ENSIGN GROUP, INC 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K. See Part I. Item 1A. Risk Factors and Cautionary Note Regarding Forward-Looking Statements. Overview We are a provider of health care services across the post-acute care continuum, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare-related properties, and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services. As of December 31, 2020, we offered skilled nursing, senior living and rehabilitative care services through 228 skilled nursing and senior living facilities. Of the 228 facilities, we operated 164 facilities under long-term lease arrangements, and have options to purchase 11 of those 164 facilities. Our real estate portfolio includes 94 owned real estate properties, which included 64 facilities operated and managed by us, 31 senior living operations leased to and operated by Pennant as part of the Spin-Off, and the Service Center location. Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates. Ensign is a holding company with no direct operating assets, employees or revenues. Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets. In addition, certain of our wholly owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. We also have a wholly-owned captive insurance subsidiary (or the Captive) that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities. References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report on Form 10-K, are not meant to imply, nor should they be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign Group. 64 Table of Contents Recent Activities Coronavirus The outbreak of 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 COVID-19 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. 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 higher prevalence of chronic medical conditions. In addition, our employees are at higher risk of contracting or spreading the disease when caring for patients due to the nature of the work environment. 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 changing guidelines include visitor policies, screening and testing 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 and local healthcare guidance to minimize further exposure, which could include implementing personal protection protocols, restricting new admissions and cohorting and isolating patients. Due to the vulnerable nature of our patients, we continue to adhere to CDC infection prevention guidelines at our facilities, even as federal, state, and local stay-at-home and social distancing orders and recommendations have 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 highly transmissible nature of the virus. The full financial impact of COVID-19 will depend upon numerous factors, including the nature and duration of the COVID-19 pandemic (such as geographic concentration of virus, rate of spread, and duration), access and costs of staffing, testing and supplies availability and use of effective vaccines, legal and regulatory matters and stimulus funding and other measures intended to mitigate the clinical and financial harm of the pandemic and the spread of it in the communities we serve. 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, we can offer the following observations regarding the impact of COVID-19 on our operations, as well as significant regulatory and legislative relief initiatives. Occupancy Prior to COVID-19, we were exhibiting consistent growth in our occupancy and skilled mix. However, following the widespread outbreak COVID-19 in 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 in the hospital that needed skilled nursing services. The introduction of COVID-19 into our operations is typically contemporaneous with COVID-19's impact in each community in which we operate. Our operations are located in 13 states and range from metropolitan, suburban and rural communities. The prevalence of the virus varies dramatically by state, within the same state or within the same county. Accordingly, the impact on each of our operations has also varied widely. 65 Table of Contents 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 throughout the organization. As of December 31, 2020, 142 affiliated skilled nursing operations across 13 states had 2,189 confirmed COVID-19 patients in-house. Also, as of December 31, 2020, 39 operations had over 20 COVID-19 positive cases and 103 operations had less than 20 cases and 77 operations had no confirmed cases of COVID-19 in-house. The vast majority of COVID-19 positive patients at our operations have recovered. We have exp erienced increases in COVID-19 cases in our facilities in correlation with the trends occurring in the local community, that as the number of cases increases in the community overall, such as in parts of Texas, Arizona and California, those trends also impact skilled nursing operations in those areas. We have experienced and expect to continue to see new positive cases in our operations as the virus continues to impact each community, as testing mandates have been enacted and we enter into colder months in many of our markets. As the COVID-19 vaccines are available and administered throughout the country, we expect to see the decline in the spread of the virus. Beginning in mid-Febr uary 2020 and continuing through the end of the year, we have seen a decrease in the number of patients due to a number of factors related to the spread of COVID-19, including lower overall patient flow into the acute-care setting. In response to the pandemic, 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 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 pandemic. 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 the remaining states. Starting in June 2020, as states began lifting stay-at-home restrictions, many of the communities in which we operate experienced an overall increase in COVID-19 cases. As the prevalence of COVID-19 increased in the communities we serve, we experienced an increase in COVID-19 cases in our operations, particularly those operations in Texas, Arizona and California. The increase in COVID-19 cases also has a direct impact on skilled nursing operations in those communities during the year, resulting in a decrease in occupancy and, in many cases, a higher skilled mix. During the year, combined Same Facilities and Transitioning Facilities occupancy declined by 8.3% and skilled mix increased by 7.1% as the pandemic worsened in many of of key states. We experienced the sharpest decline from March to May and remained relatively flat during June. As the number of COVID-19 cases increased during the summer, our occupancy experienced a modest decline. Towards the end of the summer and into October as the number of elective care/non-urgent procedures and surgeries normalized and the number of COVID-19 cases in the communities stabilized, we experienced an increase in our occupancy and skilled mix days. As we entered into the cold weather and holiday periods during the fourth quarter, our census volume declined while our skilled mix days increased. Our census has recovered subsequent to the holiday periods. Specifically, during the first half of January, combined Same Facilities and Transitioning Facilities occupancy increased by approximately 1.6% and skilled mix increased by 5.7%. The number of admissions continued to progressively increase throughout the quarter, demonstrating that the flow of patients has improved as certain markets have begun to loosen restrictions on admissions and as the sentiment towards high quality post-acute care providers has continued to improve. As COVID-19 has progressed and spread throughout the communities 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 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 skilled-in-place 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, reaching levels similar to pre-COVID-19. 