What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-11 · 440 added, 161 removed, 899 unchanged (40% of the section changed)

8 unchanged sentences

Additionally, many of these risks and uncertainties are currently amplified by and in the future may be amplified by, the COVID-19 outbreak.

The developments with respect to the spread of COVID-19 and its impacts have been occurring so rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and results of operations.

While we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and future results of operations, we expect that this situation will have a significant adverse effect on our reported results for our second fiscal quarter of 2020 and possibly beyond.

Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Report.

The developments with respect to the spread of COVID-19 and its impacts have been occurring rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the full extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and results of operations.

While we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results in the future.

Our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Report.

These forward-looking statements speak only as of the date of this Report, and are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change.

7 unchanged sentences

Our operating subsidiaries, each of which strives to be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services.

As of March 31, 2020, we offered skilled nursing, senior living and rehabilitative care services through 225 skilled nursing and senior living facilities.

As of June 30, 2020, we offered skilled nursing, senior living and rehabilitative care services through 225 skilled nursing and senior living facilities.

Of the 225 facilities, we operated 163 facilities under long-term lease arrangements, and have options to purchase 11 of those 163 facilities.

We owned an additional 92 real estate properties, which included 62 operations we operated and managed, real estate properties of 31 senior living operations that were leased to The Pennant Group, Inc.

as part of the spin-off transaction, and the Service Center location.

as part of the Spin-Off (defined below), and the Service Center location.

Of those 31 senior living operations, two are located on the same real estate properties as the skilled nursing facilities.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of March 31, 2020:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2020:

Owned and Operated Leased (with a Purchase Option) Leased (without a Purchase Option) Total for Facilities Operated

13 unchanged sentences

Recent Activities

Coronavirus - The COVID-19 pandemic has spread across the globe and disrupted economies around the world, including the markets in which we operate.

The outbreak has been declared to be a pandemic by the World Health Organization, and the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak.

Coronavirus - The outbreak of the 2019 coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization (WHO) on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, continues to spread and disrupt healthcare operations across the United States, including the markets in which we operate.

The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to selected protocol within the healthcare system across the United States.

Additionally, the Centers for Disease Control and Prevention (CDC) has stated that older adults are at a higher risk for serious illness and death from COVID-19.

The extent to which COVID-19 impacts our operations will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, additional or modified government actions, new information which may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.

In response to the pandemic, federal and state agencies have been evolving and often relaxing enforcement requirements, trending toward granting healthcare providers with flexibility to prioritize resident care over stringent adherence to regulatory compliance.

The financial impact will be dependent upon numerous factors, including the nature of the COVID-19 pandemic, such as geographic concentration of virus, rate of spread, duration, as well as access and costs of staffing, testing and supplies, the legal and regulatory matters and federal and state stimulus related to the pandemic.

The extent to which COVID-19 impacts our operations will depend on future developments which continue to remain highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, additional or modified government actions, new information which may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.

In response to the pandemic, federal and state agencies have been evolving and in some cases, relaxing enforcement requirements, trending toward granting healthcare providers with flexibility to prioritize resident care over stringent adherence to regulatory compliance.

Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our patients, residents, employees, and their respective families.

We continue to implement measures necessary to provide the safest possible environment within our sites of service taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff.

The CDC has stated that older adults, such as our patients, are at a higher risk for serious illness and death from COVID-19 due to the prevalence of chronic medical conditions.

In addition, our employees are at higher risk of contracting or spreading the disease due to the nature of the work environment when caring for patients.

Consistent with CDC guidelines and recommendations applicable to nursing facilities, we implemented new infection control policies and practices to prevent the introduction of COVID-19 into our facilities and to control the spread of COVID-19 within communities.

These changed include restricting visitors at all of our facilities except for essential healthcare personnel and certain end-of-life situations, screening employees and others permitted to enter the building, restricted communal dining, and reducing or restricting activities programming and optional therapies.

Upon confirmation of a positive COVID-19 exposure at a facility, we follow CDC guidance to minimize further exposure, including implementing personal protection protocols, restricting new admissions, and cohorting and isolating patients.

Due to the vulnerable nature of our patients, we expect many of these protections will continue at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed.

Notwithstanding these protocols and our other response efforts, the virus will likely continue to be introduced to and transmitted within certain facilities due to the transmissible nature of COVID-19.

The full financial impact of COVID-19 will continue to be dependent upon numerous factors, including the nature of the COVID-19 pandemic (such as geographic concentration of virus, rate of spread, and duration), as well as access and costs of staffing, testing and supplies), legal and regulatory matters and federal and state stimulus and other measures intended to mitigate the clinical and financial harm of the pandemic.

While the operating environment for healthcare providers is continuously changing during this pandemic, the safety and well-being of our patients and employees remains our top priority.

Although the ultimate impact of the COVID-19 pandemic remains uncertain, the Company can offer the following initial observations on its operations, as well as significant regulatory and legislative relief initiatives.

Prior to the outbreak of the COVID-19 virus, we were exhibiting consistent growth in our occupancy and skilled mix.

However, due to the impact of the COVID-19 pandemic, our operations have experienced declines in occupancy as a result of local government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, and substantial changes to protocol within the healthcare system across the United States, including temporary limitations on certain medical procedures, that limited the number of patients visiting the hospital and needing skilled nursing services.

The introduction of the virus into our operations is contemporaneous with the virus’ impact in each community in which we operate.

Although the ultimate impact of the COVID-19 pandemic remains uncertain, we can offer the following observations regarding the impact of COVID-19 on our operations, as well as significant regulatory and legislative relief initiatives.

Prior to COVID-19, we were exhibiting consistent growth in our occupancy and skilled mix.

However, following the introduction of COVID-19 into the U.S., our operations have experienced declines in occupancy as a result of local government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, and substantial restrictions and changes to protocol within the healthcare system across the U.S., including temporary limitations on certain medical procedures, which limited the number of patients visiting the hospital and needing skilled nursing services.

The introduction of the virus into our operations is typically contemporaneous with the virus’ impact in each community in which we operate.

Our operations are located in 14 states and range from metropolitan, suburban and rural communities.

1 unchanged sentence

Accordingly, the impact on each of our operations has also varied widely.

Currently we have many operations that have not seen any positive cases of COVID-19 amongst patients or staff, some that have seen only a few cases amongst patients, staff or both and a small number of operations that have multiple positive cases amongst the patients, staff or both.

We expect to continue to see new positive cases in some of our operations as the virus continues to impact each community and as testing becomes more readily available.

Our first location to have a confirmed positive COVID-19 patient and staff was in the state of Washington, which was one of the first states to have confirmed COVID-19 cases in the United States.

Our first location to have a confirmed positive COVID-19 patient and staff member was in the state of Washington, which was one of the first states to have confirmed COVID-19 cases in the United States.

Accordingly, our Washington locations were impacted beginning in mid-February.

As the weeks continued, and as reported and confirmed cases of COVID-19 infections in the United States increased, we also began experiencing an impact on our revenues and expenses in locations outside of Washington.

Beginning in mid-February, we experienced decreased volumes which we believe resulted from a number of factors related to the COVID-19 pandemic, including lower census at acute-care hospitals.

These lower volumes were the result of efforts by acute care hospitals to prepare for an increase of COVID-19 cases and critical care patients, as well as self-imposed admission restrictions due to heightened anxiety among patients and caregivers regarding the risk of exposure to COVID-19.

Occupancies were also impacted by the decision of the operating subsidiaries to limit new admissions into their operations given the risks and uncertainties surrounding the potential spread of the virus by individuals that had either tested positive for COVID-19, were symptomatic of COVID-19, but had not yet been tested positive due to a shortage of tests, or that were asymptomatic of COVID-19 but had an unknown status and were potentially positive and contagious.

As of June 30, 2020, we have 138 operations that have positive cases of COVID-19 amongst patients or staff.

Most of these operations have seen only a few cases amongst patients, staff or both and a small number of operations have had multiple positive cases amongst the patients, staff or both.

We expect to contin ue to see new positive cases in some of our operations as the virus continues to impact each community and as testing is more readily available and mandated in certain circumstances.

Approximately 80% of the patient and resident positive COVID-19 cases that we experienced in our facilities have occurred in the states of Arizona, California and Texas.

These are states which have experienced significant community outbreaks.

Beginning in mid-February and continuing throughout the second quarter, we experienced decreased volumes which we believe resulted from a number of factors related to the spread of COVID-19, including lower census at acute-care hospitals.

