The Ensign Group, Inc. Q2 2026 Earnings Call

Hello, everyone. Thank you for joining us, and welcome to The Ensign Group Q2 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Mr. Keetch. Please go ahead. Thank you, operator, and welcome everyone.

We filed our earnings press release on Monday, and it is available on the investor relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 P.M. Pacific on August 28th, 2026. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, July 29th, 2026, and these statements have not been or will be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions, and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call.

Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its independent subsidiaries do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees, or revenues. Certain of our independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the other independent subsidiaries through contractual relationships.

In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims-made coverage to our operating companies for general professional liability, as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, Inc. Which is a captive real estate investment trust that invests in healthcare properties and enters into lease agreements with certain independent subsidiaries of Ensign, as well as third-party tenants that are unaffiliated with The Ensign Group. The words Ensign company, we, our, and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our independent subsidiaries, the service center, Standard Bearer Healthcare REIT, and the insurance captive, are operated by separate independent companies that have their own management, employees, and assets.

References herein to the consolidated company and its assets and activities, as well as the use of the words we, us, and our, and similar terms, are not meant to imply, nor should it be construed as meaning, that The Ensign Group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by The Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available on Monday's press release and is available on our Form 10-Q. With that, I'll turn the call over to Barry Port, our CEO. Barry? Thanks, Chad. Before we get into our record results for the quarter, we want to spend a little time discussing what drives all of this consistency, namely the mission that our organization was founded on and strives to achieve every day.

At Ensign, we talk a lot about our mission, which is to dignify post-acute care in the eyes of the world through moments of truth. That mission is much more than a statement on a wall. It is the guiding principle behind nearly every decision that's made across our organization. We believe the best way to transform post-acute care is by consistently delivering exceptional outcomes and experiences that redefine what residents, families, and healthcare partners expect from skilled nursing. Our core values provide the foundation for that work, creating a shared culture that empowers nearly 60,000 partners to lead with compassion, accountability, ownership, and a relentless commitment to excellence.

If you visit one of our operations, nearly every single employee knows the value acronym, CAPLICO, and what each letter stands for. While CAPLICO may have begun as a set of values, over time, it has become an operating discipline that influences hiring decisions, leadership development, employee retention, clinical execution, and ultimately, the experience of residents and families. Together, our mission and values inspire local teams to strengthen each other and elevate care. We believe culture is not separate from performance. It is the foundation that makes sustainable clinical, operational, and financial performance possible. At the center of our clinical strategy is an integrated care model that empowers every healthcare discipline to participate fully in making our residents' lives better. We call this model ONE CLINICAL. In this model, therapy isn't an ancillary department. It's one half of our clinical brain.

As opposed to most of the industry that outsources therapy or treats therapy as a separate department to fulfill a singular purpose, our therapists work alongside nursing as equal clinical partners, bringing their expertise into every aspect of resident care. Together with our physician partners and our interdisciplinary teams, there is a continuous evaluation of emerging clinical evidence, sharing of best practices, and development of advanced clinical pathways that improve outcomes across our operations. Rather than treating diagnoses in isolation, they coordinate every discipline around a common set of goals, restoring function, improving quality of life, reducing avoidable complications and helping residents achieve the best possible outcome. While it may sound like a program, it's much more than that.

It is a clinical operating model that guides how our affiliated operations deliver care every day, we believe it is one of the most important differentiators of our organization that has been developed over decades. This integrated approach influences everything from fall prevention and wound care to behavior management, functional recovery, hospital utilization, quality measures, and even has led to the development of specialized clinical programs. It creates a culture of shared accountability where nursing, therapy, physicians, and other clinicians continually learn from one another and refine care based on objective, measurable outcomes. We believe this clinical patient-centric model is a durable competitive advantage that is uniquely perpetuated and refined through peer accountability in our cluster model. The proof of all this expertise and efficiency is evidenced in the outcomes.

According to the most recently published Centers for Medicare & Medicaid Services data for our same-store facilities, we achieved quality measure ratings that were 23% above the average in the states that we operate in. Likewise, these operations achieved CMS Cycle 1 survey inspection results that outperformed the average of facilities in our operating states by 18% and exceeded county-level averages by 26%. In addition, rehospitalization rates and long-stay emergency department visits were better than the national average by 15% and 24% respectively, supporting successful resident recovery and continuity of care. We also have zero CMS Special Focus Facilities, having graduated several acquisitions that we acquired with that designation.

