The Ensign Group (NASDAQ:ENSG) Q2 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Ensign Group's second quarter fiscal year 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to end the conference Over to your host, Chief Investment Officer and Executive Vice President, Chad Keetch. Thank you and welcome, everybody. We appreciate you joining us today.

0:49 And as always, before we begin, I have just a few housekeeping matters. We filed our earnings press release in 10Q yesterday. Thank you for joining us. also any forward-looking statements made today are based on management's current expectations assumptions and beliefs about our business and the environment in which we operate these statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason.

2:09 In addition, the Ensign Group, Inc. is a holding company with no direct operating assets, employees, or revenues. Certain of our wholly owned independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly owned captive insurance subsidiary, which we refer to as a captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as for workers' compensation insurance liabilities. All of our operating subsidiaries, including the service center and the captive, are operated by separate, wholly owned, independent companies that have their own management employees and assets. References herein to Ensign or the consolidated company and its assets and activities, as well as the use of terms we, us, our, and similar terms used today, are not meant to imply, nor should it be construed as meaning, that the Ensign Group, Inc. has direct operating assets, employees, or revenue.

3:21 or that any of the subsidiaries are operated by the Ensign Group. Also, we supplement our gap reporting with non-gap metrics. When viewed together with our gap 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 gap reports. A gap to non-gap reconciliation is available in yesterday's press release and is available in our 10-Q. And with that, I'll turn the call over to Barry Port, our CEO. Barry? Good morning, everyone. We want to begin today's call by thanking our operational leaders and their frontline teams for their inspirational efforts that require more than most could ever imagine. As they care for our country's most fragile and vulnerable in the most intimate of healthcare settings, they continue to show up to work each day donning an uncomfortable mask, gown, eye protection, and other personal protective equipment to do some of the most challenging but important work during one of the most difficult times in our industry's history.

4:27 We thank each of them from the bottom of our hearts for doing so with the utmost professionalism and selfless dedication. Our local leaders, caregivers, and other frontline staff are deserving of all the praise that we can muster. Appropriately, we often devote a lot of energy into acknowledging first responders and hospital workers for heroic work amidst life-threatening circumstances. Our sincere hope is that we, as a nation, begin to similarly recognize workers in the post-acute setting with that same accord. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant.

5:12 But because of the unselfish dedication of our talented leaders and the heroes serving alongside them, we are optimistic that we can continue to thrive through this uncertainty. Their heroism and dedication over the last several months has been truly inspiring. We're pleased to report that in spite of continued unique challenges presented during the current global pandemic, the operational momentum we experienced in the first quarter continued into the second quarter, where we again achieved record-breaking results. For the second quarter in a row, we achieved our highest adjusted earnings per share in our history of 78 cents, an increase of 100% over the prior year quarter, and slightly above a record-setting first quarter.

6:03 The strong results came from quarter-over-quarter improvements in skilled mix across same-store transitioning and newly acquired operations, cost-saving initiatives, improved collections, sequestration suspension, and improved Medicaid rates in certain states. We also continue to implement a number of actions to respond to the impact and uncertainty caused by the pandemic, including incurring additional COVID-19-related labor expenses, and the ongoing acquisition of unprecedented levels of PPE and other equipment. We announced yesterday that, similar to a few other well-capitalized healthcare providers, in June we began returning all of the CARES Act provider relief funds that we received.

6:48 These funds were meant to cover lost revenue and increased expenses tied to the COVID-19 pandemic. and we want to underline again that our results do not include any benefits related to those distributions. As you all know, most of our revenue comes to us from sources that are funded by taxpayer money and as stewards of those funds, we know that there is a high degree of responsibility that accompanies government reimbursement. In addition, as a for-profit operator, our organization pays tens of millions of dollars a year in taxes. After taking a hard look at our balance sheet and our liquidity, including our strong relationship with our lenders and landlords, and after gaining a better understanding of our financial performance after several months of operating in the COVID environment, we determined that it was not in the best interest of our organization to accept funds from Rounds 1, 2, or 3 of the CARES Act at this time.