Many acute care hospitals took affirmative steps to prepare for an increase of COVID-19 and critical care patients, and imposed admission restrictions due to the need to preserve personal protective equipment and a heightened anxiety among patients and caregivers regarding the risk of exposure to COVID-19.

Occupancy was also initially impacted by decisions of our operating subsidiaries to limit new admissions into their operations due to the risks and uncertainties surrounding the potential spread of the virus by individuals that had either tested positive for COVID-19, were symptomatic of COVID-19 but had not yet been tested positive due to a shortage of tests, or that were asymptomatic of COVID-19 but had an unknown status and were potentially positive and contagio us.

On March 13, 2020, President Trump issued a national emergency declaration in connection with the COVID-19 situation.

Following the State of Emergency declarations, California was the first state to have a shelter-in-place order, which was subsequently followed by similar orders in 42 states.

Our occupancy and skilled mix days for Same Facilities and Transitioning Facilities combined, decreased by 5.2% and 11.8%, respectively, between mid-March and mid-April.

Additionally, between mid-April to early May, occupancy decreased an additional 1.7% for the combined Same Facilities and Transitioning Facilities.

However, skilled mix days during the same period increased by 13.6% for the combined Same Facilities and Transiting Facilities.

While lower volume trends have continued, the rate of decline in occupancy slowed by approximately 40% over the last several weeks.

We expect that trend to continue throughout the second quarter and possibly into the third quarter of 2020.

Operating Expenses

We are experiencing increased expenses during the period impacted by COVID-19 due to the higher utilization and cost of personal protective equipment, as well as increased purchasing of other medical supplies and cleaning and sanitization materials.

In addition, we have and expect to continue to have increases in labor costs.

In response, we have reduced spending on non-essential supplies, travel costs and all other discretionary items, ceased all non-essential capital expenditure projects and have put in place wage reductions and freezes for non-clinical staff.

Following the State of Emergency declarations, California was the first state to have a shelter-in-place order, which was subsequently followed by similar orders in 42 other states.

As COVID-19 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 high acuity patients were fewer.

Between mid-May to mid-June, Same Facilities and Transitioning Facilities occupancy increased by 0.4% and skilled mix decreased by 1.1%.

However, the recent influx of COVID-19 cases in several key states, occupancy again began to decrease slightly while skilled mix improved as the number of high acuity patients increased.

Between mid-June and mid-July, combined Same Facilities and Transitioning Facilities occupancy was down by approximately 2.3% and skilled mix increased by 8.1%.

Although census trends declined significantly during the second quarter, the rate of decline in occupancy has continued to slow.

Beginning in June and continued into July, occupancy has remained stable.

As COVID-19 has progressed and spread throughout the community we serve, our local operations and caregivers have been serving higher acuity patients who have or have been suspected of having COVID-19.

The surge of COVID-19 positive patients, or patients suspected to have been exposed to COVID-19, has resulted in an increase in the number of patients requiring skilled services, which we are able to serve through skilled-in-place (SIP) precautions and procedures.

In addition, patients that are not COVID-19 positive or suspected to be COVID-19 positive but require skilled services and qualify to be cared for under the SIP precautions and procedures, have remained in our facilities instead of moving to the hospitals first.

This not only allows hospitals to maintain open acute care beds for COVID-19 patients and other highly acute patients, but it also limits the risks involved with moving patients back and forth from one care setting to another.

Accordingly, our skilled mix days have substantially recovered to rates similar to those prior to the COVID-19 impact.

Legislative and Regulatory Relief

2 unchanged sentences

• Temporary suspension of Medicare sequestration - The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) temporarily suspends the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

We anticipate that this suspension of sequestration will have a positive impact on our revenue, but the magnitude of the positive impact will depend on the continued impact of the virus on our skilled census through the remainder of the year.

• Relief funds for healthcare providers - The CARES Act also authorized the distribution of relief fund grants from the Department of Health and Human Services (HHS) to healthcare providers “to support healthcare-related expenses or lost revenue attributable to COVID-19…” Distribution were paid to each provider by HHS based upon the provider’s patient revenue.

To keep the funds, HHS will require providers to submit an attestation accepting certain terms and conditions within 30 days of receipt of each distribution of the funds.

Additionally, funding is also applicable via application.

Our operations began receiving relief fund payments in April 2020.

At this time, we anticipate that in the aggregate, we will receive approximately $39.6 million as a result of the distribution made to date.

The suspension of the Medicare sequestration increased our revenue by approximately $2.5 million in the second quarter.

The magnitude of the positive impact will depend on the continued impact of the virus on our census and skilled mix through the remainder of the year.

• Relief funds for healthcare providers - The CARES Act also authorized the distribution of relief fund grants from the Department of Health and Human Services (HHS) to healthcare providers “to support healthcare-related expenses or lost revenue attributable to COVID-19…” Distributions were automatically paid to each provider by HHS based upon the provider’s patient revenue, number of facilities and operational beds, as well as various other factors.

To keep the funds, HHS requires providers to submit an attestation accepting certain terms and conditions within 90 days of receipt of each distribution of funds.

Providers could also apply for additional funding.

Our operations began automatically receiving relief fund payments in April 2020.

We received approximately $108.8 million in relief distributions.

We have elected not to accept any of the CARES Act relief funds received to date and have returned all funds to an agent of HHS.

For further discussion, see Note 3, COVID-19 Update in the Notes to Condensed Consolidated Financial Statements.

• Increase in Federal Medical Assistance Percent (FMAP) - The Family First Coronavirus Response Act provides a 6.2% increase to FMAP.

The increase in Medicaid rates can be retroactive to January 1, 2020, depending on the state.

The rate increase will terminate at the end of the quarter when the national emergency status is lifted.

The temporary increase on FMAP and the timing of payments will substantially vary dependent on the state.

The Act permits states to retroactively increase the Medicaid rates to January 1, 2020.

The FMAP funding will terminate at the end of the quarter when the national emergency status is lifted.

To date, we have recognized $13.1 million of FMAP reimbursement relief.

The temporary increase on FMAP and the timing of payments has and will continue to vary substantially dependent on the state.

• Temporary suspension of certain patient coverage criteria and documentation and care requirements - The CARES Act and a series of temporary waivers and guidance issued by the Centers for Medicare and Medicaid Services (CMS) suspend various Medicare patient coverage criteria, as well as, certain documentation and care requirements.

These accommodations are intended to ensure patients have adequate access to care notwithstanding the burdens placed on healthcare providers due to the COVID-19 pandemic.

We believe these regulatory actions could contribute to an increase in census volumes, that many not otherwise have occurred but there can be no assurances.

• Medicare Accelerated and Advance Payment Program - The CARES Act expands the Medicare Accelerated and Advance Payment Program for the duration of the COVID-19 public health emergency to ensure providers and suppliers have the resources needed to combat the pandemic.

These regulatory actions have and will continue to contribute to an increase in census volumes and skilled mix, that may not otherwise occur.

• Medicare Accelerated and Advance Payment Program - The CARES Act expands the Medicare Accelerated and Advance Payment Program to ensure providers and suppliers have the resources needed to combat the pandemic.

Our operations began to receive advances in April 2020.

To date, we have received $98.0 million through the Medicare Accelerated and Advance Payment Program to assist in providing needed liquidity for our operations.

Year to date, we have received $98.9 million through the Medicare Accelerated and Advance Payment Program.

The payment acceleration from Medicare is to be repaid starting 120 days after the receipt of cash.

We expect that these funds will be repaid in August 2020.

• Deferral of Taxes - The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

The US Treasury Department and Internal Revenue Service, also allows corporate taxpayers to defer their first and second quarter of 2020 estimate of federal income taxes.

As the federal and state governments continue to seek ways to assist those impacted by COVID-19, we may be eligible for additional stimulus funding.

We have paid a portion of the fund back in July 2020.

• Deferral of Taxes - The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due by December 31, 2021 and the remaining 50% due by December 31, 2022.

Treasury Department and Internal Revenue Service, also allows corporate taxpayers to defer their estimated federal income taxes for the first and second quarters of 2020 to July 15, 2020.

Our net revenues for the three months ended June 30, 2020 were impacted by COVID-19 as we experienced revenue lost from a decline in occupancy, which was partially offset by our skilled mix changes.

As part of the healthcare community, we have been actively participating in ensuring our patients receive necessary services.

CMS has authorized these services through skilled in place (SIP) programs.