66 Table of Contents Legislative and Regulatory Relief In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to the healthcare industry during the COVID-19 pandemic. These initiatives include: • Temporary suspension of Medicare sequestration - The CARES Act temporarily suspended the automatic 2% reduction of Medicare claim reimbursements for the period of May 1, 2020 through March 31, 2021. The suspension of the Medicare sequestration increased our revenue by approximately $10.4 million during the year ended December 31, 2020. 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 Department of Health and Human Services (HHS) to distribute relief fund grants to healthcare providers “to support healthcare-related expenses or lost revenue attributable to COVID-19”. HHS has made several rounds of automatic distributions to providers based upon a variety of factors. Providers have also been able to apply for additional funding. To keep the funds, HHS requires providers to submit an attestation accepting certain terms and conditions; providers who are unwilling to accept the terms must return the funds. Our operating subsidiaries began automatically receiving relief fund payments in April 2020. In July 2020, HHS announced a new $5.0 billion Provider Relief Fund distribution to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19. This funding will include four separate distributions. The two distributions which the Company has received funding under relate to (i) $2.5 billion of Nursing Home Infection Control Relief distributed to be used primarily for testing and (ii) distributions to skilled nursing facilities that pass two gateway qualification tests based upon a facility’s COVID-19 infection and mortality rates. To qualify, facilities must demonstrate COVID-19 infection rates below the rate of infection in the counties in which they are located and demonstrate mortality rates below nationally established performance thresholds for nursing home residents infected with COVID-19. Facilities that qualify during each of the monthly performance periods, running from September 2020 through December 2020, will be eligible for additional funds based upon their aggregate performance on these infection and mortality measures. During the year, we received approximately $141.7 million in relief distributions from Provider Relief Funds. As of December 31, 2020, we have returned all such funds we received related to this distribution, however additional funding may continue to come. Subsequent to December 31, 2020, we received and returned another $5.1 million in funding. For additional information, please see Note 3, COVID-19 Update in the Notes to Consolidated Financial Statements. • Increase in State Funding - The Family First Coronavirus Response Act provides a 6.2% increase to Federal Medical Assistance Percentage (FMAP). The Act permits states to retroactively increase the Medicaid rates to January 1, 2020. Depending on the state, FMAP funding will terminate, either when the national emergency status is lifted, the end of the quarter when the national emergency status is lifted, or sometime between. In addition, increases in Medicaid rates can come from other areas of the state budgets outside of FMAP funding. During the year ended December 31, 2020, we recognized $45.4 million of state funding reimbursement relief. The temporary increase on the state relief funding 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 CMS suspended 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. These regulatory actions have and will continue to contribute to an increase in census volumes and skilled mix, that may not otherwise occur. These waivers are effective March 1, 2020 through the end of the emergency declaration. 67 Table of Contents • 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. We have retained $102.0 million through the Medicare Accelerated and Advance Payment Program through December 31, 2020. The repayment obligations associated with these payments begin one year from the date the accelerated or advance payment was issued, which is currently scheduled to start in April 2021. We also paid a portion of the funds back in July 2020. For further discussion, see Note 3 , COVID-19 Update in the Notes to Consolidated Financial Statements. • 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. The U.S. Treasury Department and Internal Revenue Service also allowed corporate taxpayers to defer their estimated federal income taxes for the first and second quarters of 2020 to July 15, 2020. We paid these estimated amounts in the third quarter. Net revenue Our net revenues for the year ended December 31, 2020 were impacted by COVID-19 as we experienced revenue loss due to a decline in occupancy, which was partially offset by our skilled mix changes and additional state funding. 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 programs. These programs are designed to allow skilled nursing operations 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 state relief funding has been designed to enhance the reimbursements to provide additional funding to cover COVID-19 related expenses in selected states. We recorded state relief revenue of $45.4 million for the year ended December 31, 2020, which correlates 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, slowing non-essential capital expenditure projects and temporarily instituted wage reductions and hiring freezes for non-clinical staff. The hiring freeze and wage reductions were lifted in June 2020. Overall The exact timing and pace of the recovery from the COVID-19 pandemic 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 our lower census due to the COVID-19 pandemic, we expect the adverse occupancy to recover as we see increases in hospital volumes and elective surgeries and as accessibility to the COVID-19 vaccines becomes more broad. Our forecasted metrics may be modified as the pace of the recovery in our volumes become clearer over the coming months. 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. Consistent with previous hurdles, our local leaders are adjusting their operation to meet the clinical and financial challenges, including utilizing the expertise of our Service Center resources to implement best practices. Changes in Segments - In the fourth quarter of 2020, we began reporting the results of our real estate portfolio as a new segment due to our expanding real estate investment strategy. We now have two reportable segments: (i) transitional and skilled services and (ii) real estate. Corresponding items of segment information for prior periods have been recast to reflect the change of the Company’s segment structure. 68 Table of Contents Common Stock Repurchase Program - As approved by the Board of Directors on March 4, 2020 and March 13, 2020, respectively, we entered into two separate stock repurchase programs pursuant to which we were authorized to repurchase up to $20.0 million and $5.0 million, respectively, of our common stock under the programs for a period of approximately 12 months each. During the three months ended March 31, 2020, we repurchased 0.5 million and 0.2 million shares of our common stock for a total of $20.0 million and $5.0 million under the March 4, 2020 and March 13, 2020 repurchase programs, respectively. 