7:47 If there are additional future grants available, We will reevaluate the purpose and needs of those grants, specifically considering the potential costly testing requirements or other newly mandated regulations. Overall, our company is not being overwhelmed by COVID-19. However, as you might expect, similar to what the country as a whole is experiencing, the impact has varied market by market and building by building. More recently, As expected, our portfolio has experienced an increase in COVID-19 cases in our buildings where the number of cases in the community overall are increasing, such as parts of Texas, Arizona, and California. As of August 3, 2020, the company's 226 affiliated operations across 13 states had 909 confirmed COVID-19 patients in-house.

8:41 Also, as of August 3rd, 19 operations had over 20 COVID-19 positive cases, 46 operations had less than 20 cases, and 161 operations had no confirmed cases of COVID-19 in-house. To add some additional context, four of our operations at the request of the local healthcare community proactively and intentionally dedicated their whole building to the care of COVID-positive patients. and 20 of our operations have dedicated entire wings to COVID-positive patients. It is also important to clarify some details regarding the spread of COVID-19 in nursing homes. According to recent independent studies by researchers at Harvard Medical School, Brown University and the University of Chicago, the primary drivers of COVID-19 outbreaks are a function of location of facilities as it relates to geographic prevalence Asymptomatic Spread, and Availability of Testing, not quality ratings, infection citations, staffing, or for-profit or not-for-profit status.

9:57 That said, we continue to learn and find ways to help defend against outbreaks and prevent the spread of COVID-19, and we believe we are prepared to operate effectively in the COVID environment for the foreseeable future. Our local leaders and caregivers, with the assistance of their service center resources, are methodically acquiring unprecedented levels of PPE and other supplies and equipment and are providing the latest and best practices in both clinical protocols and safety measures at a significant expense. As our local operators have responded to the needs of the healthcare community, our operations have seen an increase in the number of higher acuity patients, including COVID-19 positive patients. As the number of COVID-19 cases in the surrounding communities we serve has increased, especially in Texas, Arizona, and California, our state and county health leaders and local hospital systems have looked to enzyme-affiliated operations to care for all varieties of high-acuity patients that can safely be admitted to or remain under our care.

11:08 We continue to learn a great deal through this process and our local leaders are proactively preparing for and executing on plans to provide care for all patient types, whether COVID positive, negative, or unknown. As previously mentioned, our operations have, at the request of the local community, dedicated entire buildings and wings to care for COVID-19 patients, which are generally skilled patients that need high levels of nursing care. These efforts vary building to building and market to market and are being done in partnership with local and state public health officials to ensure compliance with infection prevention protocols and the comprehensive recommendations provided by the CDC and other public health authorities.

11:55 We reported yesterday that the vast majority of the decline in occupancies we've experienced began in the latter half of March due to governmental stay-at-home orders, a pause on vital procedures in the hospitals, and overall lower hospital occupancies, all of which directly impact patient referrals into the post-acute setting. As COVID cases began to decline in late May and June, We saw an increase in occupancy and a slight decrease of skilled mix as the needs of higher acuity patients were fewer. More specifically, between mid-May to mid-June, same-store and transitioning occupancy increased by 0.4% and skilled days decreased by 1.1%.

12:42 However, the recent influx of COVID-19 cases in several key states resulted in occupancies that have begun to decrease slightly while skilled mix improved as the number of high acuity patients increased. More specifically, between mid-June and mid-July, combined same-store and transitioning occupancy was down approximately 1.9%, and skilled mix actually increased by 8.1%. As you can see, we see a pattern emerging When COVID cases in the community increase, occupancies are negatively impacted, but skilled mix improves. As we compare these numbers with what we see happening more broadly, it is clear that our operators have remained flexible in shifting capabilities to respond to the needs of the local market. When the number of very sick people in the community increases and as hospitals need assistance with higher acuity patients, including COVID patients, we see skilled days increase.