These programs are designed to allow skilled nursing providers to provide skilled services to higher acuity patients, while allowing hospitals to have increased capacity to care for critical care patients (including COVID-19 positive patients) and limiting the risks related to moving patients between care settings in the midst of a pandemic.

In addition, the FMAP program has been designed to enhance the reimbursements to provide additional funding to cover COVID related expenses in selected states.

In the second quarter, we recorded FMAP revenue of $12.4 million, which correlate directly to the additional COVID-19 related expenses we incurred.

Operating Expenses

We have and continued to experience increased operating expenses during the period impacted by COVID-19 due to the higher utilization, cost and type of personal protective equipment, testing for COVID-19 as well as increased purchasing of other medical supplies and cleaning and sanitization materials.

In addition, we have and expect to continue to have increases in labor costs on a per patient basis.

In response, we have reduced spending on non-essential supplies, travel costs and all other discretionary items, ceased all non-essential capital expenditure projects and temporarily instituted wage reductions and hiring freezes for non-clinical staff which were both reinstated in June 2020.

The exact timing and pace of the recovery is uncertain given the impact of the pandemic on the overall U.S.

and global economy.

While we are uncertain as to the duration of the lower volumes we are experiencing due to the COVID-19 pandemic, we expect the adverse impact to continue through the end of the second quarter.

We also expect to experience a modest recovery beginning in the third quarter of 2020 as the volumes in the hospitals increase and as the spread of the virus continues to slow.

While we are uncertain as to the duration of the lower census volumes we are experiencing due to the COVID-19 pandemic, we expect the adverse impact to continue through the end of the third quarter.

We also expect to experience a modest recovery in the fourth quarter of 2020 as the volumes in the hospitals increase and as the spread of the virus continues to slow in addition to our typical fourth quarter seasonality in our business.

Our forecasted measures may be modified as the pace of the recovery in our volumes becomes more clear over the coming months.

We are focused on navigating these recent challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

We are focused on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

Each location is partnering with its local leaders and community outreach to ensure the operations are well equipped to deliver quality care.

3 unchanged sentences

These repurchase programs expired upon the repurchase of the full authorized amount under the two plans.

The stock repurchases were supported with funds from our ordinary operations and took place prior to the passage of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed by Congress and signed into law by President Trump on March 27th, 2020.

The stock repurchases were supported with funds from our ordinary operations and took place prior to the passage of The CARES Act, which was passed by Congress and signed into law by President Trump on March 27, 2020.

Currently we have no active repurchase plans and do not intend to approve another repurchase plan at this time.

15 unchanged sentences

These amendments terminate the leases related to the operations that transferred to Pennant and modified the rental payments and lease terms of the operations that remained with Ensign.

The net impact of the lease termination and modification of the senior living properties is a reduction in annual rent expense of $23.0 million.

The net impact of the lease termination and modification of the senior living properties is a reduction in annual rent expense of approximately $23.0 million.

We entered into several agreements with Pennant in connection with the Spin-off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and employee matters agreement.

13 unchanged sentences

Acquisition History

The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of March 31, 2020:

The following table sets forth the location of our facilities and the number of operational beds and units located at our facilities as of June 30, 2020:

TX CA AZ UT CO WA ID NE IA SC WI NV KS Total

7 unchanged sentences

(1) Campus represents a facility that offers both skilled nursing and senior living services.

During the three months ended March 31, 2020, we expanded our operations through a combination of long-term leases and a real estate purchase, with the addition of three stand-alone skilled nursing operations and one stand-alone independent living operation.

During the six months ended June 30, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone independent living operation.

The addition of these operations added a total of 247 operational skilled nursing beds and 162 operational senior living units to be operated by our affiliated operating subsidiaries.

The purchase price for the acquisitions during the six months ended June 30, 2020 was $14.1 million.

During the first quarter of 2020, the Company entered into a long-term lease agreement to transfer two senior living operations to Pennant.

Our affiliated operations retained ownership of the real estate for these two senior living communities.

The purchase price for the acquisition during the three months ended March 31, 2020 was $14.1 million.

For further discussion of our acquisitions, see Note 9, Acquisitions in the Notes to Condensed Consolidated Financial Statements.

Subsequent to June 30, 2020, we expanded our operations through the acquisition of one campus operation for a purchase price of $8 million, which added 62 operational skilled nursing beds and 162 operational senior living units to be operated by our operating subsidiary.

Key Performance Indicators

16 unchanged sentences

The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenue source for that given period.

These rates exclude additional FMAP payments we recognized as part of The Family First Coronavirus Response Act.

• Occupancy percentage (operational beds).

8 unchanged sentences

The following table summarizes our overall skilled mix from our skilled nursing services for the periods indicated as a percentage of our total skilled nursing routine revenue and as a percentage of total skilled nursing patient days:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Days 29.7 % 29.0 % 29.5 % 29.5 %

7 unchanged sentences

The following table summarizes our overall occupancy statistics for skilled nursing operations for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Occupancy for transitional and skilled services:

2020 2019 2020 2019

Operational beds at end of period 22,907 20,656 22,907 20,656

8 unchanged sentences

The following table sets forth our total revenue by payor source generated by our transitional and skilled services and our "Other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Transitional and Skilled Services Other (1)

7 unchanged sentences

Total revenue $ 556,779 $ 469,238 $ 27,920 $ 23,678 $ 584,699 $ 492,916

Medicaid 40.0 % 41.0 % 11.4 % 13.7 % 38.7 % 39.7 %

Medicare 31.4 25.3 — — % 29.9 24.1

Medicaid-skilled 6.6 6.8 — — % 6.2 6.5

Subtotal 78.0 73.1 11.4 13.7 % 74.8 70.3

Managed care 14.8 18.4 — — % 14.1 17.5

Private and other 7.2 8.5 88.6 86.3 % 11.1 12.2

Total revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(1) Private and other payors in our "all other" category includes revenue from rental income, senior living operations and all payors generated in our other ancillary operations.

Three Months Ended March 31,

Six Months Ended June 30,

Transitional and Skilled Services Other (1)

7 unchanged sentences

Total revenue $ 1,115,184 $ 918,496 $ 59,128 $ 45,728 $ 1,174,312 $ 964,224

Medicaid 39.8 % 40.7 % 10.9 % 14.1 % 38.3 % 39.4 %

Medicare 29.6 25.6 — — 28.2 24.4

Medicaid-skilled 6.6 6.8 — — 6.2 6.5

Subtotal 76.0 73.1 10.9 14.1 72.7 70.3

Managed care 16.5 18.5 — — 15.7 17.6

Private and other 7.5 8.4 89.1 85.9 11.6 12.1

Total revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(1) Private and other payors in our "all other" category includes revenue from rental income, senior living operations and all payors generated in our other ancillary operations.

6 unchanged sentences

Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or other state-specific programs.

As part of, and subsequent to, the Spin-Off transaction, we lease 31 of the 92 real estate properties owned by us to Pennant on a triple-net basis.

As part of, and subsequent to, the Spin-Off, we lease 31 of the 92 real estate properties owned by us to Pennant on a triple-net basis.

Annual rental income generated from the leases with Pennant is approximately $14.0 million.

20 unchanged sentences

• Shift of Patient Care to Lower Cost Alternatives .

The growth of the senior population in the United States continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs.

The growth of the senior population in the U.S.

continues to increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs.

In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals, and other post-acute care settings.

54 unchanged sentences

Examples include the following:

(1) approving temporary expansion sites to ensure that local hospitals and health systems have the capacity to handle a potential surge of COVID-19 patients (i.e.

(1) approving temporary expansion sites to ensure that local hospitals and health systems have the capacity to handle a potential surge of COVID-19 patients ( e.g.

CMS Hospital Without Walls);

2 unchanged sentences

(4) expanding in-place COVID-19 testing to allow for more testing at home or in community based settings;

and (5) temporarily waiving certain documentation, reporting and audit requirements to allow providers, health care facilities, Medicare Advantage and Part D plans, and states to focus on the provision of care (i.e., Patients Over Paperwork).

We believe these regulatory actions could contribute to an increase in volume, but there can be no assurances.

Many states have also waived regulations to ease regulatory burdens on the healthcare industries.

It remains uncertain when federal and state regulators will resume enforcement of those regulations which are waived or otherwise not being enforced during the public health emergency due to the exercise of enforcement discretion.

We believe these regulatory actions could contribute to an increase in skilled mix that may not otherwise occur.

CMS also authorized temporary waivers on medical review requirements, effective March 1, 2020, for the duration of the public health emergency.