We ended the quarter with over 80% of our skilled nursing operations earning a CMS quality measure rating of four or five stars, exceeding the national averages in every single one of the 15 quality measurement categories, including all five claim-based measurements. This is also especially notable given that many of our acquisitions were one and two star when we took them over. Importantly, all these measures come from a variety of objective sources, including CMS measures, claims-based metrics, regulatory surveys, occupancy trends, and referral behavior. Whether viewed through quality ratings, survey performance, occupancy growth, referral trends, rehospitalization rates, emergency department utilization, or managed care relationships, we believe the consistency of these outcomes provides compelling evidence that our operating model is delivering meaningful results for residents and healthcare partners alike. These results are not the product of any single initiative.

They reflect the cumulative impact of our operating model, our ONE CLINICAL approach, the integration of therapy and nursing, investments in technology and clinical tools, and the local leadership culture that drives accountability and execution at the bedside every day. The strength of our clinical model ultimately depends on the quality and stability of our people. One of our foundational CAPLICO core values is customer second, the belief that by taking extraordinary care of our employees, they in turn will provide exceptional care to our residents. We have long believed that outstanding resident outcomes begins with engaged, supported, and empowered caregivers who know they are loved and appreciated. We are especially proud of the continued improvement in employee and leadership stability.

In particular, our director of nursing turnover continues to improve. Our overall RN retention rate is also 8% better than the average across our 17-state footprint using CMS-reported data. Similarly, administrator turnover is an impressive 46% lower than the CMS-measured state average. We believe this level of leadership stability is one of the key differentiators of our organization. It creates continuity for our caregivers and residents and reinforces accountability at the local level and allows the investments we make in our clinical programs, technology, and resources to translate into consistently superior quality outcomes, care efficiency, regulatory performance, and financial results. As we've said many times, the improvement in our operating metrics like occupancy and skill mix and the corresponding financial results are a direct reflection of a relentless patient-focused culture. In today's healthcare environment, patient volumes and acuity levels are directly tied to objective and verifiable positive clinical outcomes.

As each operation solidifies its reputation in its respective market, they are not only being chosen to care for more and more patients. They are also being entrusted to care for increasingly complex cases, including a larger share of Medicare, managed care, and other skilled patients. Patients' families, hospital systems, physicians, and managed care organizations continue to choose Ensign-affiliated operations at increasing rates because of the outcomes our teams achieve. This cannot and will not happen, especially consistently over a long period of time, without consistently achieving these industry-leading, high-quality clinical outcomes. In healthcare, trust is ultimately expressed through patient choice and referral behavior. Hospitals, physicians, managed care organizations, patients, and families make decisions every day about where care will be delivered. Occupancy growth is therefore more than a financial metric.

It's one of the clearest external validations that an operation is consistently delivering the outcomes and experience that stakeholders value. To highlight this point, on the census front, our same-store and transitioning occupancy for the second quarter was 84.1% and 84.7%, respectively. As for our ability to attract high acuity patients, our combined same facilities and transitioning facilities revenue and days increased by 10.7% and 6.7%, respectively, over the prior year quarter. Managed care revenue increased by 6.1% and 16.2%, respectively, for same-store and transitioning operations over the prior year quarter, with skilled mix days up 6.2% and 9.4%, respectively, from the second quarter of 2025. The primary driver of these improvements continues to be the expanding trust from the communities we serve, earned through consistent clinical outcomes.

We continue to acquire new operations with significant long-term upside and expect to maintain a healthy pace of growth as we expand our mission-driven approach to transform and dignify post-acute care. Since 2024, we have successfully sourced, underwritten, closed, and transitioned 102 new operations across several markets, many of which are already performing at or above expectations, both clinically and financially. We also continue to benefit from powerful demographic tailwinds, which we expect will further support the census momentum we are seeing across our portfolio. We are pleased with our current same-store occupancy, we are equally excited about the remaining organic growth opportunity as we clinically and culturally transform these operations. At 84% occupancy, we still have meaningful runway, with many of our most mature operations consistently achieving occupancy in the mid-90% range. This embedded growth remains one of the most compelling drivers of our long-term performance.

Reflecting the strength of our same-store operations, continued operational momentum across our portfolio, and the ability of our local teams to deliver strong clinical outcomes that deepen referral relationships and support sustainable growth, along with the contribution from acquisitions, we are increasing our annual 2026 earnings guidance to $7.75 to $7.85 per diluted share, up from our previous guidance of $7.48 to $7.62, which we increased last quarter. We are also increasing our annual revenue guidance to $5.87 billion-$5.92 billion, up from $5.81 billion-$5.86 billion. The midpoint of our earnings guidance represents an 18.7% increase over 2025 and a 41.8% growth rate over 2024. We remain highly confident in 2026 and expect our local teams to continue executing, innovating, and integrating new operations while delivering strong results.