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 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. As we enter a period of economic uncertainty, we are taking steps to manage our expenses and preserve our cash. We believe our current cash management strategy is appropriate at this time and will consider approving stock repurchase programs in the future after we gain additional visibility into our cash flows and how to best utilize those funds. Key Performance Indicators We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate, excluding the estimates of variable consideration under the revenue recognition standard, ASC 606. These indicators and their definitions include the following: Transitional and Skilled Services • Routine revenue. Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition. • Skilled revenue. The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled patients who are included in this population represent very high acuity patients who are receiving high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care. Skilled revenue excludes any revenue generated from our senior living services. • Skilled mix . The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue. Skilled mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are receiving skilled nursing services at the skilled nursing facilities for any given period. • Average daily rates. 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). The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in a facility which are available for occupancy during the measurement period. • Number of facilities and operational beds. The total number of skilled nursing facilities that we own or operate and the total number of operational beds associated with these facilities. Skilled Mix. Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare, managed care and other skilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care. Accordingly, Medicare and managed care reimbursement rates are typically higher than from other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly affect our revenue and profitability. 69 Table of Contents 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: Year Ended December 31, Skilled Mix: 2020 2019 2018 Days 31.7 % 29.0 % 29.5 % Revenue 53.1 % 48.8 % 49.6 % Occupancy . We define occupancy derived from our transitional and skilled services as the ratio of actual patient days (one patient day equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period. The number of licensed beds in a skilled nursing facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and four-bed wards have been reduced to two-bed rooms for resident comfort, and larger wards have been reduced to conform to changes in Medicare requirements. These beds are seldom expected to be placed back into service. We believe that reporting occupancy based on operational beds is consistent with industry practices and provides a more useful measure of actual occupancy performance from period to period. The following table summarizes our overall occupancy statistics for skilled nursing operations for the periods indicated: Year Ended December 31, Occupancy for transitional and skilled services: 2020 2019 2018 Operational beds at end of period 23,172 22,625 19,615 Available patient days 8,392,147 7,560,687 6,984,685 Actual patient days 6,171,198 5,987,027 5,405,952 Occupancy percentage (based on operational beds) 73.5 % 79.2 % 77.4 % Segments In the fourth quarter of fiscal year 2020, we began reporting the results of our real estate portfolio as a new segment as we continue to expand our real estate investment strategy. We now have two reportable segments: (1) transitional and skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) real estate, which is comprised of properties owned by us and leased to skilled nursing and assisted living operations, including our own operating subsidiaries and third party operators, and are subject to triple-net long-term leases. Prior to this new segment structure, we had one reportable segment, transitional and skilled services. We also reported an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation and other ancillary operations. Our senior living, mobile diagnostics, transportation and other ancillary operations businesses are neither significant individually nor in aggregate and therefore do not constitute a reportable segment. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level. We have presented our segment results in this Annual Report on Form 10-K on a comparative basis to conform to the new segment structure. Revenue Sources Transitional and Skilled Services Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors. We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates. 70 Table of Contents We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts. Several of our operating subsidiaries entered into transactions with several such hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts. Each affected operating subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status. Real Estate We generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance, and maintenance and repair costs, subject to certain exceptions. As of December 31, 2020, our real estate portfolio was comprised of 94 real estate properties. Of these properties, 64 are leased to affiliated skilled nursing facilities wholly-owned and managed by us, 31 are leased to senior living operations wholly-owned and managed by Pennant, and our Service Center property, which is leased to our Service Center and numerous third parties for commercial office space. Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates. During the year ended December 31, 2020, we generated rental revenues of $61.3 million, of which $46.1 million was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation. Other Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs. In addition, we hold majority membership interests in our other ancillary operations. Payment for these services varies and is based upon the service provided. The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Primary Components of Expense Cost of Services (exclusive of rent and depreciation and amortization shown separately). Our cost of services represents the costs of operating our operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients. Cost of services also includes the cost of general and professional liability insurance, rent expenses related to leasing our operational facilities that are not included in facility rent - cost of services, and other general cost of services with respect to our operations. Facility Rent - Cost of Services. Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-party real estate owners. Our operating subsidiaries lease and operate but do not own the underlying real estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements. Expenses related to leasing our operations are included in cost of services. General and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to our information systems and stock-based compensation related to our Service Center employees. Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary of the depreciable lives of our depreciable assets: Buildings and improvements Minimum of three years to a maximum of 57 years, generally 45 years Leasehold improvements Shorter of the lease term or estimated useful life, generally 5 to 15 years Furniture and equipment 3 to 10 years 71 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we review our judgments and estimates, including but not limited to those related to the variable considerations to arrive at the transaction price for revenue recognition, income taxes, intangible assets and loss contingencies. We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. Refer to Note 2, Summary of Significant Accounting Policies , within the Notes to Consolidated Financial Statements for further information on our critical accounting estimates and policies, which are as follows: • Revenue recognition - the estimate of variable considerations to arrive at the transaction price, including methods and assumptions used to determine settlements with Medicare and Medicaid payors or retroactive adjustments due to audits and reviews; • Self-insurance - the valuation methods and assumptions used in estimating costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported; • Acquisition accounting - the assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions; and • Income taxes - the estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position. Results of Operations We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results serve as a strong indicator that our strategy is working and our transformation is underway. Despite the sharp declines in our census beginning in late March 2020 as a result of the COVID-19 pandemic, we continued to experience healthy growth during fiscal year 2020, achieving record revenue and net income. Our net revenue for the year ended December 31, 2020 continued to be impacted by COVID-19 as we experience revenue loss from a decline in occupancy which was offset by our skilled mix changes. To respond to the COVID-19 pandemic and ease the healthcare system burdens, CMS has waived existing regulatory requirements under the Emergency Waivers 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 skilled nursing facility coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their skilled nursing facility 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 state relief funding has been designed to enhance the reimbursements to provide additional funding to cover COVID-19 related expenses in selected states. For the year ended December 31, 2020, we recorded state relief revenue of $45.4 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states. See Recent Activities for further information. Since 2016, our total revenue increased $965.0 million, or 67.1%, representing a 13.7% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew from $0.56 in the 2016 to $3.06, representing a 52.9% CAGR. Over the past year, we have continued to make progress on targeted initiatives, 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 18.3%. We have also strengthened our collection process and identified non-clinical areas where we can manage spending. These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and cash generated from strong performance resulted in strong fiscal year performance. 72 Table of Contents 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: Year Ended December 31, 2020 2019 2018 Revenue: Service revenue 99.4 % 99.7 % 99.9 % Rental revenue 0.6 0.3 0.1 Total revenue 100.0 % 100.0 % 100.0 % Expense: Cost of services 77.6 79.6 80.8 Return of unclaimed class action settlement — — (0.1) Rent—cost of services 5.4 6.1 6.7 General and administrative expense 5.4 5.4 5.2 Depreciation and amortization 2.3 2.5 2.6 Total expenses 90.7 93.6 95.2 Income from operations 9.3 6.4 4.8 Other income (expense): Interest expense (0.4) (0.8) (0.9) Interest and other income 0.2 0.1 0.1 Other expense, net (0.2) (0.7) (0.8) Income before provision for income taxes 9.1 5.7 4.0 Provision for income taxes 2.0 1.3 0.6 Net income from continuing operations 7.1 4.4 3.4 Net income from discontinued operations, net of tax — 1.0 1.9 Net income 7.1 5.4 5.3 Less: net income attributable to noncontrolling interests in continuing operations — — — Net income attributable to noncontrolling interests in discontinued operations — — — Net income attributable to The Ensign Group, Inc. 7.1 % 5.4 % 5.3 % The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated: Year Ended December 31, 2020 Transitional and skilled services Real estate All Other Eliminations Consolidated Total revenue $ 2,288,182 $ 61,275 $ 99,257 $ (46,118) $ 2,402,596 Total expenses, including other expense, net 1,960,370 29,952 238,033 (46,118) 2,182,237 Segment income (loss) 327,812 31,323 (138,776) — 220,359 Loss from sale of real estate and impairment charges (2,753) Income before provision for income taxes $ 217,606 Year Ended December 31, 2019 Transitional and skilled services Real estate All Other Eliminations Consolidated Total revenue $ 1,934,243 $ 49,868 $ 97,023 $ (44,610) $ 2,036,524 Total expenses, including other expense, net 1,708,333 32,389 222,820 (44,610) 1,918,932 Segment income (loss) 225,910 17,479 (125,797) — 117,592 Loss from sale of real estate and impairment charges (1,425) Income before provision for income taxes $ 116,167 73 Table of Contents Year Ended December 31, 2018 Transitional and skilled services Real estate All Other Eliminations Consolidated Total revenue $ 1,678,849 $ 40,177 $ 74,142 $ (38,567) $ 1,754,601 Total expenses, including other expense, net 1,503,297 28,324 180,753 (38,567) 1,673,807 Segment income (loss) 175,552 11,853 (106,611) — 80,794 Loss from sale of real estate and impairment charges (9,047) Income before provision for income taxes $ 71,747 Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Transitional and Skilled Services Segment Revenue The following table presents the transitional and skilled services revenue and key performance metrics by category during the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 Change % Change Total Facility Results: (Dollars in thousands) Transitional and skilled revenue $ 2,288,182 1,934,243 $ 353,939 18.3 % Number of facilities at period end 195 190 5 2.6 % Number of campuses at period end* 24 23 1 4.3 % Actual patient days 6,171,198 5,987,027 184,171 3.1 % Occupancy percentage — Operational beds 73.5 % 79.2 % (5.7) % Skilled mix by nursing days 31.7 % 29.0 % 2.7 % Skilled mix by nursing revenue 53.1 % 48.8 % 4.3 % Year Ended December 31, 2020 2019 Change % Change Same Facility Results(1): (Dollars in thousands) Transitional and skilled revenue $ 1,787,138 $ 1,650,515 $ 136,623 8.3 % Number of facilities at period end 152 152 — — % Number of campuses at period end* 15 15 — — % Actual patient days 4,711,983 5,036,697 (324,714) (6.4) % Occupancy percentage — Operational beds 74.1 % 79.7 % (5.6) % Skilled mix by nursing days 33.6 % 30.4 % 3.2 % Skilled mix by nursing revenue 55.4 % 50.7 % 4.7 % 74 Table of Contents Year Ended December 31, 2020 2019 Change % Change Transitioning Facility Results(2): (Dollars in thousands) Transitional and skilled revenue $ 208,657 $ 185,895 $ 22,762 12.2 % Number of facilities at period end 16 16 — — % Number of campuses at period end* 4 4 — — % Actual patient days 602,072 617,091 (15,019) (2.4) % Occupancy percentage — Operational beds 76.8 % 79.5 % (2.7) % Skilled mix by nursing days 25.9 % 22.2 % 3.7 % Skilled mix by nursing revenue 43.1 % 37.6 % 5.5 % Year Ended December 31, 2020 2019 Change % Change Recently Acquired Facility Results(3): (Dollars in thousands) Transitional and skilled revenue $ 292,387 $ 88,818 $ 203,569 NM Number of facilities at period end 27 22 5 NM Number of campuses at period end* 5 4 1 NM Actual patient days 857,143 303,700 553,443 NM Occupancy percentage — Operational beds 68.5 % 72.0 % NM Skilled mix by nursing days 25.0 % 21.4 % NM Skilled mix by nursing revenue 46.3 % 39.3 % NM Year Ended December 31, 2020 2019 Change % Change (Dollars in thousands) Facility Closed Results(4): Skilled nursing revenue $ — $ 9,015 $ (9,015) NM Actual patient days — 29,539 (29,539) NM Occupancy percentage — Operational beds — % 65.2 % NM Skilled mix by nursing days — % 17.0 % NM Skilled mix by nursing revenue — % 36.6 % 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 year ended December 31, 2019, which were excluded from Same Facilities results for the year ended December 31, 2019 and 2020 for comparison purposes. Transitional and skilled services revenue increased $353.9 million, or 18.3%, compared to the year ended December 31, 2019. Of the $353.9 million increase, Medicare and managed care revenue increased $244.1 million , or 28.7%, Medicaid custodial revenue increased $97.1 million , or 12.3%, Medicaid skilled revenue increased $17.0 million , or 12.8% and private revenue decreased $4.3 million , or 2.6%. The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations. We experienced the impact of COVID-19 during the last three quarters of 2020, which negatively impacted our census. Our occupancy decreased by 5.7% compared to the same period in the prior year. The decline is offset by the increase in skilled mix days due to a shift toward high acuity patients. 