CMS is also pausing standard medical review activities, including prior authorization and other reviews that require providers to provide documentation.

In addition, CMS is re-prioritizing scheduled program audits and contract-level Risk Adjustment Data Validation audits for MA organizations, Part D sponsors, Medicare-Medicaid Plans, and Programs of All-Inclusive Care for the Elderly organizations.

Re-prioritizing these audit activities will allow providers, CMS and the organizations to focus on patient care.

CMS recently updated their COVID-19 Provider Burden Relief Frequently Asked Questions (FAQs) related to claim audit waivers for multiple services.

On March 30, 2020, CMS suspended most Medicare Fee-For-Service (FFS) medical review because of the COVID-19 pandemic.

This included pre-payment medical reviews conducted by Medicare Administrative Contractors (MACs) under the Targeted Probe and Educate program, and post-payment reviews conducted by the MACs, Supplemental Medical Review Contractor (SMRC) reviews and Recovery Audit Contractor (RAC).

CMS expects to resume these audit activities beginning on August 3, 2020, regardless of the status of the public health emergency.

All reviews will be conducted in accordance with statutory and regulatory provisions, as well as related billing and coding requirements.

Waivers and flexibility in place at the time of the dates of service of any claims potentially selected for review will also be applied.

The COVID 1135 Waiver also allows the SNF to provide a “skill-in-place” program for Medicare beneficiaries who are residents of the SNF and who meet the skill in place criteria, foregoing the usual 3-day qualifying hospital stay, as outlined in the waiver.

As patients qualify for SIP for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B PT, OT, SLP program.

Testing requirements

Beginning in April 2020, authorities in several states in which we operate began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities.

This came after the CDC stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes.

On June 19, 2020, CMS instructed Medicare Administrative Contractors and Medicare Advantage plans to cover COVID-19 testing for nursing home residents consistent with CDC testing guidelines and recommendations.

Subsequently, on July 22, 2020, CMS announced that nursing homes in states with a 5% or greater positivity rate for COVID-19 will be required to test all nursing home staff each week.

In response to CDC guidelines recommending COVID-19 testing guidelines, mandated Medicare coverage of such tests, and mandates for staff testing in specific situations, in addition to recommended infection prevention control measures, we anticipate that the number of states mandating COVID-19 testing of patients and staff may increase.

Testing mandates can vary by state and may require testing for 1) residents, 2) staff, or 3) both residents and staff.

The responsibility for performing testing varies by payor and state.

In addition, CMS may also implement federal testing requirements.

Non-compliance with these state or federal mandates may result in imposition of fines or other administrative action, including license revocation.

Additionally, the responsibility for payment of such tests will vary based on the patient's payor.

Reporting requirements

On April 19, 2020, CMS announced new regulatory requirements that will require skilled nursing homes to report cases of COVID-19 directly to the CDC.

On April 19, 2020, CMS announced new regulatory requirements requiring skilled nursing homes to report cases of COVID-19 directly to the CDC.

This information must be reported in accordance with existing privacy regulations and statues.

In addition, skilled nursing homes are required to inform residents, their families and representatives of COVID-19 cases in their facilities.

this notification is required to take place by 5pm the next calendar day following the occurrence of a single confirmed infection of COVID-19, or of three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another.

Further, the CDC will be providing a reporting tool to skilled nursing homes that will support Federal efforts to collect nationwide data to assist in COVID-19 surveillance and response.

This notification is required to take place by 5:00 p.m.

(local time) the next calendar day following the occurrence of:

(1) a single confirmed infection of COVID-19, or (2) three or more residents or staff with new-onset of respiratory symptoms that occur within 72 hours of one another.

CMS is making COVID-19 nursing home data collected under this mandate publicly available on a dedicated website.

There could be civil monetary penalties for not meeting these reporting requirements.

We believe these reporting requirements will not have a material impact on our consolidated financial statements.

We believe these reporting requirements will not have a material impact on our Condensed Consolidated Financial Statements.

On April 30, 2020, CMS announced that it would be convening an independent commission to conduct comprehensive assessments of nursing home responses to the COVID-19 pandemic.

The commission will consist of SNF residents, families, resident/patient advocates, industry experts, clinicians, medical ethicists, administrators, academicians, infection control and prevention professionals, state and local authorities, and other experts.

The commission is expected to develop recommendations specific to (1) protecting residents from COVID-19 and improving the responsiveness of care delivery;

On June 19, 2020 CMS announced the initial membership of the Coronavirus Commission on Safety and Quality in Nursing Homes (Commission on Safety and Quality).

The Commission on Safety and Quality consists of resident advocates, infectious disease experts, directors and administrators of nursing homes, academics, state authorities, clinicians, a medical ethicist and a nursing home resident.

In addition to the official Commission on Safety and Quality members, there may also be new members added to help bring additional viewpoints and insights.

The Commission on Safety and Quality will conduct a comprehensive assessment of the overall response to the COVID-19 pandemic in nursing homes.

Based on its assessment, the Commission on Safety and Quality will make recommendations on actions and best practices for immediate and future actions.

The Commission on Safety and Quality's key areas of focus include:

(1) protecting residents from COVID-19 and improving the responsiveness of care delivery;

(2) strengthening regulations to enable rapid and effective identification and mitigation of COVID-19 transmissions in nursing homes;

and (3) enhancing enforcement strategies to improve compliance with infection control policies.

Recommendations from the commission will be delivered to CMS and may be incorporated into the regulatory framework applicable to nursing facilities.

As previously mentioned, Medicare presently accounts for approximately 27.9% of our transitional and skilled nursing services revenue, being our second-largest payor.

Medicare presently accounts for approximately 29.6% of our transitional and skilled nursing services year-to-date revenue, being our second-largest payor.

The Medicare program and its reimbursement rates and rules are subject to frequent change.

32 unchanged sentences

Current law requires CMS to calculate an annual Medicare market basket update to the payment rates.

On August 7, 2019, CMS issued a final rule for fiscal year 2020 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

On July 31, 2020, CMS issued a final rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the final rule, effective October 1, 2020, the aggregate payments to skilled nursing facilities increase by 2.2% for fiscal year 2021, compared to fiscal year 2020.

This estimated increase is attributable to a 2.2% market basket increase factor with a 0.0% point reduction for multifactor productivity adjustment.

On April 10, 2020, CMS issued a proposed rule for fiscal year 2021 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the proposed rule, effective October 1, 2020, the aggregate will increase by 2.3%, for fiscal year 2021 compared to fiscal year 2020.

This estimated increase is attributable to a 2.7% market basket increase factor with a 0.4% point reduction for multifactor productivity adjustment.

Skilled Nursing Facility Value-Based Purchasing (SNF-VBP) Program

30 unchanged sentences

The law retained the MMR process for claims over the threshold, but reduced the claim threshold to $3,000.

Due to COVID-19, CMS authorized temporary waivers on medical review requirements, effective March 1, 2020, for the duration of the public health emergency.

CMS is also pausing standard medical review activities, including prior authorization and other reviews that require providers to provide documentation.

Re-prioritizing these audit activities will allow providers, CMS and the organizations to focus on patient care.

Consistent with CMS’ “Patients over Paperwork” initiative, the agency has also been moving toward eliminating burdensome claims-based functional reporting requirements for Part B therapy services.

12 unchanged sentences

and (2) providers in private practice, including speech-language pathologists, who perform and bill for multiple services in a single day.

On May 27, 2020, CMS added physical therapy, occupational therapy and speech-language pathology to list of approved telehealth Providers for the Medicare Part B programs provided by a skilled nursing facility as a part of the COVID-19 1135 waiver provisions.

This waiver allows the reimbursement of certain HCPCS codes delivered by PT, OT, SLP through telehealth.

The reimbursement follows the existing physician fee screen reimbursement through the duration of the public health emergency.

These services have been used to provide some services to community based outpatients from our SNFs that are eligible through local rules to provide community-based outpatient services.

Eligible PT, OT, SLP services delivered through telehealth to long-term care residents, when the local COVID-19 quarantine requirements suggest provision of PT, OT, SLP services through alternative means, are also reimbursed per the waiver.

The COVID-19 1135 waiver provisions also allow for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through the end of the public health emergency.

Our facilities are utilizing this waiver as physicians elect to provide telehealth visits to Medicare Part B beneficiaries residing in the SNF.

Sequestration of Medicare Rates

The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration.

Medicare FFS claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments.