13:47 At the same time, occupancies decline as extra precautions are taken on new admissions. When COVID retreats, occupancies begin to recover and skilled mix begins to normalize. While occupancies are lower than they were a year ago at this time, the fact that occupancy levels have remained relatively steady over the last few months combined with the comparatively strong skilled mix demonstrates the resilience of our model and our local leaders' ability to adapt to changing circumstances in their local healthcare markets. As we said last quarter, this pandemic arrived at our doorsteps at a time when our organization has never been stronger clinically and financially.

14:33 Our local leadership model is shining through in these results and our local approach is the reason why we were able to report such a strong quarter. As we've said before, Ensign was born in times much like these and our model is not only designed to survive but to thrive and grow in the face of uncertainty. Our current health combined with our culture, proven local leadership strategy, healthy balance sheet, and the enormous potential in our newly acquired transitioning and same store operations gives us confidence that we are well positioned to manage through these unusual times and a rebound to our pre-COVID path. As we've said today, we've seen and we expect to continue to see a significant impact from the pandemic on our results throughout the remainder of our year.

15:25 But with several months of COVID behind us and following two record quarters in a row, we are raising our annual earnings guidance to $3 to $3.10 per diluted share up from our previous guidance of $2.50 to $2.58 per diluted share, and we are affirming our annual revenue guidance of $2.42 billion to $2.45 billion. We are confident that we can provide this guidance for several reasons, including our better than expected results in the first half of the year, the operational adjustments being made by our local operators, and the benefits we've received from regulatory waivers, rate adjustments, and the other continued efforts already mentioned.

16:13 While the pathway to achieving these results has and will differ significantly from what we expected when we gave guidance prior to the pandemic, we are confident that we are well positioned to operate in the current environment, but more importantly, to regain much of our pre-COVID momentum as the flow of patients continues to normalize over time. As the year progresses, we will continue to evaluate the impact of COVID-19 across the portfolio and readjust as necessary. And with that, I'll ask Chad to give us an update on our recent investment activity. Chad? Thank you, Barry. The company paid a quarterly cash dividend of $0.05 per share of Ensign Common stock. Due to our strong liquidity, we are pleased to continue our longstanding practice of paying a dividend to our shareholders.

17:02 As a reminder, Ensign has been a dividend-paying company since 2002 and have increased the dividend each year since 2002, and there are currently no plans to suspend future dividends. Just a few days ago, we announced the acquisition of the real estate and operations of a post-acute care retirement campus located in Tempe, Arizona, which includes Tempe Post-Acute, a 62-bed skilled nursing facility, Desert Marigold Senior Living of Tempe, a senior living center with 72 assisted living beds and 90 independent living units. This was one of the several acquisitions that we had in the works when COVID appeared on the scene and is the first closing we have had since the pandemic started. Our transition process was a little different this time, but we are confident in our customizable clinical and operational plan that will allow us to selectively acquire in the current environment.

17:57 With this addition, our growing portfolio is now comprised of 226 skilled nursing operations, 24 of which also include senior living operations and other ancillary businesses across 14 states. Ensign now owns 93 real estate assets, 63 of which we operate. This portfolio of owned assets took less than five years to acquire as compared to the 15 years it took us to acquire the 94 assets we spun out to CTRE in 2014. Thank you for joining us today. In some cases, some of the deals that we expected to see this year have been delayed as the CARES Act funding has provided additional capital to provide temporary assistance to undercapitalized or struggling operations.

19:12 However, we anticipate that there will be a significant influx of older and newer deals that come out of this pandemic. As these current and future turnaround opportunities present themselves, we are doing more to refine our decision-making process to ensure that we are choosing the best available opportunities. While we are always very selective with each potential acquisition opportunity and pass on the vast majority of the opportunities that are presented to us, we will be even more selective in the coming quarters in order to be sure that we have plenty of dry powder in 2021. Whether we are acquiring the real estate or entering into long term lease arrangements, the health of our balance sheet will remain paramount. Our approach to acquisitions will continue to be based on paying fair and reasonable prices using historical performance, not on pro forma or future results that we will create through our performance.