75 Table of Contents Revenue in our Same Facilities increased $136.6 million, or 8.3%. The impact of COVID-19 resulted in a decrease in occupancy of 5.6%. The decline in our occupancy is mainly in our non-skilled patient days, which was partially offset by the shift toward high acuity patients. Our skilled days increased by 3.7%, coupled with an increase in our skilled revenue daily rate of 10.6%, resulted in an increase in skilled mix revenue of $118.6 million, or 14.7%. We continued to experience decreased Medicaid custodial and private patient days census related to COVID-19 throughout 2020. Our Medicaid census decreased by 9.5%, but was offset by an increase in our Medicaid daily rate of 6.4% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states. In addition, total revenue for Same Facilities included $35.3 million of Medicaid revenue related to the state relief funding. Revenue generated by our Transitioning Facilities increased $22.8 million, or 12.2%, primarily due to increases in our daily rate and skilled mix days compared to the year ended December 31, 2019 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago. In addition, we experienced a shift toward higher acuity patients, as demonstrated by increased census in all skilled payors . Our skilled days increased by 13.4% , 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 $203.6 million compared to the year ended December 31, 2019. We acquired six operations between January 1, 2020 and December 31, 2020 across three states. The increase in revenue is also due to the remaining 26 acquired facilities continuing to build out their clinical operations and develop strong relationships. In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in 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 and 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) : Year Ended December 31, Same Facility Transitioning Acquisitions Total 2020 2019 2020 2019 2020 2019 2020 2019 Skilled Nursing Average Daily Revenue Rates: Medicare $ 669.76 $ 612.60 $ 594.20 $ 543.30 $ 649.45 $ 631.27 $ 660.78 $ 607.24 Managed care 495.41 461.77 470.38 427.88 478.66 433.97 491.53 458.26 Other skilled 534.00 495.83 505.73 468.21 346.56 339.08 525.51 490.93 Total skilled revenue 584.60 528.36 536.37 489.17 578.94 523.86 580.14 525.41 Medicaid 240.05 225.57 248.99 234.52 224.75 222.20 238.62 226.43 Private and other payors 232.70 225.67 236.41 222.00 215.02 208.68 230.52 223.97 Total skilled nursing revenue $ 355.20 $ 317.87 $ 321.53 $ 289.10 $ 312.08 $ 285.23 $ 345.92 $ 313.11 (1) These rates exclude state relief revenue we recognized and include sequestration reversal of 2%. Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 9.3% and 9.4%, respectively, compared to the year ended December 31, 2019. Revenue for the year ended December 31, 2020 includes results of eight months of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will continue through March 31, 2021. In addition, our new payment model, PDPM, became effective on October 1, 2019. Our average Medicaid rates increased 5.4% from 2019 to 2020 due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states. 76 Table of Contents Payor Sources as a Percentage of Skilled Nursing Services. We use our skilled mix as a measure 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 (1) : Year Ended December 31, Same Facility Transitioning Acquisitions Total 2020 2019 2020 2019 2020 2019 2020 2019 Percentage of Skilled Nursing Revenue: Medicare 30.1 % 23.6 % 24.1 % 20.7 % 32.6 % 23.9 % 29.8 % 23.4 % Managed care 16.7 18.8 14.9 13.3 12.3 12.9 16.0 17.9 Other skilled 8.6 8.3 4.1 3.6 1.4 2.5 7.3 7.5 Skilled mix 55.4 50.7 43.1 37.6 46.3 39.3 53.1 48.8 Private and other payors 6.7 8.0 10.5 11.8 8.1 8.5 7.3 8.5 Medicaid 37.9 41.3 46.4 50.6 45.6 52.2 39.6 42.7 Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % (1) The revenue mix exclude state relief revenue we recognized . Year Ended December 31, Same Facility Transitioning Acquisitions Total 2020 2019 2020 2019 2020 2019 2020 2019 Percentage of Skilled Nursing Days: Medicare 15.9 % 12.2 % 13.0 % 11.0 % 15.7 % 10.8 % 15.6 % 12.0 % Managed care 12.0 12.9 10.2 9.0 8.0 8.5 11.2 12.2 Other skilled 5.7 5.3 2.7 2.2 1.3 2.1 4.9 4.8 Skilled mix 33.6 30.4 25.9 22.2 25.0 21.4 31.7 29.0 Private and other payors 10.4 11.7 14.1 15.3 11.7 11.6 10.9 12.1 Medicaid 56.0 57.9 60.0 62.5 63.3 67.0 57.4 58.9 Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of Services The following table sets forth total cost of services for our transitional and skilled services segment for the periods indicated (dollars in thousands): Year Ended December 31, Change 2020 2019 $ % Cost of service $ 1,770,336 $ 1,533,321 $ 237,015 15.5 % Revenue percentage 77.4 % 79.3 % (1.9) % Cost of services related to our transitional and skilled services segment increased $237.0 million, or 15.5%, due primarily to additional costs at new acquisitions, which accounted for $144.0 million of the increase. Cost of services as a percentage of revenue decreased to 77.4% from 79.3%, a decrease of 1.9%. We experienced an increase in expenses on a per patient day basis related to COVID-19, including wages, supplies and additional ancillary costs. These increases were offset with better collections and lower purchased services expenses. 77 Table of Contents Real Estate Segment Year Ended December 31, Change 2020 2019 $ % Rental revenue generated from third-party tenants $ 15,157 $ 5,258 $ 9,899 188.3 % Rental revenue generated from Ensign affiliated operations 46,118 44,610 1,508 3.4 Total rental revenue $ 61,275 $ 49,868 $ 11,407 22.9 % Segment income 31,323 17,479 13,844 79.2 Depreciation and amortization 18,218 15,196 3,022 19.9 FFO $ 49,541 $ 32,675 $ 16,866 51.6 % Rental revenue. Our rental revenue, including revenue generated from our affiliated facilities, increased by $9.9 million, or 188.3% to $15.2 million, compared to the year ended December 31, 2019. The increase in revenue is attributable to a full year of rental income from Pennant in the current fiscal year compared to three months of rental income received in 2019 as the Spin-Off was effective on October 1, 2019. FFO. Our FFO increased $16.9 million, or 51.6% to $49.5 million, compared to the year ended December 31, 2019. The increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense. All Other Service Revenue Our other revenue increased by $2.2 million, or 2.3% to $99.3 million, compared to the year ended December 31, 2019. Other revenue for 2020 includes senior living revenue of $47.9 million and revenue from other ancillary services of $51.4 million. The increase in other revenue is primarily due to acquisitions of