While we are proud of these results, we also recognize there's always more to learn and more work to do. We remain focused on helping our local leaders find better ways to care for residents, support caregivers, and strengthen the operations they serve. Next, I'll ask Spencer to add some operational insights regarding our operations. Spencer? Thanks, Barry, and hello, everyone.

Today, I'm excited to share a facility highlight that illustrates how leadership stability and clinical excellence can fundamentally transform a struggling operation and dignify the healthcare experience for our patients, their families, and the frontline caregivers whose commitment and compassion make our mission possible. The Reserve, a 135-bed skilled nursing operation located in the Charleston, South Carolina metro area, is led by licensed nursing facility administrator Greg Hicks and RN Director of Nursing, Amanda Bruno. When we acquired The Reserve in 2023, it was operating under state conservatorship following multiple failed CMS surveys with immediate jeopardy findings. In fact, in the annual survey prior to transition, The Reserve experienced the worst inspection performance of any skilled nursing facility in South Carolina, with a Cycle 1 score of 500 points. Now remember, with surveys, fewer points is better.

This 500-point survey was over 900% worse than the South Carolina state average. This and previous failures had led to the facility being designated as a CMS Special Focus Facility, which is essentially a last-ditch attempt by federal and state survey agencies to improve a facility's clinical quality before forcing it to shut down. The clinical challenges were exacerbated by leadership turnover and frontline staffing shortages that resulted in heavy reliance on agency staffing and an inability to accept new admissions. Trust was low with local hospital and managed care providers, which meant that occupancy stayed chronically low, and the facility's clinical and staffing challenges were accompanied by major financial deficits. Where many saw The Reserve as a problem facility, the local South Carolina cluster partners recognized an opportunity to live our organization's mission of dignifying care and transforming the experience of staff and residents alike.

After a lot of internal debate and discussions with state regulators, the decision was made to acquire The Reserve and help it become what the community deserved. The first step in this turnaround was to find and empower the right leaders who not only had a vision for the facility but could gain the trust and support of state regulators, hospital systems, and the local healthcare workforce. Those leaders included Greg Hicks, a seasoned administrator with a history of successful clinical turnarounds, and Amanda Bruneau, a nurse leader with decades of critical care experience who had been working as a unit manager at a sister facility while being mentored for months in our Director of Nursing and Training program. With the support of market resources and cluster partners, this duo rallied the facility's interdisciplinary leadership team and quickly established a culture centered on quality, accountability, and clinical execution.

Over the past few years, the results have been spectacular. Just six months after acquisition, The Reserve graduated from the Federal Special Focus Facility program and has now achieved three consecutive deficiency-free health inspections, going from a one-star CMS inspection rating to a five-star rating. Today, The Reserve's Cycle 1 score ranks it as the number 1 operation in the entire state for survey performance. The Reserve's success mirrors an exciting trend of survey successes that we're having across Ensign affiliates. As Barry mentioned, our collective Cycle 1 surveys average 26% better than the counties in which they operate. As of today, there's not a single Special Focus Facility among the 398 Ensign affiliates. The Reserve's success goes far beyond just survey performance. It currently enjoys a CMS five-star overall rating, as well as five stars for quality measures, including those that are claims-based.

Some examples include significantly outperforming both state and national peers for lower use of antipsychotic medications, fewer emergency department visits, and lower rehospitalization rates for short-stay patients. These outcomes reflect disciplined clinical approaches, deeply rooted in the ONE CLINICAL processes that Barry described earlier, where therapy and other care disciplines work hand in hand with nursing. Speaking of nursing, The Reserve has not only eliminated all contract nursing but has become one of the state's leading facilities for RN retention, with an RN turnover rate 28% better than the state average. Stability in the clinical team has allowed The Reserve to expand its ability to care for higher acuity patients and become a preferred provider for people who had previously had limited placement options in the Charleston area.

In fact, earlier this year, The Reserve was awarded a contract with the South Carolina Department of Health and Human Services to care for patients requiring ventilator and tracheostomy services, making them the only facility with this approval in their geographic area. Quality outcomes and improved staff retention have also naturally led to improved operational performance. For example, prior to transition, the facility struggled with low occupancy that hovered around 60%. As the facility rebuilt trust with hospitals, physicians, and residents, referral relationships have strengthened, and admissions accelerated. In fact, during Q2, The Reserve touched 100% occupancy for the first time ever, and averaged 92% occupancy for the quarter, up from 83% in quarter two of 2025. During the same period, skilled days increased 39%, while managed care revenues increased by 69%. As expected, financial results have followed. The Reserve's total revenue and EBIT have improved every year since transition.