20:08 Most of the operations we acquire start out with lower occupancies and lower CMS star ratings, and we build that into the purchase price. But when occupancies go down, we have significant cushion that's built into our model. Lastly, as a brief update, we began the process of unlocking some equity value in seven or eight of our 73 owned and unlevered real estate assets. We have selected a few of our own assets that have built up significant equity value to take to HUD for very attractive, long-term, fixed-rate debt. This process can take several months and will not be completed until next year, but we are preparing now for a wave of new acquisitions that we see on the horizon in 2021. And with that, I'll pass the call over to Barry for some more detail around operations.

21:00 Barry? Thanks, Chad. We're very pleased to report that we are seeing some very promising outcomes across the organization as we have seen improved clinical results amongst our patients, the vast majority of which are able to recover and return to home, while simultaneously limiting the spread of the virus, reducing the pressure on local hospitals, and doing so in a cost-effective manner to further benefit the overall cost to Medicare and Medicaid programs. While this is a dangerous virus, we have toiled day and night to continue to develop effective care plans that have resulted in above-average outcomes, which has only added to the confidence of our local healthcare community.

21:45 To help illustrate these results, we would like to offer a few examples. As the COVID-19 outbreak began in suburban Washington state, we had an early view from our operations into how to defend against COVID entering our facilities, prevent its spread, and in cases of outbreaks, initiate clinical practices to improve outcomes. Our model facilitated the sharing of best practices among operators, clinicians, and medical directors. One excellent example of this is Sunview Respiratory and Rehab in Youngstown, Arizona. During the early weeks of the pandemic, CEO Sean Hill and COO Marla Sanchez, together with the Arizona Resource Teams, tirelessly prepared for the eventuality of COVID in their facility.

22:35 They participated in COVID education, rigorously applied CDC guidance and CMS regulations, and obtained masks, gowns, and other recommended PPE. Under the direction of their medical director, Dr. Omar Hassan, they also developed a COVID-19-focused clinical program and provided proactive training to their nursing staff and care staff. Unfortunately, in June, COVID entered Sunview, and when universal testing was conducted, many residents and numerous staff were quickly identified as COVID-positive. The Sunview team was prepared and immediately went to work executing their response plan, which included enhanced assessment, monitoring, and implementation of high-acuity clinical interventions and practices normally carried out in emergency departments of acute hospital settings.

23:30 In order to sustain the enhanced interventions and elevated staffing levels that this type of care required, Sunview utilized the benefit waivers approved by CMS as well as their existing managed care partnerships to qualify eligible beneficiaries for skilled reimbursement, which also allows them to implement an aggressive treatment plan without intrusive transition between two different healthcare settings. As a result of these actions, the facility not only Thank you. Thank you. This aggressive treat-in-place approach has yielded incredible clinical outcomes as well. As of today, Sunview is COVID-free.

24:31 Nearly all affected residents have recovered, resulting in a COVID mortality rate of only 2.3%. By comparison, CMS reported that the mortality rate for skilled nursing residents nationally for the same time period was 26 to 30%. Another example seen at Southland Living in Norwalk, California. They showed us how many of our facilities have provided skilled services to high-acuity patients while allowing the local acute hospital to maintain bed availability and simultaneously reducing risks related to moving frail patients. Under the direction of Matt Flake, CEO, and Shoni Del Pilar, COO, Southland's interdisciplinary team began a rigorous program of change of condition monitoring along with early clinical intervention. The objective was to elevate the level of care at the facility to address emergent clinical needs in-house.