facilities. Consolidated Financial Expenses Rent — cost of services. Our rent — cost of services as a percentage of total revenue decreased by 0.7% to 5.4%, 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. General and administrative expense increased $18.9 million or 17.0%, to $129.7 million. This increase was primarily due to increases in wages and benefits due to COVID-19, enhanced performance and growth. General and administrative expense remained consistent at 5.4%, as a percentage of revenue. Depreciation and amortization . Depreciation and amortization expense increased $3.5 million, or 6.9%, to $54.6 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. Interest expense also decreased as we were able to generate increased cash from strong operational performance coupled with the deferred tax programs, allowing us to reduce the amount outstanding on our Credit Facility. Provision for income taxes. Our effective tax rate was 21.3% for the year ended December 31, 2020, compared to 20.6% for the same period in 2019. The higher effective tax rate was due to lower tax benefits from stock compensation, offset by higher tax expense from non-deductible compensation. See Note 14, Income Taxes , in the Notes to Consolidated Financial Statements for further discussion. 78 Table of Contents Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018 Transitional and Skilled Services The following table presents the transitional and skilled services revenue and key performance metrics by category during the year ended December 31, 2019 and 2018: Year Ended December 31, 2019 2018 Change % Change (Dollars in thousands) Total Facility Results: Transitional and skilled revenue $ 1,934,243 $ 1,678,849 $ 255,394 15.2 % Number of facilities at period end 190 168 22 13.1 % Number of campuses at period end* 23 19 4 21.1 % Actual patient days 5,987,027 5,405,952 581,075 10.7 % Occupancy percentage — Operational beds 79.2 % 77.4 % 1.8 % Skilled mix by nursing days 29.0 % 29.5 % (0.5) % Skilled mix by nursing revenue 48.8 % 49.6 % (0.8) % Year Ended December 31, 2019 2018 Change % Change (Dollars in thousands) Same Facility Results(1): Transitional and skilled revenue $ 1,410,491 $ 1,307,719 $ 102,772 7.9 % Number of facilities at period end 131 131 — — % Number of campuses at period end* 9 9 — — % Actual patient days 4,199,374 4,070,122 129,252 3.2 % Occupancy percentage — Operational beds 80.3 % 78.2 % 2.1 % Skilled mix by nursing days 31.1 % 31.2 % (0.1) % Skilled mix by nursing revenue 51.2 % 51.1 % 0.1 % Year Ended December 31, 2019 2018 Change % Change (Dollars in thousands) Transitioning Facility Results(2): Transitional and skilled revenue $ 364,167 $ 330,795 $ 33,372 10.1 % Number of facilities at period end 33 33 — — % Number of campuses at period end* 7 7 — — % Actual patient days 1,247,573 1,201,138 46,435 3.9 % Occupancy percentage — Operational beds 78.1 % 75.3 % 2.8 % Skilled mix by nursing days 25.5 % 25.2 % 0.3 % Skilled mix by nursing revenue 44.9 % 45.2 % (0.3) % 79 Table of Contents Year Ended December 31, 2019 2018 Change % Change (Dollars in thousands) Recently Acquired Facility Results(3): Transitional and skilled revenue $ 149,995 $ 28,580 $ 121,415 NM Number of facilities at period end 26 4 22 NM Number of campuses at period end* 7 3 4 NM Actual patient days 510,541 95,034 415,507 NM Occupancy percentage — Operational beds 74.0 % 73.9 % NM Skilled mix by nursing days 20.9 % 20.5 % NM Skilled mix by nursing revenue 36.4 % 33.4 % NM Year Ended December 31, 2019 2018 Change % Change (Dollars in thousands) Facility Closed Results(4): Skilled nursing revenue $ 9,590 $ 11,755 $ (2,165) NM Actual patient days 29,539 39,658 (10,119) NM Occupancy percentage — Operational beds 65.2 % 72.9 % NM Skilled mix by nursing days 17.0 % 16.1 % NM Skilled mix by nursing revenue 34.4 % 33.4 % 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, 2016. (2) Transitioning Facility results represent all facilities purchased from January 1, 2016 to December 31, 2017. (3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2018. (4) Facility Closed results represents closed operations during the year ended December 31, 2019, which were excluded from Same Facilities results for the year ended December 31, 2019 and 2018 for comparison purposes. Transitional and skilled services revenue increased $255.4 million, or 15.2% compared to the fiscal year ended 2018. Of the $255.4 million increase, Medicaid custodial revenue increased $111.1 million, or 16.4%, Medicare and managed care revenue increased $112.0 million, or 15.2%, Medicaid skilled revenue increased $15.2 million, or 12.9%, and private and other revenue increased $17.1 million, or 11.9%. Revenue in our Same Facilities increased $102.8 million, or 7.9%. Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities in which we operate increased our occupancy by 2.1% to 80.3%. We continued to see a shift in higher patient acuity. These two factors increased our skilled mix revenue by $45.0 million, or 6.9%. • Medicare revenue, including our Part B, increased $26.2 million: Medicare daily rate grew by 4.6% and patient days grew by 0.3%. We continued to focus on higher acuity Medicare patient, which is demonstrated by sub-acute patient day growth of 9.0%. • Managed care revenue grew by $19.5 million: patient days grew by 5.2% and managed care daily rate grew by 3.0%. • Other skilled revenue increased $10.7 million: patient days grew by 4.2% and revenue daily rate grew by 4.5%. We continue to grow revenue with our Medicaid plans. Our Medicaid revenue, excluding Medicaid-skilled revenue, increased by $38.1 million, primarily driven by an increase in Medicaid days. We also experienced an increase in Medicaid daily rate of 3.1% 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 $33.4 million, or 10.1%, primarily due to increases of 3.9% in both total patient days and revenue daily rate. Strong occupancy growth from 2.8% to 78.1% demonstrates our ability to transition these healthcare operations that were acquired two and three years ago. • Managed care revenue increased $10.1 million: managed care days grew by 13.1% and managed care daily rate grew by 2.3%. • Medicare revenue increased $7.3 million: Medicare daily rate grew by 4.2%. 80 Table of Contents • Medicaid revenue, excluding Medicaid-skilled revenue, increased $12.7 million: Medicaid days grew by 4.1% and Medicaid daily rate grew by 5.6%, Transitional and skilled services revenue generated by Recently Acquired Facilities increased by approximately $121.4 million . We acquired 26 operations between January 1, 2019 and December 31, 2019 in five 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. 