Most recently, in Q2, revenue increased by 18%, and EBIT grew by 97% over prior year quarter. We expect these financial results will continue because they are the natural result of years of investment in creating clinical excellence and building relationships of trust in their healthcare community. Consistent results like these cannot and will not happen without delivering high-quality clinical care. Success in referral patterns, payer relationships, occupancy growth, skilled mix trends, and regulatory performance are all indicators of community trust. Especially in metro markets like Charleston, people have choices, and the fact that so many are choosing The Reserve shows the trust and reputation that the team has fought so hard to earn.

While there's still so much more work to be done at The Reserve, we're incredibly proud of the visionary leaders, the field resources, cluster partners, and of course, the compassionate caregivers who have driven this remarkable transformation. Their success reflects the power of the Ensign model at work, hiring and developing exceptional leaders, retaining and empowering strong clinical talent, leveraging the expertise and best practices available through transparency, and earning the trust of residents, families, referral partners, and regulators through consistently superior outcomes. While every operations path is unique, the principles behind this success are replicated throughout our organization and are foundational to the industry-leading clinical, regulatory, and operational results that our affiliated operations continue to achieve. With that, I'll turn it over to Chad to discuss more about our ongoing growth and acquisitions.

Thank you, Spencer. During the quarter and since, we accelerated our growth by adding 20 new operations, all of which included the real estate assets, bringing the number of operations acquired during 2025 and since to 71. These recent additions include 19 in Texas and one in Iowa. In total, we added 2,392 new skilled nursing beds, 100 senior living beds, and 55 independent living beds across two states. This growth brings the number of operations in our recently acquired group of operations to 18% of our entire portfolio. We were thrilled to complete these acquisitions and expand our presence in Texas. These assets are made up of newly constructed, high-quality facilities in populated and growing metro areas, justifying a higher purchase price. However, these operations are almost all lower than our average occupancies for these geographies and all present significant clinical and operational hurdles.

While things have started to improve, we expect these, like most of our turnaround deals, will take more time to generate the returns we expect. Over time, however, as our leaders and clinicians focus relentlessly on improving the quality of care and establishing a culture of ownership and accountability, we are confident that these operations will become the facility of choice in the markets they serve. We continue to learn from and improve our transition process and believe that those lessons are showing through in the performance. As we continue to scale, we are able to lean on our talented resources that are spread across many geographies, enhancing our ability to digest larger deals by breaking them into bite-sized pieces, transitioning in the traditional Ensign way, but with a local cluster-driven plan that gives each operation the time and attention they deserve.

In every single deal decision, the most important factor we consider is surrounding our plan for local leadership. Our mantra of "First Who, Then What" is at the heart of every single deal decision we make. So far this year, we've been presented with over 350 acquisition opportunities within our geographies. Of those 350 operations, we've executed on 25 of them. There are many factors we consider when deciding whether to pursue a deal or not, but one of the most common reasons we pass on an acquisition is because we aren't satisfied with the question of who the leader will be. When we feel there is a cultural fit, we sometimes elect to leave the current administrator in place and leverage our training and cluster support model to help expose them to our culture, teach them our systems, and provide the right expectations for ownership and accountability.

In some recent portfolio deals, for example, we selected to keep several impressive administrators. Because of this continuously refined process of onboarding, they have been very successful leaders, many of whom are now CEOs of their respective operations. In the instances where we've made a change, we've either replaced the outgoing administrator with an experienced licensed administrator from another building or a licensed administrator that recently completed their AIT training program. In either case, each operation is surrounded by their local cluster partners and service center resources to help implement the clinical and operational systems required to transform a struggling building into a strong clinical partner to their local healthcare community. The performance of our newly acquired operations, particularly over the last few years, shows that our local leadership-driven approach to transitions works for single operations, small portfolios, and larger portfolios.

Our local leaders continue to recruit future CEOs for Ensign-affiliated operations. We have a deep bench of CEOs in training that are eagerly preparing for the opportunity to lead. The type of leader we recruit is typically a person with significant experience leading people, very often in a different industry. These experienced leaders average 35 years old. It's not uncommon that applicants that join us are looking to pivot towards a second or even a third career path. We are constantly refilling the AIT ranks. Over the last year, we've had an average of approximately 54 AITs at various stages of the program, actively training and obtaining the hours necessary to obtain their license. This number is particularly impressive when you consider we've added 71 operations in just the last year and a half. We see a high demand from qualified applicants and can be very selective.

Our local clusters drive the recruiting efforts for AITs and are very selective on who they will admit into the program. This high-quality influx of leadership talent, combined with our decentralized transition model, allows us to grow without being limited by typical corporate bottlenecks. We also continue to maintain enough cash and available capacity under our line of credit to fund a significant amount of growth, including adding even more real estate assets to our portfolio. Therefore, our unique leadership and acquisition strategy puts us in an excellent position to continue growing in a healthy and sustainable way. Because our model is driven by local leaders who are supported by a cluster of their peers, our model is truly scalable.