25:32 As a result of these efforts, Southland had a 66% decrease in transfers to the acute setting for the same period in the prior year, despite an increase in medical frailty in both their new admissions and long-term care residents. By applying the lessons learned across several geographies and by providing the local leadership with tools and resources rather than directives, our affiliated facilities have been able to achieve prevalence and mortality rates far below the national average. It really is in times like these that Ensign's unique operating model really shines. Our leadership and our operating model are the reasons why we have adapted and will continue to adapt during this unprecedented time, and it's one of the reasons why we have seen our acuity and outcomes improve. As our leaders have appropriately utilized the skill in place approach, we have saved CMS millions of dollars in unnecessary hospital observation stays, fewer life-threatening transitions of care, and lower mortality rates. These savings are the direct result of early intervention and enhanced clinical treatments that are possible only as a result of the waiver for the three-day hospital stay in select managed care relationships.

26:56 Rather than attempting to roll out a one-size-fits-all approach across many markets with varying local restrictions, our CEO caliber leaders and their clinical partners, with the support of a world-class service center, are very carefully working with local governments, hospitals, and their managed care partners to be a solution for this pandemic. Now I'll pass the call over to Suzanne to provide more details around our quarter and guidance. Suzanne? Thank you, Barry, and good morning, everyone. Detailed financials for the quarter are contained in our TANQ and press release filed yesterday. Some additional highlights for the quarter include gaps, Net income was $40 million, an increase of 95% over the prior year quarter. Adjusted net income was $43 million, an increase of 99% over the prior year quarter. Consolidated gap revenues were $585 million, an increase of 19% over the prior year quarter.

27:55 Same-store occupancy for the quarter was 73.7%, which is down 5.9% from the prior year quarter. Same-store skilled mixed days was 31.4%, an increase of 100 basis points. The same-store Medicare days were up 16%. Transitioning occupancy was 76.1%, which is down 3.8% over the prior year quarter. Transitioning skilled mix days was 25.5%, an increase of 360 basis points. And transitioning managed care revenue was up 12%. The company's liquidity remained strong for the six months ended June 30th with cash generated from operations of $174 million and free cash flow of $147 million.

28:46 As of July 31st, we had cash and cash equivalents of approximately $100 million and $320 million of available capacity under a revolving credit facility. As Chad mentioned, we also own 93 assets. 73 of which are unlevered with significant equity value that provides us even more liquidity. In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to healthcare providers during the COVID-19 pandemic, including the waiver of the three-day qualifying stay, the CARES Act, which provides, among other things, provider relief funding and an accelerated advance payment program for Medicare which equates to approximately $100 million for us.

29:32 More specifically, the company received directly and indirectly approximately $110 million of the provider relief funding under the CARES Act, including rounds one, two, and three. To date, all provider relief funds have been returned. In addition, the CARES Act temporarily suspends the automatic 2% reduction of Medicare claims reimbursement, otherwise known as C-Crestration. for the period of May 1, 2020 through December 31, 2020. This suspension of sequestration had and will continue to have a positive impact on our revenue, the magnitude of which will depend on how the pandemic affects our Medicare expenses for the remainder of the year. The federal government also increased FMAP by 6.2%, which, depending upon the state, will provide an increase in Medicaid rates.

30:23 The temporary increase in funding and the timing of payments varies by state, but eight of the states in which we operate have already approved increases, and several others are looking to do so as well. As Barry mentioned, we are increasing our previously announced 2020 annual guidance to Thank you for joining us. Deluded weighted average common shares outstanding of approximately $55.5 million, a tax rate of 25%, the inclusion of acquisitions close to date, the exclusion of losses associated with startup operations which are not yet stabilized, the inclusion of anticipated Medicare and Medicaid reimbursement rates increases, not a provider tax, and no resurgence of COVID-19 pandemic with the primary exclusion coming from stock-based compensation.

31:37 Additionally, other factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy and skilled mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals, the resurgence of COVID-19 pandemic, and other factors. And with that, I'll turn it back over to Barry. Barry? Thanks, Suzanne. Before we move on to questions, we just want to reiterate again that our optimism expressed today is based entirely on our confidence in our local teams and our proven model. Our success has and will always be due to their daily commitment and sacrifice and their ownership of our culture and organizational mission.