All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to remain in place through at least 2023, unless Congress takes further action.

In response to COVID-19, the “CARES Act” will temporarily suspend the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

Medicare Fee-For-Service (FFS) claims with dates of service or dates of discharge on or after April 1, 2013 incur a 2.0% reduction in Medicare payments.

All Medicare rate payments and settlements have incurred this mandatory reduction and it will continue to be in place through at least 2023, unless Congress takes further action.

In response to COVID-19, the CARES Act temporarily suspended the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through December 31, 2020.

Programs of All-Inclusive Care for the Elderly

34 unchanged sentences

Another relevant change is a 2019 Final rule that removed the prohibition on the use of pre-dispute, binding arbitration agreements by LTC facilities.

The rule imposed specific requirements on the use these agreements, including requiring the use of plain language in drafting;

The rule imposed specific requirements on the use of these agreements, including requiring the use of plain language in drafting;

that facilities post a notice in plain language that describes the policy on the use of agreements for binding arbitration in an area that is visible to residents and visitors;

63 unchanged sentences

In February 2020, CMS announced that part of its Enhancing Enforcement efforts would include improved oversight of state survey agencies (SSA) and revisions to the State Performance Standards System, which is the program used to access SSA performance.

In responding to the COVID-19 pandemic, CMS announced a new, targeted inspection plan to focus inspections on urgent patient safety threats and infection control, therefore causing a shift in the number of nursing homes inspected and how the inspections are conducted.

As this change would disrupt the inspection domain of the Nursing Home Five Star Quality Rating System, results of inspections conducted on or after March 4, 2020 will not be used to calculate a nursing home’s health inspection star ratings.

In addition, on June 25, 2020, CMS announced that beginning July 29, 2020, data used to calculate measures in the Five Star Quality ratings system will be based on the data collection period ending December 31, 2019 so as to exclude data from resident assessments that are impacted by the waiver associated with the public health emergency.

Monitoring Compliance in Our Facilities

94 unchanged sentences

Our results serve as a strong indicator that our strategy is working and our transformation is underway.

In the first quarter of 2020, we achieved record revenue and net income.

Our total revenue increased $118.3 million, or 25.1% while our diluted GAAP earning per share grew more than 87.0%, from $0.39 to $0.73, comparing the first quarter of 2020 to the same period in 2019.

These record results are driven by strong business performance and continued operating leverage.

Revenue from our transitional and skilled services collectively increased by double digits.

Operations in our Same Facilities and Transitioning Facilities accelerated growth which impacted the overall strong financial success in the quarter.

The following table sets forth operations results details of our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:

Three Months Ended March 31,

Revenue 100.0 % 100.0 %

We experienced healthy census growth during the first two months of 2020, achieving record revenue and net income.

However, we experienced sharp declines in census beginning in late March 2020, which was attributable to concerns relating to the COVID-19 pandemic.

Our net revenues for the three months ended June 30, 2020 continued to be impacted by COVID-19 as we experience revenue lost from a decline in occupancy which was partially offset by our skilled mix changes.

To respond to the COVID-19 pandemic and ease the healthcare system burdens, a series of temporary waivers and guidance issued by CMS, including a waiver of the requirement to have a three-day stay in a hospital to get Medicare coverage of a skilled nursing stay as well as the authorization of renewed SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits.

As our communities experience surges of COVID-19 cases, our patients needs have required the use of skilled care, resulting in an increase in Medicare Part A days.

In addition, the FMAP program have been designed to enhance the reimbursements to provide additional funding to cover COVID related expenses in selected states.

In the second quarter, we recorded FMAP revenue of $12.4 million, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Our total revenue for the quarter increased $91.8 million, or 18.6% while our diluted continuing operations GAAP earning per share grew more than 97.3%, from $0.37 to $0.73, compared to the second quarter in 2019.

Over the past four quarters, we have continued to make progress on initiatives which we established more than two years ago.

Including our foundational structure of local operations that are the centers of excellence in the communities they serve.

As part of this focus, we have been able to expand our relationships with doctors, hospitals and managed care plans.

Revenue from our transitional and skilled services collectively increased by more than 7%.

We have also strengthened our collection process as well as identified non-clinical areas where we can manage spending.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of tax payments and proceeds from Medicare Accelerated and Advance Payment Program resulted in strong second quarter performance.

The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Service revenue 100.0 % 100.0 % 100.0 % 100.0 %

Cost of services 77.3 80.1 77.2 79.5

6 unchanged sentences

Interest expense (0.4) (0.8) (0.5) (0.8)

Interest income 0.1 0.1

Interest and other income 0.2 0.1 0.2 0.1

Other expense, net (0.2) (0.7) (0.3) (0.7)

7 unchanged sentences

Net income attributable to The Ensign Group, Inc.

Three Months Ended March 31,

6.8 % 6.0 % 7.0 % 5.9 %

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Non-GAAP Financial Measures:

4 unchanged sentences

EBITDA total (2)

$ 68,599 $ 50,714 $ 138,759 $ 100,881

Adjusted EBITDA from continuing operations (1)

1 unchanged sentence

Adjusted EBITDA total (2)

$ 72,383 $ 56,776 $ 146,191 $ 113,532

Valuation Metric

Adjusted EBITDAR (3)

$ 104,842 $ 210,958

(1) EBITDA and Adjusted EBITDA represents results without discontinued operations of the Spin-Off, which occurred on October 1, 2019.

(2) EBITDA and Adjusted EBITDA total for 2019 represents results inclusive of discontinued operations.

(3) Presented for current year only.

The following discussion includes references to EBITDA, Adjusted EBITDA and Adjusted EBITDAR which are non-GAAP financial measures (collectively, Non-GAAP Financial Measures).

53 unchanged sentences

The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Consolidated statements of income data:

24 unchanged sentences

(c) All adjustments included in the table below are presented within net income from discontinued operations, net of tax.

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019

Net income from discontinued operations, net of tax $ 8,141 $ 14,183

net income attributable to noncontrolling interests in discontinued operations 200 350

Interest income, net (12)

Interest and other income, net (10) (22)

Provision for income taxes 976 2,801

7 unchanged sentences

Adjusted EBITDA from discontinued operations $ 12,336 $ 24,477

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Three Months Ended March 31,

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended June 30,

(Dollars in thousands)

4 unchanged sentences

(1) Includes revenue from rental income and services generated from our senior living services, rental income and other ancillary services.

Our total revenue increased $118.3 million, or 25.1%, compared to the three months ended March 31, 2019.

The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations, which collectively grew by $109.1 million, or 24.3%, primarily attributable to increases in patient days and revenue per patient day from Same Facilities and Transitioning Facilities, along with the impact of acquisitions.

Total revenue from all operations acquired on or subsequent to January 1, 2019 increased our consolidated revenue by $65.4 million during the three months ended March 31, 2020, when compared to the same period in 2019.

Our total revenue increased $91.8 million, or 18.6%, compared to the three months ended June 30, 2019.

The increase in revenue was primarily driven by an increase in our skilled mix days and revenue per patient day from Same Facilities and Transitioning Facilities in our transitional and skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to July 1, 2019 increased our consolidated revenue by $48.2 million during the three months ended June 30, 2020, when compared to the same period in 2019.

In addition, we recorded $12.4 million of FMAP revenue, which correlate directly to the additional COVID-19 expenses incurred.

All FMAP revenue is included in Medicaid revenue.

Transitional and Skilled Services

The following table presents the transitional and skilled services revenue and key performance metrics by category during the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The following table presents the transitional and skilled services revenue and key performance metrics by category during the three months ended June 30, 2020 and 2019:

Three Months Ended June 30,

2020 2019 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 51.4 % 48.7 % 2.7 %

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 53.4 % 50.5 % 2.9 %

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 43.2 % 36.9 % 6.3 %

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 45.0 % 37.6 % NM

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change % Change

11 unchanged sentences

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2019.

(4) Facility Closed results represents closed operations during the three months ended March 31, 2019, which were excluded from Same Facilities results for the three months ended March 31, 2019 and 2020 for comparison purposes.

Transitional and skilled services revenue increased $109.1 million, or 24.3%, compared to the three months ended March 31, 2019.

Of the $109.1 million increase, Medicare and managed care revenue increased $57.7 million, or 28.9%;

Medicaid custodial revenue increased $39.6 million, or 21.8%;

Medicaid skilled revenue increased $5.6 million, or 18.5%;

and private and other revenue increased $6.2 million, or 16.4%.