We are also very comfortable growing the way we have over the last few years, with lots of transactions across many states, including small deals and larger portfolios, and where it makes sense, even higher-priced strategic assets. As we look at the current pipeline, our local leadership teams and their partners at the service center are working together to source and underwrite and carefully select the right opportunities. We have several new additions lining up for Q3 and Q4 and expect to be very busy for the remainder of the year, including operations within our existing footprint and acquisitions in new states. We continue to see opportunities that include everything from multi-facility portfolios, landlords looking to replace current tenants, nonprofits looking to divest of their post-acute assets, and a steady flow of traditional onesie-twosies.

In terms of priority, we are first looking to grow in our existing markets, as this allows us to be better partners to the healthcare communities by offering complementary services to hospitals, managed care organizations, and to their patients and families. Lastly, we are also pleased with the continued growth with Standard Bearer, which added 23 new assets during the quarter and since, including two senior living communities in Wisconsin and one memory care facility in California, all of which will be operated by a third party under triple net lease. Standard Bearer is now comprised of 177 owned properties, of which 140 are leased to an Ensign affiliated operator, and 38 of which are leased to third party operators.

We are excited to continue to add to the growing list of relationships with unaffiliated operators, which further diversifies our tenant base and helps our organization as a whole continue to advance our mission by working closely with like-minded operators that want to make a difference in this industry. Standard Bearer will continue to work together with our existing operating partners and the new relationships we are developing in order to acquire portfolios comprised of operations that Ensign will operate, and facilities with high quality third parties are interested in operating under a lease. Collectively, Standard Bearer generated rental revenue of $44.1 million for the quarter, of which $37.8 million was derived from Ensign affiliated operations. For the quarter, Standard Bearer reported $24.7 million in FFO, and as of the end of the quarter, had an EBITDA to rent coverage ratio of 2.4 times.

With that, I'll turn the call over to Suzanne to add more color around our numbers and our guidance. Suzanne? Thank you, Chad, and good morning, everyone.

Detailed financials for the quarter are contained in our 10-Q and press release filed on Monday. Some additional highlights for the quarter compared to the prior year quarter include the following. GAAP diluted earnings per share was $1.68, an increase of 16.7%. Adjusted diluted earnings per share was $1.92, an increase of 20.8%. Consolidated GAAP revenue and adjusted revenues were both $1.4 billion, an increase of 17.3%. GAAP net income was $99.7 million, an increase of 18.2%. Adjusted net income was $114.3 million, an increase of 22.5%. Other key metrics as of June 30th, 2026 include cash and cash equivalents of $262.3 million, and cash flows from operations of $272.1 million. During the first half of 2026, we spent more than $460 million to execute our strategic growth plan.

We made these investments from a position of strength, as shown by our lease-adjusted net debt to EBITDA ratio of 2 times after taking these investments into consideration. Our continued ability to maintain low leverage, even during periods of significant acquisitions, is particularly noteworthy and demonstrates our commitment to disciplined growth, as well as our belief that we can continue to achieve sustainable growth in the long run. In addition, we currently have more than $592 million available under our line of credit, which when combined with the cash in our balance sheet, gives us more than $850 million in dry powder for future investments. We also own 183 assets, of which 159 are owned completely debt-free. They have gained significant value over time, adding even more liquidity to help with future growth. The company paid a cash dividend of six and a half cents per common share.

We have a long history of paying dividends and have increased the annual dividend for 23 consecutive years. As Barry mentioned, we are increasing our annual 2026 earnings guidance to between $7.75 and $7.85 per diluted share, and our annual revenue guidance between $5.87 billion to $5.92 billion. We have evaluated multiple scenarios and based upon their strength and performance and the positive momentum we've seen in occupancy and skilled mix, as well as the continued progress on labor, agency management, and other operational initiatives, we have confidence that we can achieve these results. Our 2026 guidance is based on diluted weighted average common shares outstanding of approximately 59.5 million. Tax rate of 25%. The inclusion of acquisitions closed and expected to be closed during the third quarter of 2026, and the inclusion of management's expectations on reimbursement rates.

With the primary exclusions coming from stock-based compensation and amortization of system implementation cost. Additionally, other factors that could impact our quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy in skilled mix, the influence of the general economy on census and staffing, the short-term impact of our acquisition activities, variations in insurance rules and other factors. With that, I'll turn it back over to Barry. Barry? Thanks, Suzanne. To wrap up, we again want to thank our exceptional team of caregivers, our local operational leaders, and our service center partners.