32:24 We're grateful to our shareholders for your confidence and support. We cannot adequately express our appreciation to our colleagues in the field and at the Service Center for making us better every single day. Thank you all. And with that, we'll now turn the time over to Q&A. Operator, can you please instruct the audience on the Q&A procedure? As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Frank Morgan of RBC Capital Markets. Your question, please.

33:11 Good morning. I guess with the guidance update you've provided today, it looks like sort of the implied guidance for the second back half of the year could be as much as $1.54 in the second half of the year. Is there anything we should be thinking about in terms of the cadence there between the third and fourth quarter? I know there's Thank you for joining us. in terms of overall occupancy. But there are some things that will cause some fluctuation, some of which are relatively known, others of which are fairly unknown.

34:10 We're receiving some temporary Medicaid rate enhancements at the moment. Some of those will burn off. There might be some offset to that from just regular state reimbursement increases. You know, the length of the three-day stay waiver is a fairly unknown quantity there, though we expect it to run through the end of the third quarter and hopefully end of the fourth. So those are some things that are impacting it. Suzanne, can you think of others that are? No, I think you covered them really well, Barry. You know, I think that as we've been talking about, you know, the end of the – Thank you so much for joining us. you know standard increases kind of filter in at the end of Q3 and then fully enforce in Q4 and so you've got that and then just the skilled in place and we do know that's going to be it looks supposed to be in place all of Q3 but that might burn off in Q4 depending upon the declaration of the state of emergency.

35:35 Yeah let me just add to that too this is Chad I mean you know obviously with occupancies as we described in the prepared portion of our remarks you know COVID you know The prevalence of COVID in the communities we're in is also something to watch, and that impacts both occupancies and mix, as Barry described. So that clearly could impact things as well. So it almost sounds like 3Q might be better than 4Q. I mean, it sounds like with a lot of the continuation of these programs, is that a fair way to think about it, or do you think it could be fairly equally weighted between them? I don't think we expect it to be better, Frank. If anything, it might be the same or slightly down from Q2.

36:25 Definitely Q4 being stronger. We're trying to give clarity, though, through the whole remainder of the year. It's really difficult to do quarter by quarter. will understand. So net-net, a lot of the programs that may run through their third quarter, as those wind down, the rate increases that would normally occur for Medicare in the fourth quarter and maybe higher occupancies would make for a slightly better, potentially, theoretically, a little bit better. In terms of the states that have this special funding, I know you talked about a number of states that have actually passed through the FMAP increase. Are these are all big, important states to you.

37:11 How would you rate the magnitude or the benefit that you're getting through the temporary FMAP increase? Yeah, that's a great question, Frank. You know, when we kind of think about what states actually have the FMAP program in place, California has a very strong program in place. Texas has a very strong program in place. And, you know, Arizona has had They're a little bit different on the program they have. They have a strong program, but it's more of a whole dollar program versus California and Texas have a daily rate program in place. And so all of our larger states have these programs in place. And so California and Texas specifically have their programs in place through the end of the emergency based upon how they've laid everything out.

38:01 They still have to go through it. At least we expect them to go through the end of the emergency based on everything we've been told. Gotcha. And then interesting, the commentary about the M&A and then also the financing, the HUD financing on some of your unencumbered assets. Any kind of early read on how much equity you could pull out of those buildings and maybe how we could extrapolate that across the rest of your unencumbered portfolio? Yeah, that's a great question, Frank. and others. Ninety-three owned assets have been acquired in the last five years.

38:50 A good portion of those are newer assets, at least to Ensign, and a lot of them are going through that transition phase that we talk about as a key part of our model. A lot of those, I would say, are not at full value, so to speak, but that said, I can give you some sense on the HUD loan as one tool that we have to basically take some of that equity off the table and use it to fund future growth. We're looking at under 10 assets. HUD programs are pretty specific in how they're structured but If you're looking at a 70% to 75% loan-to-value on those assets, it represents around $120 million in loan proceeds.