(4) Facility Closed results represents closed operations during the three months ended June 30, 2019, which were excluded from Same Facilities results for the three months ended June 30, 2019 and 2020 for comparison purposes.

Transitional and skilled services revenue increased $87.5 million, or 18.7%, compared to the three months ended June 30, 2019.

Of the $87.5 million increase, Medicare revenue increased $56.2 million , or 47.3%, Medicaid custodial revenue increased $30.4 million, or 15.8%, Medicaid skilled revenue increased $4.6 million, or 14.4% and private and other revenue increased $0.5 million, or 1.3%.

These increases are partially offset by the decrease in managed care revenue of $4.2 million or 4.8%.

Revenue in our Same Facilities increased $28.8 million, or 7.1%.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 0.2% to 80.1%.

We continued to see a shift in higher patient acuity.

Our skilled days increased by 0.5% coupled with an increase from our revenue daily rate of 6.7%, resulting in an increase in skilled mix revenue of $25.4 million, or 12.7%.

We continue to grow revenue with our Medicaid plans.

Our Medicaid revenue, excluding Medicaid-skilled revenue, increased by $9.8 million, compared to the three months ended March 31, 2019, primarily driven by an increase in Medicaid days.

We also experienced an increase in our Medicaid daily rate of 4.3%, compared to the three months ended March 31, 2019, as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

Revenue generated by our Transitioning Facilities increased $7.3 million, or 16.5%, primarily due to increases of 7.5% and 6.2%, respectively, in total patient days and revenue daily rate.

Strong occupancy growth of 5.0% to 82.7%, compared to the three months ended March 31, 2019, demonstrates our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we continued to see a shift in higher patient acuity.

Our skilled days increased by 1.3% coupled with an increase from our revenue daily rate of 6.5%, resulting in an increase in skilled mix revenue of $3.5 million, or 21.2%, compared to the three months ended March 31, 2019.

Our Medicaid revenue, excluding Medicaid-skilled revenue, increased by $2.1 million, compared to the three months ended March 31, 2019, attributable to an increase in Medicaid days of 6.2% and Medicaid daily rate of 3.7%.

Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $62.3 million compared to the three months ended March 31, 2019 .

We acquired 27 operations between April 1, 2019 and March 31, 2020 across six states.

The impact of COVID-19 resulted in a decrease of occupancy of 5.9%.

The decline in our occupancy is mainly in our non-skilled patient days, which is being offset by a shift to higher Medicare days.

Our skilled mix days increased by 1.0% coupled with an increase from our revenue daily rate of 13.0%, including the impact of 2% sequestration reversal, resulting in an increase in skilled mix revenue of $17.2 million.

In addition, included in total revenue for Same Facilities is $9.7 million of Medicaid revenue related to FMAP program.

We began experiencing a significant decline our Medicaid custodial and private patient days related to COVID-19 during the second quarter of 2020.

Our Medicaid census decreased by 7.7%, but is offset by an increase in our Medicaid daily rate of 5.9% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

Revenue generated by our Transitioning Facilities increased $5.5 million, or 12.0%, primarily due to an increase in Medicare patient days of 19.1% coupled with the increase in revenue daily rate of 12.5% offset by the decrease of 6.2% in non-skilled patient days .

W e experienced and continued to see a shift in higher patient acuity, resulting in an increase in skilled mix revenue of $4.2 million, or 25.7%, compared to the three months ended June 30, 2019.

Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $56.1 million compared to the three months ended June 30, 2019 .

We acquired 24 operations between July 1, 2019 and June 30, 2020 across six states.

In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

1 unchanged sentence

The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing revenue $ 346.41 $ 314.68 $ 320.26 $ 284.72 $ 301.88 $ 280.00 $ 337.55 $ 310.16

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 12.1% and 9.9%, respectively, compared to the three months ended March 31, 2019.

(1) These rates exclude additional FMAP revenue we recognized as part of The Family First Coronavirus Response Act and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 11.8% and 12.2%, respectively, compared to the three months ended June 30, 2019.

The increase is attributable to the 2.4% net market basket increase that became effective in October 2019 coupled with our continued shift towards higher acuity patients.

Included in revenue for the three months ended June 30, 2019 is the results of two months of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through December 31, 2020.

In addition, our new payment model, PDPM, became effective on October 1, 2019.

Our average Medicaid rates increased 4.3% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Medicaid rates exclude the amount of FMAP revenue we recorded.

Payor Sources as a Percentage of Skilled Nursing Services.

1 unchanged sentence

The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended March 31,

Three Months Ended June 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Our other revenue increased by $9.2 million, or 41.5% to $31.2 million, compared to the three months ended March 31, 2019.

Other revenue for the first quarter in 2020 includes senior living revenue of $15.2 million;

Our other revenue increased by $4.2 million, or 17.9% to $27.9 million, compared to the three months ended June 30, 2019.

Other revenue for the second quarter in 2020 includes senior living revenue of $14.9 million;

mobile diagnostics revenue of $6.5 million, medical transportation revenue of $4.4 million and rental and other ancillary operations revenue of $2.1 million.

The increase in Other revenue is due to organic growth and acquisitions.

The increase in other revenue is due to acquisitions and rental income from Pennant.

Cost of Services

The following table sets forth total cost of services for continuing operations of our transitional and skilled services and "All Other" category for the periods indicated (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change

3 unchanged sentences

(1) This represents cost of services as a percentage of revenue.

Consolidated cost of services increased $82.5 million, or 22.2% compared to the three months ended March 31, 2019.

Consolidated cost of services increased $57.0 million, or 14.4% compared to the three months ended June 30, 2019.

Consolidated cost of services as a percentage of revenue decreased by 2.8%.

Transitional and Skilled Services

Cost of services related to our transitional and skilled services segment increased $57.1 million, or 15.3%, due primarily to additional costs for COVID-19 related expenses and at Recently Acquired Facilities.

Cost of services as a percentage of revenue decreased to 77.4% from 79.7%, a decrease of 2.3%.

We experienced an increase in expenses related to COVID-19, including wages, supplies and additional therapy costs.

These increases were offset with better collections and lower costs of insurance expenses.

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.7% to 5.6%, primarily due to our recent acquisitions including real estate assets, coupled with the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

G eneral and administrative expense increased $5.6 million or 21.6%, to $31.4 million.This increase was primarily due to increases in wages to support growth.

In addition, general and administrative expense as a percentage of revenue increased by 0.3% to 5.4%.

Depreciation and amortization .

Depreciation and amortization expense increased $1.2 million, or 10.0%, to $13.6 million.

This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations.

Depreciation and amortization decreased 0.2%, to 2.3%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.5%, to 0.2%.

Other expense primarily includes interest expense related to borrowings under our credit facility.

During the quarter, we were able to utilize the proceeds from Medicare Accelerated and Advance Payment Program and deferral tax programs to reduce the amount outstanding on our revolving credit facility.

Most of these deferral programs expired in July 2020.

Provision for income taxes.

Our effective tax rate was 25.0% for the three months ended June 30, 2020, compared to 18.0% for the same period in 2019.

The higher effective tax rate reflects a decrease in tax benefit from stock-based payment awards.

See Note 15, Income Taxes , in the Notes to Condensed Consolidated Financial Statements for further discussion.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Six Months Ended June 30,

(Dollars in thousands)

Transitional and skilled services 1,115,184 95.0 % 918,496 95.3 %

All other (1)

59,128 5.0 45,728 4.7

Total revenue $ 1,174,312 100.0 % $ 964,224 100.0 %

(1) Includes revenue from rental income and services generated from our senior living services, rental income and other ancillary services.

Our total revenue increased $210.1 million, or 21.8%, compared to the six months ended June 30, 2019.

Total revenue from operations acquired on or subsequent to July 1, 2019 increased our consolidated revenue by $88.8 million during the six months ended June 30, 2020, when compared to the same period in 2019.

In addition, we recorded $13.1 million of FMAP payments received.