Healthcare is ultimately a people business. While we need to discuss occupancy, reimbursement, margins, and growth on these calls, those outcomes are the byproduct of something much more fundamental. Nearly 60,000 people who have chosen to care for others and who are united by a common set of values and purpose. Every day, thousands of caregivers, nurses, therapists, housekeepers, dietary staff, administrators, and countless others Have opportunities to create moments that exceed expectations for coworkers, residents, and families during some of the most vulnerable times in their lives.

That shared sense of purpose is difficult to quantify on a financial statement, but it is one of the greatest competitive advantages that we have. It strengthens our culture, attracts leaders who share our values, improves clinical outcomes, and builds trust with referral partners, and ultimately creates long-term value for our shareholders. This quarter's results are another reflection of that enduring connection between purpose and performance. We believe exceptional outcomes ultimately create their own form of accountability because residents, families, referral partners, regulators, and payers all have the ability to independently validate whether an operation is truly delivering value. We remain grateful for our local leaders and frontline teams whose commitment to our mission continues to set our affiliated operations apart.

With that, we'll now turn to the Q&A portion of our call. Operator, can you please provide instructions for the Q&A?

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed in to today's call, please press star then one to raise your hand. Star then nine to raise your hand, and star then six to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Raj Kumar with Stephens. Your line is now open. Go ahead. Hey, appreciate the focus on the quality metrics that you provided in your investor deck and today's commentary.

Maybe kind of looking at some of the changes CMS has made behind the scenes. I believe the July 2026 cycle had some updated thresholds for the QM measure, where Ensign particularly excels in. I guess, maybe given your internal testing, would be curious on if you see any changes or any initial indications around changes to your QM ratings from the underlying changes in CMS methodology. And then maybe as a quick follow-up to that, on the Special Focus Facility, have you seen any impacts to the favorability side in terms of it being off of that list and attracting more of the patient base or referral base? Thank you. Sure. Yeah, great question.

Yeah, CMS announced that there's some meaningful changes to how they're doing their five-star rating. Again, that's not a surprise. They talked about this two or three years ago. They said they were going to be doing this periodically to kind of continue to force a certain number of buildings to be in each of the star categories. The American Health Care Association did some analysis that talked about what could happen with people moving out of losing a quality measure five-star rating. We are still doing preliminary analysis. We're working on it hard with preliminary reports. We're seeing that it will affect us. It's going to affect everybody. We're actually pretty pleased with the way it's affecting us compared to what the American Health Care Association had expected. We're seeing a lot less impact.

In some cases, it's being counteracted by improvements in other areas in the five stars. The overall net effect on overall five stars is actually looking to not be that much for us at all.

As far as the reserve goes, look, I think they've been gaining significant momentum over a long period of time. We've seen a pretty big growth trajectory for them in terms of occupancy. Being off the designation list, I don't know that it dramatically changes things because that momentum has been built over the course of three years now, and they've seen tremendous momentum despite the fact that they've technically been on that list. That just speaks to what local leaders can do to change a facility's reputation with the acute providers and managed care organizations when they can see meaningful results happen.

Great. Maybe just one on, I think the board authorized a share repurchase program. I guess, the company deploys capital through various means, M&A and internal investments being priority, then, with the healthy dividend. I guess as we think about maybe that potential fourth pillar, do you see share repurchases being an ongoing type of investment or just more near-term driven?

Well, look, we've had a share repurchase program for a while now. It's nothing new for us. I think, we increased the amount a little bit just because we feel really confident about the direction we're headed, and we feel like the pricing of our stock when our board approved the plan was undervalued.

Yeah. I would just echo what Barry said. This is part of our strategy, has always been part of our strategy. As we continue to grow, you should expect the number to go up. I think that just represents our overall growth there. Also all the liquidity that we still have. This is not going to impact the acquisition strategy at all, and we're going to continue to grow like we always have.

Perfect. Thank you. The next question comes from the line of Ben Hendrix with RBC Capital Markets.

Your line is now open. Please go ahead. Great. Thank you very much.

Appreciate the commentary and the case study on The Reserve, in South Carolina. Seems like that was a pretty rapid turnaround in terms of the reduced contract labor and improved turnover there. As I think about this large bolus of newly acquired facilities on the platform currently, how should we realistically think about the timeline through the newly acquired phase, into the transitioning phase, and then into the same store bucket? Do you typically, or would you typically target getting that contract labor level down to target levels and improving retention to a steady state level? By extension, would we expect some upside to guidance if we were to see a transition at the speed of The Reserve within that portfolio?