81 Table of Contents 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: Year Ended December 31, Same Facility Transitioning Acquisitions Total 2019 2018 2019 2018 2019 2018 2019 2018 Skilled Nursing Average Daily Revenue Rates: Medicare $ 628.20 $ 600.65 $ 542.67 $ 520.85 $ 594.74 $ 528.11 $ 607.24 $ 580.96 Managed care 470.85 457.09 420.48 410.87 432.41 423.94 458.26 447.34 Other skilled 496.37 475.12 491.15 522.24 327.22 246.85 490.93 475.59 Total skilled revenue 537.00 517.86 484.13 473.60 501.13 460.52 525.41 509.10 Medicaid 232.41 225.48 203.99 193.18 231.46 235.70 226.43 218.30 Private and other payors 231.87 225.31 202.19 198.33 229.17 237.61 223.97 218.42 Total skilled nursing revenue $ 327.48 $ 317.01 $ 275.25 $ 264.81 $ 287.52 $ 282.07 $ 313.11 $ 304.57 Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 4.6% and 4.2%, respectively. The increase was attributable to the 2.4% net market basket increase that became effective in October 2019 coupled with the continuous shift towards higher acuity patients. In addition, our new payment model (PDPM) became effective on October 1, 2019. Our average Medicaid rates increased 3.7% from 2018 to 2019 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: Year Ended December 31, Same Facility Transitioning Acquisitions Total 2019 2018 2019 2018 2019 2018 2019 2018 Percentage of Skilled Nursing Revenue: Medicare 23.2 % 23.6 % 25.1 % 26.8 % 20.6 % 17.9 % 23.4 % 24.2 % Managed care 18.4 18.1 18.1 16.9 13.8 14.4 17.9 17.7 Other skilled 9.6 9.4 1.7 1.5 2.0 1.1 7.5 7.7 Skilled mix 51.2 51.1 44.9 45.2 36.4 33.4 48.8 49.6 Private and other payors 7.5 7.6 11.3 11.5 11.0 14.1 8.5 8.5 Medicaid 41.3 41.3 43.8 43.3 52.6 52.5 42.7 41.9 Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Year Ended December 31, Same Facility Transitioning Acquisitions Total 2019 2018 2019 2018 2019 2018 2019 2018 Percentage of Skilled Nursing Days: Medicare 12.1 % 12.4 % 12.7 % 13.6 % 10.0 % 9.5 % 12.0 % 12.6 % Managed care 12.7 12.5 11.8 10.8 9.2 9.6 12.2 12.0 Other skilled 6.3 6.3 1.0 0.8 1.7 1.4 4.8 4.9 Skilled mix 31.1 31.2 25.5 25.2 20.9 20.5 29.0 29.5 Private and other payors 10.8 11.0 15.6 15.6 13.9 16.8 12.1 12.2 Medicaid 58.1 57.8 58.9 59.2 65.2 62.7 58.9 58.3 Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 82 Table of Contents Cost of Services The following table sets forth total cost of services for our transitional and skilled services segment for the periods indicated (dollars in thousands): Year Ended December 31, Change 2019 2018 $ % Cost of service $ 1,533,321 $ 1,344,255 $ 189,066 14.1 % Revenue percentage 79.3 % 80.1 % (0.8) % Our revenue growth of 15.2% surpassed our increase in cost of services of 14.1%, which demonstrates that we are able to manage our expenses. Cost of services related to our transitional and skilled services segment increased $189.1 million, or 14.1%, due primarily to additional costs at Recently Acquired Facilities, which accounted for $98.1 million of the increase. Cost of services as a percentage of revenue decreased to 79.3% from 80.1%, a decrease of 0.8%. We experienced improvements in collection efforts and operations, all of which were able to leverage off of our higher occupancies. Real Estate Year Ended December 31, Change 2019 2018 $ % Rental revenue generated from third-party tenants $ 5,258 $ 1,610 $ 3,648 226.6 % Rental revenue generated from Ensign affiliated operations 44,610 38,567 6,043 15.7 Total rental revenue $ 49,868 $ 40,177 $ 9,691 24.1 % Segment income 17,479 11,853 5,626 47.5 Depreciation and amortization 15,196 12,035 3,161 26.3 FFO $ 32,675 $ 23,888 $ 8,787 36.8 % Rental revenue. Our rental revenue increased $3.6 million, or 226.6% to $5.3 million, compared to the year ended December 31, 2018. The increase was mainly due rental income received from Pennant during the fourth quarter in 2019, as a result of our Spin-Off completed on October 1, 2019. FFO. Our FFO increased $8.8 million, or 36.8% to $32.7 million, compared to the year ended December 31, 2018. The increase in FFO is primarily related to the increase in rental revenue offset by an increase in interest expense to support our real estate acquisitions. All Other Service Revenue Our other revenue increased $22.9 million, or 30.9% to $97.0 million, compared to fiscal year ended 2018. The increase in revenue is due to organic growth and acquisitions. Other revenue for 2019 includes senior living revenue of $40.0 million and revenue from other ancillary services of $57.0 million. Consolidated Financial Expenses Rent — cost of services. Our rent — cost of services as a percentage of total revenue decreased by 0.6%, to 6.1%, 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. Our general and administrative expense as a percentage of revenue increased by 0.2%, to 5.4%, primarily due to increases in wages to support growth and in incentives due to operational improvements. Depreciation and amortization. Depreciation and amortization expense increased $6.2 million, or 13.8%, to $51.1 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 0.1%, to 2.5%, as a percentage of revenue. 83 Table of Contents Other expense, net. Other expense, net as a percentage of revenue decreased by 0.1%, to 0.7%. Other expense primarily includes interest expense related to borrowings under our Credit Facility. Provision for income taxes. Our effective tax rate was 20.6% for the year ended December 31, 2019, compared to 17.7% for the same period in 2018. The higher effective tax rate reflects a decrease in tax benefit from share-based payment awards and a one-time benefit from IRS approval of non-automatic change for 2018 that did not reoccur in 2019. See Note 14, Income Taxes , in the Notes to Consolidated Financial Statements for further discussion. Liquidity and Capital Resources 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 Credit Facility. Our liquidity as of December 31, 2020 is impacted by cash generated from strong operational performance and deferred payment of the employer portion of social security taxes through the end of 2020. Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our Credit Facility, and cash generated from operations. Cash paid to fund acquisitions was $11.0 million, $154.8 million and $91.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total capital expenditures for property and equipment were $50.3 million, $71.5 million and $50.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. We currently have approximately $65.0 million budgeted for renovation projects for 2021. We believe our current cash balances, our cash flow from operations and the amounts available under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months. 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 December 31, 2020 consisted of bank term deposits, money market funds and U.S. Treasury bill related investments. In addition, as of December 31, 2020, we held debt security investments of approximately $45.6 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 December 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. As mentioned above, one of our 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 December 31, 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 pandemic, 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 consolidated statement of cash flows for the periods presented: Year Ended December 31, 2020 2019 2018 Net cash provided by/(used in): (In thousands) Continuing operating activities $ 373,351 $ 168,927 $ 170,152 Continuing investing activities (58,666) (224,030) (141,340) Continuing financing activities (137,298) 83,278 (70,345) Net (decrease)/increase in cash and cash equivalents from discontinued operations — (83) 30,279 Net increase/(decrease) in cash and cash equivalents 177,387 28,092 (11,254) Cash and cash equivalents beginning of period, including cash of discontinued operations 59,175 31,083 42,337 Cash and cash equivalents end of period, including cash of discontinued operations 236,562 59,175 31,083 Less cash of discontinued operations at end of period — — 41 Cash and cash equivalents at end of period $ 236,562 $ 59,175 $ 31,042 84 Table of Contents Operating Activities Cash provided by continuing operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities. For 2020 compared to 2019, the $204.4 million increase in cash provided by continuing operating activities for the year ended December 31, 2020 w as primarily due to higher net income and changes in working capital in 2020 compared to 2019. Changes in working capital was driven by deferred payment of the employer portion of social security taxes, strong accounts receivable