39:43 You could maybe look to that as a way to say what eight or nine of those assets would be worth. So that gives you some sense. But you can't necessarily extrapolate that across all those owned assets because, again, so many of those are still in the transition phase as newly acquired or transitioning assets. But it's definitely a great question and something we look at and talk about all the time. And we're also still evaluating ways that we can illustrate and show that value to our investors because it is a significant source of liquidity, as both Suzanne and I mentioned. And it's really nice to have. Sure.

40:31 And I'm assuming those 10 assets that you are financing, those would be some of the more mature of those assets that are closer to sort of that, you know, equilibrium, you know, steady state performance than those that we're in. and I would assume that is that the case. Yeah, that's right. That's exactly right. Okay. And then, so now that you've got this money and the M&A opportunities that you see out there, I'm just curious, I mean, you talked about the revamp of the interest of doing things now. Like, the opportunities you're seeing today, are these mostly turnaround assets or would these be assets where people are just, you know, just don't want to deal with COVID, don't and many more.

41:37 or there's, you know, maybe there's some private equity investors that are looking to, you know, to liquidate their interests and things like that. So we have sort of the kind of standard non-pandemic related sellers that are out there. But that said, I think there's definitely, you know, a group of sellers that because of COVID and, and even just sort of PDPM, which is not something that we've talked a whole lot about, but just the continued regulation and everything that it takes to run a skilled nursing facility. We're seeing a lot of those folks that are, you know, and getting through it right now because of some of the CARES Act funding that's helped immensely.

42:23 But as that burns off, we'll be very interested in selling. So we're seeing a little bit of both, but in both categories, it does represent a very healthy pipeline for 2021. Gotcha. I'll hop back in the queue. Thanks. Thank you. Again, to ask a question, please press Star 1 on your touchtone telephone. Again, that's Star 1 on your touchtone telephone to ask a question. Our next question comes from the line of Scott Fidel of Stevens, Inc. Your line is open. Hi. Great. Thanks. Good afternoon, everyone. First question, just interested in terms of what you're seeing more recently around occupancy rates from some of the lower-acuity patient cohorts, and then what type of external or engagement activities you might be undertaking to re-ramp up occupancy around some of the lower acuity individuals.

43:33 So maybe just on the occupancy, I think we quoted some numbers as Barry went through it, looking kind of mid-May to Thank you. Thank you. and as we have COVID come into that area, then we actually see the skill mix go up. And so because we're, you know, skilling employees or, you know, passing or going over the three-day qualifying waiver for the stay of the hospital, we're actually seeing that increase in helping relieve the overall system in that area and taking those higher acuity skilled patients. And so it's kind of, you know, really...

44:37 equal to how heavy COVID is impacting that specific area of how we're seeing this. It's a very building by building specific, and I don't know if I answered your question, but it's a very hard thing to say about it. Yeah, and Scott, I think one thing to maybe remember is some of the reductions you see in occupancy are somewhat deliberate, both on the part of the, you know, kind of the hospital system, but also just, again, elective cases being shut down. Those things are naturally temporary phenomenon. I can tell you also that as we look at kind of the world of outbreak buildings that we've experienced so far, which we have quite a bit of experience across a wide range of geographies, as you look at those and you see kind of the path that they went down, when COVID enters, you see a pretty sharp reduction in occupancy You see COVID kind of work its way through things and then resolve.

45:54 And then you see a natural path back upwards to kind of more stable occupancy. And again, as we look back at our own experience in our outbreak buildings, that path is clear in every single building. They're all happening at different times across the entire portfolio, and you have new outbreaks happening and new challenges emerging. But as we study those trends across our portfolio, it gives us a pretty high degree of confidence that as things begin to normalize, which they most invariably will in terms of volume through the healthcare system... We feel like, you know, the portfolio overall will kind of follow a similar path that we saw, you know, all of our individual buildings go through on a building-by-building and market-by-market basis.