Transitional and Skilled Services

The following table presents the transitional and skilled services revenue and key performance metrics by category during the six months ended June 30, 2020 and 2019:

Six Months Ended June 30,

2020 2019 Change % Change

Total Facility Results:

(Dollars in thousands)

Transitional and skilled revenue 1,115,184 918,496 $ 196,688 21.4 %

Number of facilities at period end 193 171 22 12.9 %

Number of campuses at period end* 23 22 1 4.5 %

Actual patient days 3,173,676 2,879,167 294,509 10.2 %

Occupancy percentage — Operational beds 76.4 % 79.4 % (3.0) %

Skilled mix by nursing days 29.5 % 29.5 % — %

Skilled mix by nursing revenue 50.8 % 49.2 % 1.6 %

Six Months Ended June 30,

2020 2019 Change % Change

Same Facility Results(1):

(Dollars in thousands)

Transitional and skilled revenue $ 876,403 $ 805,535 $ 70,868 8.8 %

Number of facilities at period end 152 152 — — %

Number of campuses at period end* 15 15 — — %

Actual patient days 2,431,203 2,494,206 (63,003) (2.5) %

Occupancy percentage — Operational beds 76.9 % 79.8 % (2.9) %

Skilled mix by nursing days 31.5 % 30.7 % 0.8 %

Skilled mix by nursing revenue 53.1 % 50.8 % 2.3 %

Six Months Ended June 30,

2020 2019 Change % Change

Transitioning Facility Results(2):

(Dollars in thousands)

Transitional and skilled revenue $ 102,568 $ 89,805 $ 12,763 14.2 %

Number of facilities at period end 16 16 — — %

Number of campuses at period end* 4 4 — — %

Actual patient days 307,982 303,266 4,716 1.6 %

Occupancy percentage — Operational beds 79.4 % 78.8 % 0.6 %

Skilled mix by nursing days 24.7 % 22.3 % 2.4 %

Skilled mix by nursing revenue 41.8 % 37.4 % 4.4 %

Six Months Ended June 30,

2020 2019 Change % Change

Recently Acquired Facility Results(3):

(Dollars in thousands)

Transitional and skilled revenue $ 136,213 $ 17,764 $ 118,449 NM

Number of facilities at period end 25 2 23 NM

Number of campuses at period end* 4 3 1 NM

Actual patient days 434,491 63,831 370,660 NM

Occupancy percentage — Operational beds 71.6 % 71.9 % NM

Skilled mix by nursing days 21.8 % 20.4 % NM

Skilled mix by nursing revenue 42.3 % 36.5 % NM

Six Months Ended June 30,

2020 2019 Change % Change

(Dollars in thousands)

Facility Closed Results(4):

Skilled nursing revenue $ — $ 5,392 $ (5,392) NM

Actual patient days — 17,864 (17,864) NM

Occupancy percentage — Operational beds — % 66.2 % NM

Skilled mix by nursing days — % 16.9 % NM

Skilled mix by nursing revenue — % 34.6 % NM

* Campus represents a facility that offers both skilled nursing and senior living services.

Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.

(1) Same Facility results represent all facilities purchased prior to January 1, 2017.

(2) Transitioning Facility results represent all facilities purchased from January 1, 2017 to December 31, 2018.

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2019.

(4) Facility Closed results represents closed operations during the three months ended June 30, 2019, which were excluded from Same Facilities results for the six months ended June 30, 2019 and 2020 for comparison purposes.

Transitional and skilled services revenue increased $196.7 million, or 21.4%, compared to the six months ended June 30, 2019.

Of the $196.7 million increase, Medicare and managed care revenue increased $109.8 million , or 27.1%, Medicaid custodial revenue increased $70.1 million , or 18.7% Medicaid skilled revenue increased $10.2 million , or 16.3% and private and other revenue increased $6.6 million , or 8.6%.

The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations during the first quarter of 2020, which grew first quarter revenue by $109.1 million.

We began experiencing the impact of COVID-19 during our second quarter, which negatively impacted our census by 6.0%.

This was offset by our strong census in the first quarter, resulting in a net occupancy decline of 3.0% for the six months ended June 30, 2020.

The occupancy decline was offset by the increase in skilled mix days due to a continuous shift toward high acuity patients.

Total revenue from all operations acquired on or subsequent to January 1, 2019 increased our consolidated revenue by $88.8 million during the six months ended June 30, 2020, when compared to the same period in 2019.

Revenue in our Same Facilities increased $70.9 million, or 8.8%.

The impact of COVID-19 resulted in a decrease in occupancy of 2.9%.

The decline in our occupancy is mainly in our non-skilled patient days, which is being offset by the shift toward high acuity patients.

Our skilled days increased by 0.8%, coupled with an increase in our skilled revenue daily rate of 10.6%, resulting in an increase in skilled mix revenue of $42.4 million, or 10.7%.

In addition, included in total revenue for Same Facilities is $10.4 million of Medicaid revenue related to FMAP program.

We began experiencing a significant decline our Medicaid custodial and private patient days related to COVID-19 during the second quarter of 2020.

Our Medicaid census decreased by 2.9% but is offset by an increase in our Medicaid daily rate of 4.9% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

Revenue generated by our Transitioning Facilities increased $12.8 million, or 14.2%, primarily due to increases in our daily rate and patient days compared to the six months ended June 30, 2019 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we continued to see a shift toward higher acuity patients .

Our skilled days increased by 2.4%, coupled with an increase from our skilled mix revenue daily rate of 9.6%.

Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $118.4 million compared to the six months ended June 30, 2019.

We acquired 24 operations between July 1, 2019 and June 30, 2020 across six states.

In the future, if we acquire additional turnaround or start up-operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

Historically, we have generally experienced lower occupancy rates, lower skilled mix at Recently Acquired Facilities and therefore, we anticipate generally lower overall occupancy during years of growth.

The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2020 2019 2020 2019 2020 2019 2020 2019

Skilled Nursing Average Daily

Revenue Rates:

Medicare $ 670.19 $ 598.59 $ 591.98 $ 532.66 $ 640.72 $ 606.06 $ 659.51 $ 592.89

Managed care 486.12 455.96 459.72 425.46 460.35 426.54 481.46 453.16

Other skilled 530.41 492.22 500.48 462.71 334.43 346.66 522.09 489.47

Total skilled revenue 575.38 520.26 528.81 482.30 563.00 498.84 570.34 517.29

Medicaid 233.45 222.62 241.58 231.61 215.45 225.11 231.54 223.83

Private and other payors 232.89 229.92 239.48 222.35 211.29 198.65 230.38 227.54

Total skilled nursing revenue $ 341.02 $ 315.07 $ 312.17 $ 285.85 $ 290.78 $ 277.35 $ 331.33 $ 311.00

(1) These rates exclude additional FMAP revenue we recognized as part of The Family First Coronavirus Response Act.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 12.0% and 11.1%, respectively, compared to the six months ended June 30, 2019.

Included in revenue for the six months ended June 30, 2020 is the results of two months of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through December 31, 2020.

In addition, our new payment model, PDPM, became effective on October 1, 2019.

Our average Medicaid rates increased 3.4% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Payor Sources as a Percentage of Skilled Nursing Services.

We use our skilled mix as measures of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2020 2019 2020 2019 2020 2019 2020 2019

Percentage of Skilled

Nursing Revenue:

Medicare 27.4 % 23.9 % 23.1 % 20.6 % 29.2 % 19.8 % 27.2 % 23.5 %

Managed care 17.2 18.9 15.0 13.6 11.7 14.1 16.3 18.2

Other skilled 8.5 8.0 3.7 3.2 1.4 2.6 7.3 7.5

Skilled mix 53.1 50.8 41.8 37.4 42.3 36.5 50.8 49.2

Private and other payors 7.4 8.1 11.0 12.2 9.2 8.9 7.9 8.4

Medicaid 39.5 41.1 47.2 50.4 48.5 54.6 41.3 42.4

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2020 2019 2020 2019 2020 2019 2020 2019

Percentage of Skilled

Nursing Days:

Medicare 13.9 % 12.5 % 12.2 % 11.1 % 13.2 % 9.1 % 13.7 % 12.3 %

Managed care 12.0 13.0 10.2 9.1 7.4 9.2 11.2 12.5

Other skilled 5.6 5.2 2.3 2.1 1.2 2.1 4.6 4.7

Skilled mix 31.5 30.7 24.7 22.3 21.8 20.4 29.5 29.5

Private and other payors 10.7 11.4 14.3 15.4 12.8 12.0 11.4 11.8

Medicaid 57.8 57.9 61.0 62.3 65.4 67.6 59.1 58.7

Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Our other revenue increased by $13.4 million, or 29.3% to $59.1 million, compared to the six months ended June 30, 2019.

Other revenue for the first half of 2020 includes senior living revenue of $30.1 million;

mobile diagnostics revenue of $14.4 million, medical transportation revenue of $10.7 million and rental and other ancillary operations revenue of $3.9 million.