I'll start and I'll let my partners comment. Yes, the recent acquisitions we've done, I would say, I'd just point to the fact that they are much more representative of typical turnaround transitions that we've talked about for years and years. I think we've been fortunate to have some higher occupancy buildings with decent clinical reputations over the prior few years that have been, I would say, more rapid turnarounds just because of those two factors. Nevertheless, all of these represent amazing opportunities for us. They're all very low occupancy. They're all very low skilled mix. That gets us really excited because we know as we rebuild the clinical reputation, that the other things will follow in dramatic fashion. I think, we show in our investor deck on slide 22 how facilities improve over time.

It shows five quarters, then 15 quarters, then 45 quarters, you kind of see that growth trajectory. Your question about would we revise guidance if they performed more ahead of schedule, I think our answer to that is consistently yes. We plan things out to be as accurate as we can. We try to reflect accuracy in our guidance, sometimes things exceed our expectation or not, then we'll revise accordingly if and when we need to. For now, those Texas acquisitions, they're not accretive. They probably won't be for a while. Again, that's all performing according to what we had projected and expected.

The continued shift is baked into our guidance for Q3, Q4, so it would have to perform better than what we have baked in.

Thank you for that. Last one from me on Standard Bearer, with three acquisitions of third-party managed facilities. Can you think about, or give us some thoughts on how you're assessing third-party managers, the mix in the overall Standard Bearer portfolio, and do you guys have a lot of diversification among managers, or do you have certain groups that you like to work with in particular? Thanks. Great question. In terms of priority, we always want to own it and operate it ourselves.

That's diversification being less of a priority, I would say, for Standard Bearer. Pretty confident that Ensign-affiliated operators are amongst the best and so we're leaning into that from a Standard Bearer point of view. Then, our second priority is to do really attractive long-term leases and operate, where we're leasing from someone else that owns the real estate. Have tons of really valuable relationships with real estate partners and REITs and others out there that we continue to work with. Then, of course, the third scenario would be the one you just mentioned where we own it and lease to a third party.

Strategically, in most cases, the scenario where we lease to a third party is it's a portfolio deal, that for whatever reason, it's not a fit for all the buildings to be operated by Ensign. Maybe there's a geographic situation or some other kind of operational hurdle that makes us only want some of the portfolio. That's where we've kind of looked to other third parties to say, "Okay, this is a state we're not in. Here's a few buildings that you could operate and lease from Standard Bearer." That's worked out really well for us, frankly, to be able to successfully close deals that in the past maybe we wouldn't have, if we weren't looking to lease to third parties.

There are some situations, particularly with our former partners over at The Pennant Group, where we'll see a standalone senior living operation that's not something that Ensign's looking to do, at least broadly. We've worked with them where they've actually brought us some opportunities to say, "Hey, we want to grow. Here's a wonderful assisted living facility. Would you guys buy it and lease to us?" They're clearly our largest third-party tenant is The Pennant Group. We have a few others that are on the skilled nursing side Continue to expand that base of other parties.

I can tell you that we get a lot of outreach from smaller operators out there that really want to be part of what we're doing together. We're just excited about it. Again, probably the biggest challenge is to say, "Well, we want those for ourselves first," right? Definitely a lot of folks out there that we look forward to working with and developing those relationships more and more every quarter.

Thank you very much. Your next question comes from the line of A.J.

Rice with UBS. Your line is now open. Please go ahead. Hi, everybody.

Thanks. Maybe just to ask on the payer side, what are you seeing in terms of your discussion with states? Anything changing there? Any updated rate outlook? Also in managed care contracting, are you seeing any changes there, and any comment on that end?

Yeah. Go ahead, Rick. Well, I was just going to say on the state budget side, it's always dynamic and there's always things that we're looking at, and Medicaid's a big payer for us.

We're encouraged so far by what we're seeing. We have active engagement in all of our states, and we have good, I think, visibility into the direction, at least for this year, and even some of our states into next year. We feel good about our position, in terms of rate stability. Certainly, we're not going to see any major increases, but to have stability and the line of sight into that is something we're excited about and appreciate. On the rate side with Medicare, you've seen that. Obviously encouraged by that increase. On the managed care side, we continue to benefit from great relationships with our managed care partners.

Again, that's a very dynamic and kind of ever-changing relationship that we have with both rates and networks and facilities that are included and not. We have a really great team, and they collaborate well, both with our local leaders and with the local regionalized managed care offices to put ourselves in a really good position. We've seen some great growth also in VA, with the VA and our relationship with the Veterans Administration. We've become somewhat of a larger provider for them and have really benefited from the relationship we've had with them, putting their program into many of our facilities as well.

Okay. That's helpful. How about on the cost side, any comments on labor dynamics, what you're seeing there, average wage increases, turnover rates? Any update on that trend?