collections, timing of accrued expenses and accrued wages and related liabilities. For 2019 compared to 2018, the $1.2 million decrease in cash provided by continuing operating activities was primarily due to an income tax refund we received of $11.0 million in 2018 that did not recur in 2019, offset by higher net income and changes in working capital in 2019. Changes in working capital was driven by timing of collections of accounts receivable and payments of prepaid expenses and other assets, and accrued wages and related liabilities. Investing Activities Investing cash flows consist primarily of capital expenditures, investment activities and cash used for acquisitions. The decrease in cash used in continuing investing activities for the year ended December 31, 2020 compared to the same period in 2019 of $165.4 million was primarily due to a decrease in cash used for acquisitions, net of escrow deposits, of $143.8 million coupled with a decrease in capital expenditures of $21.2 million. The increase in cash used in continuing investing activities in 2019 compared to 2018 of $82.7 million was primarily due to an increase in cash used for acquisitions, net of escrow deposits, of $62.9 million and an increase in capital expenditure spending by $20.6 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, net proceeds from the Medicare Accelerated and Advance Payment Program, net and sale of shares of common stock through employee equity incentive plans. The decrease in cash provided by continuing financing activities for the year ended December 31, 2020 compared to the same period in 2019 of $220.6 million was primarily due to a net debt repayment of $212.5 million in 2020 compared to a net borrowing of $83.3 million in the same period in 2019. Additionally, during the first quarter of 2020 we repurchased $25.0 million of common stock and during 2019 we repurchased $6.4 million. Both repurchases were under our authorized common stock repurchase programs. The decreases are offset by net proceeds received under the Medicare Accelerated and Advance Payment Program of $102.0 million. The increase in cash provided by continuing financing activities in 2019 compared to 2018 by $153.6 million was primarily due to net borrowing of $83.3 million in 2019 compared to a net repayment of $69.9 million in 2018. We also received $11.6 million of dividend from Pennant in connection with the Spin-Off, which was used to repay third party debt. During 2019, we repurchased $6.4 million of common stock under our authorized common stock repurchase program. We did not have any repurchases of common stock in 2018. Contractual Obligations, Commitments and Contingencies and Capital Expenditures Total long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows: December 31, 2020 2019 2018 2017 2016 (In thousands) Credit facilities and term loans $ — $ 210,000 $ 123,125 $ 190,625 $ 270,125 Mortgage loan and promissory notes 117,806 120,350 122,955 125,394 14,032 Total $ 117,806 $ 330,350 $ 246,080 $ 316,019 $ 284,157 85 Table of Contents Significant contractual obligations as of December 31, 2020 were as follows, including the future periods in which payments are expected: 2021 2022 2023 2024 2025 Thereafter Total (In thousands) Operating lease obligations $ 128,251 $ 128,107 $ 126,371 $ 125,400 $ 125,301 $ 1,040,860 $ 1,674,290 Long-term debt obligations 2,802 2,906 3,016 3,128 3,245 102,551 117,648 Interest payments on long-term debt 3,940 3,837 3,725 3,613 3,499 49,212 67,826 Total $ 134,993 $ 134,850 $ 133,112 $ 132,141 $ 132,045 $ 1,192,623 $ 1,859,764 Not included in the table above are our actuarially determined self-insured general and professional malpractice liability, workers' compensation and medical (including prescription drugs) and dental healthcare obligations which are broken out between current and long-term liabilities in our financial statements included in this Annual Report on Form 10-K. Credit Facility with a Lending Consortium Arranged by Truist We maintain the Credit Facility with a lending consortium arranged by Truist, which includes a revolving line of credit of up to $350 million in aggregate principal amount. The maturity date of the Credit Facility is October 1, 2024. The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50% to 1.50% per annum or LIBOR plus a margin range from 1.50% to 2.50% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, we pay a commitment fee on the unused portion of the commitments that ranges from 0.25% to 0.45% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. Mortgage Loans and Promissory Notes As of December 31, 2020, 19 of our subsidiaries are under mortgage loans insured with HUD for an aggregate amount of $113.9 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. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment. For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and reduced by 1% per year for years five through ten of the loan. There is no prepayment penalty after year ten. The term of the mortgage loans are 25 to 35-years. 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 fiscal year of 2020, 164 of our facilities are under long-term lease arrangements, of which 88 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc. (CareTrust). The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography. Under each master lease, our individual subsidiaries that operate those properties are the tenants and CareTrust's individual subsidiaries that own the properties subject to the Master Leases are the landlords. The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%. At our option, we can extend the Master Leases for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If we elect to renew the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease. Additionally, four of the 89 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024. We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, we lease certain of our equipment under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve rent increases. 86 Table of Contents Thirty-seven of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under seven separate master lease arrangements. Under these master leases, a breach at a single facility could subject one or more of the other affiliated facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. U.S. Department of Justice Civil Investigative Demand On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it is investigating to determine whether we have violated the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who served as medical directors, advisory board participants or other referral sources. The CID covered the period from October 3, 2013 to the present, and was limited in scope to ten of our Southern California skilled nursing facilities. In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 to the present, relating to the same topic. As a general matter, our operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. We have fully cooperated with the U.S. Department of Justice to promptly respond to the requests for information and have recently been advised that the U.S. Department of Justice has declined to intervene in any subsequent action based on or related to the subject matter of this investigation. Inflation We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We may not be successful in offsetting future cost increases. Off-Balance Sheet Arrangements During the year ended December 31, 2020, we increased our outstanding letters of credit by $2.2 million. As of December 31, 2020, we had approximately $7.6 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit. 87 Table of Contents