The increase in other revenue is due to acquisitions and rental income from Pennant.

Cost of Services

The following table sets forth total cost of services for continuing operations of our transitional and skilled services and "All Other" category for the periods indicated (dollars in thousands):

Six Months Ended June 30,

2020 2019 Change

Transitional and skilled services $ 861,667 77.3 % $ 727,309 79.2 % $ 134,358 18.5 %

All other 44,603 75.4 39,422 86.2 5,181 13.1

Total cost of services $ 906,270 77.2 % $ 766,731 79.5 % $ 139,539 18.2 %

(1) This represents cost of services as a percentage of revenue.

Consolidated cost of services increased $139.5 million, or 18.2% compared to the six months ended June 30, 2019.

Consolidated cost of services as a percentage of revenue decreased by 2.3% to 77.2%.

Transitional and Skilled Services

Our revenue growth of 24.3% surpassed our increase in cost of services of 21.9%, which demonstrates that we are able to manage our expenses.

Cost of services related to our transitional and skilled services segment increased $134.4 million, or 18.5%, due primarily to additional costs at Recently Acquired Facilities, which accounted for 85.7 million of the increase.

Cost of services as a percentage of revenue decreased to 77.3% from 79.2%, a decrease of 1.9%.

We experienced improvements in operations, all of which were able to leverage off of our higher occupancy.

Rent — cost of services.

2 unchanged sentences

G eneral and administrative expense increased $10.6 million or 19.9%, to $63.7 million.

This increase was primarily due to increases in wages to support growth and in incentives due to operational improvements.

This increase was primarily due to increases in wages to support growth.

In addition, general and administrative expense as a percentage of revenue decreased by 0.1% to 5.4%.

6 unchanged sentences

Other expense primarily includes interest expense related to borrowings under our credit facility.

Interest expense during the second quarter of 2020 decreased as we were able to utilize the proceeds from Medicare Accelerated and Advance Payment Program and deferral tax programs to reduce the amount outstanding on our revolving credit facility.

Provision for income taxes.

Our effective tax rate was 23.5% for the three months ended March 31, 2020, compared to 19.7% for the same period in 2019.

Our effective tax rate was 24.2% for the six months ended June 30, 2020, compared to 18.9% for the same period in 2019.

The higher effective tax rate reflects a decrease in tax benefit from stock-based payment awards.

2 unchanged sentences

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our revolving credit facilities.

Our liquidity as of June 30, 2020 is impacted by cash receipt from Provider Relief Fund and Medicare Accelerated and Advance Payment Program, and deferral social security taxes and estimated federal income taxes for the first and second quarters of 2020 under the CARES Act.

Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our revolving credit facility, and cash generated from operations.

Total capital expenditures for property and equipment were $15.8 million and $12.8 million for the three months ended March 31, 2020 and 2019, respectively.

Cash paid to fund acquisitions was $0.4 million, and $42.4 million for the six months ended June 30, 2020 and 2019, respectively.

Total capital expenditures for property and equipment were $27.1 million and $32.1 million for the six months ended June 30, 2020 and 2019, respectively.

We currently have approximately $42.0 million budgeted for renovation projects for 2020, which incorporates the temporary suspension of non-essential capital expenditure projects.

1 unchanged sentence

We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.

Our cash and cash equivalents as of March 31, 2020 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of June 30, 2020 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of March 31, 2020, we held debt security investments of approximately $47.9 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of March 31, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to COVID-19, that would indicate any other-than-temporary impairment.

In addition, as of June 30, 2020, we held debt security investments of approximately $48.9 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of June 30, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to COVID-19, that would indicate any other-than-temporary impairment.

As mentioned above, one primary source of cash is generated from our ongoing operations.

Our positive cash flows have supported our business and have allowed us to pay regular dividends to our stockholders.

We currently anticipate that existing cash and total investments as of March 31, 2020, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

We currently anticipate that existing cash and total investments as of June 30, 2020, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

Given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 outbreak, we will continue to evaluate the nature and extent of the impact to our business and financial position.

The following table presents selected data on our continuing operations from our condensed consolidated statement of cash flows for the periods presented:

Three Months Ended March 31,

(In thousands)

Six Months Ended June 30,

Net cash provided by/(used in):

(In thousands)

Continuing operating activities $ 174,138 $ 52,825

9 unchanged sentences

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

For the first quarter of 2020 compared to the same period in 2019, the $11.4 million increase in cash provided by continuing operating activities was primarily due higher net income and changes in working capital in the first quarter of 2020.

Changes in working capital was driven by timing of payments of income taxes, prepaid expenses and other assets, and accrued wages and related liabilities.

The $121.3 million increase in cash provided by continuing operating activities for the six months ended June 30, 2020 compared to the same period in 2019 w as primarily due to higher net income and changes in working capital in the first two quarters of 2020.

Changes in working capital was driven by deferred payment of the employer portion of social security taxes, strong accounts receivable collections, deferred payments of income taxes, timing of accrued expenses and accrued wages and related liabilities.

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment purchases and cash used for acquisitions.

The decrease in cash used in continuing investing activities in the first quarter of 2020 compared to the same period in 2019 of $2.3 million was primarily due to a decrease in cash used for acquisitions, net of escrow deposits, of $5.3 million, offset by an increase in capital expenditure spending by $3.0 million.

The decrease in cash used in continuing investing activities for the six months ended June 30, 2020 compared to the same period in 2019 of $46.1 million was primarily due to a decrease in cash used for acquisitions, net of escrow deposits, of $42.0 million coupled with a decrease in capital expenditures of $5.0 million.

Financing Activities

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.

The decrease in cash provided by continuing financing activities in the first quarter of 2020 compared to the same period in 2019 of $14.8 million was primarily due to the repurchase of $25.0 million of common stock under our authorized common stock repurchase programs.

We did not have any repurchases of common stock in the first quarter of 2019.

The decrease is offset by an increase of net borrowing of $19.3 million in the first quarter of 2020 compared to $7.5 million in the same period in 2019.

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, proceeds from the Medicare Accelerated and Advance Payment Program, proceeds from the Provider Relief Fund and proceeds from the sale of shares of common stock through employee equity incentive plans.

The decrease in cash provided by continuing financing activities for the six months ended June 30, 2020 compared to the same period in 2019 of $37.1 million was primarily due to a net repayment of $180.8 million in the first two quarters of 2020 compared to a net borrowing of $34.0 million in the same period in 2019.

Additionally, during the first two quarters of 2020 we repurchased $25.0 million of common stock under our authorized common stock repurchase programs.

We did not have any repurchases of common stock in the first two quarters of 2019.

The decreases are offset by proceeds received under the Medicare Accelerated and Advance Payment Program of $98.9 million, as well as proceeds received under the Provider Relief Funds of $108.8 million.

Credit Facility with a Lending Consortium Arranged by Truist

4 unchanged sentences

Mortgage Loans and Promissory Note

During the first quarter of 2020, 19 of our subsidiaries are under mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $115.5 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of June 30, 2020, 19 of our subsidiaries are under mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $115.0 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear fixed interest rates range of 2.6% to 3.5% per annum.

3 unchanged sentences

The term of the mortgage loans are 25 to 35-years.

In addition to the HUD mortgage loans above, we have a promissory note issued in connection with an acquisition.

This note bears fixed interest rate is 5.3% per annum.

The term of the note is 12 years and are secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

In addition to the HUD mortgage loans above, we have two promissory notes.

The notes bear fixed interest rates of 5.3% and 4.3% per annum and the term of the notes are 12 years and 10 months, respectively.

The 12 year note which was used for an acquisition is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

Operating Leases

During the first quarter of 2020, 163 of our facilities are under long-term lease arrangements, of which 85 of the operations are under the triple-net Master Leases with CareTrust REIT, Inc.

During the second quarter of 2020, 163 of our facilities are under long-term lease arrangements, of which 85 of the operations are under the triple-net Master Leases with CareTrust REIT, Inc.

In connection with the Spin-Off, 11 of the original 94 properties were transferred to Pennant.

54 unchanged sentences

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace LIBOR and other reference rates expected to be discontinued.

Adoption of the provisions of ASU 2020-04 is optional.

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

An entity may elect to apply the amendments prospectively through December 31, 2022.

We are currently evaluating the impact of ASU.

1 unchanged sentence

Off-Balance Sheet Arrangements

As of March 31, 2020, we had approximately $5.4 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

As of June 30, 2020, we had approximately $5.8 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis