas market, what you’re seeing there from a reimbursement perspective and then just, do you have any new development plans there, like maybe recycling any assets in that marketplace?

Alan J. Norman

Yes, those are great questions Eric. It’s almost like I asked you to ask them or something, but yeah, actually Texas we’re seeing as a favorable environment right now, both from a reimbursement standpoint as well as from an operating standpoint, and we are doing exactly that. Thanks to the creativity and frankly leadership of the guys that are out in the Texas market right now, we are taking some older properties currently and completely overhauling. It’s almost like new construction and I’ll talk about this probably on the next quarterly call as we make more progress, but we’re taking assets that are 30, 40, and 50 years old and knocking out about a third of the beds, overhauling the facility, changing the way operations are performed there, delayed delivery, delay of care delivered, and seeing some real excitement both from some of the governmental offices that I won’t mention yet as well as from the community, the physicians and such, and we think that this is something as we prove that it is successful, that’s why I really don’t want to talk about it too much; as we prove that it is successful, I think that it’s something that we can do over and over again and we think Texas is a great place to do it, one because of construction cost in that state, two because of the land cost, and three just because there are so many worn buildings that are priced what we believe are favorably.

Operator

We have no further questions on our roster.

Christopher R. Christensen

More than anything I just want to thank again the shareholders who have placed their confidence on us. I want you to know that we’re doing everything we can to execute on our plan and our strategy, and more than us executing, I do want to thank those people that are actually making this happen out in the field who are also many of them are large shareholders as I mentioned; I want to thank all of them for making us better each day. So, thanks for your time on this call.

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Source: The Ensign Group, Inc., Q2 2008 Earnings Call Transcript
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