46:48 I think that's kind of re-emphasized by, like, how the, if you look and see what the managed care are seeing for utilization right now, you know, they're projecting that in second half of 2020, they're projecting an increase in their utilization, and so I think to Barry's point, that's really how we're mirroring because as their throughput increases and their utilization increases, then so does ours. And so really looking at that as a kind of consistent pathway and pattern that we're seeing. Yeah, understood. And maybe taking the other side of the patient mix and clearly the strong acuity shows through in the second quarter and we certainly see that in Thank you for joining us.

47:47 and which has been translating into some of the stronger pricing stats as well. Clearly, you've had this bolus of COVID patients coming in that also impact that too in the second quarter. You know, is there any way that you could sort of give us some more insights into sort of drilling down between let's call it the non-COVID higher acuity patient mix in terms of how the trends may have been impacted there and then obviously we know that and you've seen the new COVID patients as well driving up the acuity. So I think one of the easiest ways to see this pattern and pathway is looking at a small little area that we have been breaking up for the last couple years of the other skilled. We've talked about that being our subacute and our higher acute and really what that group of Payers boils down to is it's a really high acute clinical patient. And really that's where the testing ground of all of, you know, some of the complex clinical stuff started.

48:52 And now, you know, over the last year in the preparation for PDPM, we were talking and you've heard us talk about this expansion of these highly complex clinical care pathways that we're developing and putting in place. And so I think what you see with the last kind of quarters through Q4, Q2, and Q1 and then Q2 is that continued expansion of those clinical care pathways, which then has resulted in higher complex clinical management and higher complex medical management, which is one of the key conditions that as you look through PDPM, you know, that nursing focus, the nursing delivery has really been something that we've been able to execute on. And so I think it's that continuation of that growth and, you know, What COVID does is it actually pairs and partners right into those higher clinical care skill sets that we've been developing for the last year and a half, two years.

49:50 Okay. And then just one last one for me, just interested in your thoughts on the final Medicare SNF rates and policy changes for 2021. came in at 2.2%, not that far off the last couple years. Just in terms of the rate itself and then some of the policy changes that CMS included in there, you know, how you're thinking about those relative to what you were expecting to see. Thanks. Very great question that, you know, comes in at 2.2%, consistent with what we were expecting. The proposal is at 2.3%, really diving in and looking through some of the changes that are encompassed in there. not a significant amount of changes that really impact how we pull this rule through. If anything, some slight positives for us that allow us to capture some of the things that we're already doing, you know, allow the rate now really captures those additional clinical procedures that we already had in place. And so, if at all, somewhat positive to some of those additional things that we were doing already caught up in the rate, but really, really pleased with the rule and pleased with The relatively light number of changes that are outside the rate itself, but the few that are in there are positive for us.

51:04 Okay, great. Thank you. Thanks. Thank you. We have a question from the line of Frank Morgan, RBC Capital Markets. Your line is open. You actually almost answered it in that last comment. I was wanting the PDPM update. I think you hit on most of that, particularly in light of COVID, but any other thoughts, that's fine. If not, I'm good. Yeah, look, I can just clarify a little further and add a little more color. Prior to COVID, we saw a pretty even split between kind of what I would call a rehab-type patient and a medical management-type patient, which is more of a COVID situation.

51:51 Thank you. Thank you. to cater towards that more complex patient type. We have spent a lot of time not just learning the PDPM system but continuing to do what we've done for the last, I would say, 10 years, which is to be the type of facility that can take the higher acuity patient and drive the kind of outcomes that you would expect.

52:48 and so for us, that continued transition continues to go well for us. Thank you. Thanks, Frank. Thank you. At this time, I'd like to turn the call back over to CEO Barry Port for closing remarks. Sir? Thank you, Lateef, and thank you, everyone, for joining us today. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.