Yeah. Operationally what we're seeing is a couple of things. We're seeing a lot of good stability at low levels on our contract labor usage. That applies, our biggest contract labor historically coming out of COVID was nursing registry, RNs and even CNAs, and that's been really flat for the last year at a low level, incrementally going down a little bit. We're really happy with what that is. Turnover, if you look industry-wide, the labor situation's gotten better for everybody, which we're excited about. That bodes well for all of us. We track our relative acceleration in our turnover trends, going down versus what CMS provides for the industry as a whole. We're excited because, while the industry's getting better, we're getting better at a quicker pace, and we're starting to get some separation on how quickly our turnover is going down.

That's been a huge focus operationally for us. Without people doing the frontline care, we really are nothing. We're super encouraged to see that. As far as overtime continues to be something that's going in a good direction for us. That's important because, obviously there's a cost associated with that, but also just the quality that's given by people that are fresh and doing their best is something that we're really emphasizing. We're happy to see overtime go down.

Okay. All right. Thanks so much.

Your next question comes from the line of Clarke Murphy with Truist Securities. Your line is now open. Please go ahead. Hey, good afternoon, everyone.

This is Clark on for David Macdonald. Just wanted to start, the Southeast is still a relatively new and under-penetrated area for you guys. Could you just talk about how results have been in that area of the country and, when I think about the commentary that you guys gave about getting to mid 90% occupancy among your more mature facilities, those facilities are largely outside of that region. Just wanted to see if there's anything kind of structurally different as far as what level those facilities could get to over time.

Well, we're really excited about the Southeast. Obviously, it's a huge population center A really good kind of labor environment and historically, generally a good regulatory environment as well.

Also a huge healthcare kind of magnet too. Our success in Tennessee has been tremendous as a new state. We've seen really great growth in both quality outcomes and earnings that accompany that in the state of Tennessee and are constantly evaluating new opportunities to grow in that state. South Carolina has been a really strong state for us. We've had some good growth there. We highlighted a South Carolina building there on our call. Albeit small, Alabama, we are adding another building there and feel really good about how things are moving in Alabama as well. There are other adjacent states in the southeast that we get excited about too, and I wouldn't be surprised if we grew into some of those states either this year or next.

Got it. That's helpful. Then just as a follow-up kind of on the M&A front. When you guys acquire a facility, can you talk about when you're looking at the leadership team that's in place and you're making a decision to retain or not retain some of the key leadership positions, can you just talk about how your approach to thinking about that has changed? I understand it probably varies a little bit at the local facility and geographic level, but just kind of more broadly how you're thinking about those relationships and kind of putting in your own people versus leaving what's there would be helpful.

Yeah, this is a great question, Clarke. I'll start with that others can add. The great thing is, there is a lot of amazing talent out there. There's a lot of people who want to do the right things and a lot of skill that's not within our organization. We know that part of our mission to be what we want to be entails bringing people in from, call it the outside, if they fit certain attributes and criteria. We've improved our ability, I feel like, especially with some of the recent bigger deals, call it the last three years or so, to really make part of the underwriting process looking at the talent and making sure that it's part of our process to be able to get in there and get access so we can identify people that can be great. I very recently highlighted Tennessee.

That's just one example. That acquisition, the major majority of the leaders that are still operating those facilities were people who were already in Tennessee when we came into the state, there's some really great leaders there. That's played out in some of our bigger deals in California and even the recent Texas one. I think it comes from having better processes for our local leaders to get access and then also service center supportive processes for doing trainings before the fact and vetting processes where we can really find good talent. Now look, our AITs are always going to be a major part of this, that's not changing. We currently average around 50 AITs at any given time. People that are training with skilled leaders in existing operations and getting ready to take on this career.

Chad's highlighted in the past that these are mature, seasoned, 35-year-old average age people that they know what it's like to lead people. That will never stop being a big part of what we do. To grow like we want to grow in order to fulfill our mission, we've got to have outside people too, and I think we recognize that, and I think we're doing a better and better job at that.

The only thing I'd just add to that is, obviously we're going through the process of underwriting and doing our due diligence. I guess this isn't necessarily new, but certainly something to highlight is getting access to those folks from the seller's point of view so we could kind of get to know them as we're doing the due diligence. I think that's been something that's been really successful for us is we usually jointly announce the acquisition or we're present at the same time that the current owners are announcing the deal. Just showing to the facility this kind of joint effort and anyway. That's a really positive thing that we always try to get. Sometimes sellers can be a little protective of that, but most of the time, especially recently, we've had a lot of early access, which really helps this process.

Clarke, if you're talking, you're on mute.

That's all. I'm all set. Thank you, guys. Appreciate it.

Okay, thanks. There are no further questions at this time.

This concludes today's call. Thank you for attending.