What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-07-28 compared with 2021-04-29 · 371 added, 157 removed, 893 unchanged (37% of the section changed)

19 unchanged sentences

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 March 31, 2021, we offered skilled nursing, senior living and rehabilitative care services through 232 skilled nursing and senior living facilities.

As of June 30, 2021, we offered skilled nursing, senior living and rehabilitative care services through 240 skilled nursing and senior living facilities.

Of the 240 facilities, we operated 175 facilities under long-term lease arrangements, and have options to purchase 11 of those 175 facilities.

1 unchanged sentence

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.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of March 31, 2021:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2021:

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

16 unchanged sentences

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.

As the vaccine distribution commenced and infection rates are began to decline, we experienced a recovery in occupancy rates throughout the first quarter of 2021, when compared to the fourth quarter of 2020.

As the vaccine distribution commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and continued throughout the second quarter of 2021.

The improvements in occupancy were due to our operations developing innovative approaches to confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive.

Additionally, we have seen increases in hospital volumes for surgeries.

Some operations added COVID-19 wings, while others become COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facility occupancy rebounded by 0.4% and 1.6%, respectively, during the first quarter of 2021 compared the fourth quarter of 2020.

By strengthening existing partnerships and creating new partnerships, and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize.

We believe that our operations are prime to rebuild occupancies and continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the three months ended March 31, 2021, we received approximately $9.1 million in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

As of March 31, 2021, and the date hereof, we have returned all Provider Relief Funds that we received related to this distribution.

We may receive additional relief fund payments in the future.

Further, we repaid the remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds in March 2021.

During the three months ended March 31, 2021, we received an additional $15.6 million in state relief funding and recognized $16.5 million as revenue, of which $6.5 million was classified as unapplied state funding included in our liabilities as of December 31, 2020.

Some operations added COVID-19 wings, while others became COVID-19 dedicated facilities, enabling an important offloading of strained hospital capacity.

Even with COVID-19 demands waning, the partnerships developed during the pandemic will continue to benefit us into the future.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facility occupancy rebounded by 2.1% and 3.0%, respectively, during the second quarter of 2021 compared to the fourth quarter of 2020, and 1.7% and 1.5%, respectively, compared to the first quarter of 2021.

By strengthening existing partnerships, creating new partnerships and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize.

We believe our operations are primed to rebuild occupancies and continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the three and six months ended June 30, 2021, we received approximately $2.4 million and $11.5 million, respectively, in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

To date, we have returned all Provider Relief Funds that we received.

Further, in March 2021, we repaid the remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds.

During the three and six months ended June 30, 2021, we received an additional $16.8 million and $32.4 million, respectively, in state relief funding and recognized $16.7 million and $33.2 million, respectively, as revenue, of which $5.8 million and $6.5 million were classified as unapplied state funding included in our liabilities as of June 30, 2021 and December 31, 2020, respectively.

See Note 3, COVID-19 Update in the Notes to the Condensed Consolidated Financial Statements.

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Despite these challenges, we believe we are well-positioned to operate effectively in the current environment.

Our forecasted metrics may be modified as the pace of the recovery in our volumes become clearer over the coming months.

Our forecasted metrics may be modified as the pace of the recovery in our volumes and related activity become clearer over the coming months.

We continue to focus on navigating the challenges presented by COVID-19 through utilizing the infrastructure of our local operational approach.

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Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of March 31, 2021:

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of June 30, 2021:

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

2 unchanged sentences

Senior living operations 1 — — 2 5 — — 1 — — — — — 9

Campuses(1) 4 1 3 1 1 — 2 2 2 — — — 7 23

4 1 3 1 1 — 1 2 2 — — — 7 22

Number of operated beds/units

4 unchanged sentences

Senior living communities 1 — — — 3 — — 1 — — — — — 5

Campuses(1) 2 — 3 — — — 1 — — — 0 — 2 8

2 — 3 — — — — — — — — — 2 7

Number of owned and operated beds/units

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(1) Campuses represent facilities that offer both skilled nursing and senior living services.

During the three months ended March 31, 2021, we expanded our operations through long-term leases with the addition of four stand-alone skilled nursing operations.

During the six months ended June 30, 2021, we expanded our operations through a combination of long-term leases and a real estate purchase with the addition of twelve stand-alone skilled nursing operations.

Of these additions, one is related to a purchase of owned property, further expanding our real estate portfolio.

These new operations added a total of 1,263 operational skilled nursing beds operated by our affiliated operating subsidiaries.

Subsequent to March 31, 2021, we expanded our operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 322 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our acquisitions, see Note 8, Operation Expansions in the Notes to the Condensed Consolidated Financial Statements .

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These indicators and their definitions include the following:

Transitional and Skilled Services

Skilled Services

• Routine revenue — Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services.

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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,

2021 2020 2021 2020

Days 30.9 % 29.7 % 32.6 % 29.5 %

Revenue 51.4 % 51.4 % 53.5 % 50.8 %

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.

Occupancy — We define occupancy derived from our 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.

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

Three Months Ended March 31,

Occupancy for transitional and skilled services:

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

Occupancy for skilled services:

2021 2020 2021 2020

Operational beds at end of period 24,486 22,907 24,486 22,907

4 unchanged sentences

We 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.

(1) 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, 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.

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Revenue Sources

The following table sets forth our total service 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,

Transitional and Skilled Services Other (1)

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

Three Months Ended June 30,

Skilled Services Other (1)

Total Service Revenue

2021 2020 2021 2020 2021 2020

5 unchanged sentences

Private and other 39,500 40,008 17,943 21,208 57,443 61,216

Total revenue $ 601,036 $ 558,304 $ 22,240 $ 27,647 $ 623,276 $ 585,951

Three Months Ended March 31,

Transitional and Skilled Services Other (1)

Total service revenue $ 612,882 $ 556,677 $ 21,727 $ 24,402 $ 634,609 $ 581,079

Three Months Ended June 30,

Skilled Services Other (1)

Total Service Revenue

2021 2020 2021 2020 2021 2020

5 unchanged sentences

Private and other 6.5 7.2 82.6 86.9 9.1 10.5

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.

Total service 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 senior living operations and all payors generated in our other ancillary operations.

(2) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

In addition to the service revenue above, our rental revenue derived from triple-net lease arrangements with third parties is $3,977 and $3,662, respectively for the three months ended March 31, 2021 and 2020.

Transitional and Skilled Services

Six Months Ended June 30,

Skilled Services Other (1)

Total Service Revenue

2021 2020 2021 2020 2021 2020

$ 475,412 $ 443,893 $ 7,401 $ 6,421 $ 482,813 $ 450,314

Medicare 360,311 330,628 — — 360,311 330,628

Medicaid-skilled 82,733 72,394 — — 82,733 72,394

Subtotal 918,456 846,915 7,401 6,421 925,857 853,336

Managed care 221,308 184,345 — — 221,308 184,345

Private and other 74,154 83,721 36,566 45,628 110,720 129,349

Total service revenue $ 1,213,918 $ 1,114,981 $ 43,967 $ 52,049 $ 1,257,885 $ 1,167,030

Six Months Ended June 30,

Skilled Services Other (1)

Total Service Revenue

2021 2020 2021 2020 2021 2020

39.2 % 39.8 % 16.8 % 12.3 % 38.4 % 38.6 %

Medicare 29.7 29.6 — — 28.6 28.3

Medicaid-skilled 6.8 6.6 — — 6.6 6.2

Subtotal 75.7 76.0 16.8 12.3 73.6 73.1

Managed care 18.2 16.5 — — 17.6 15.8

Private and other 6.1 7.5 83.2 87.7 8.8 11.1

Total service 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 senior living operations and all payors generated in our other ancillary operations.

(2) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

In addition to the service revenue above, our rental revenue derived from triple-net lease arrangements with third parties is $3,927 and $7,904, respectively, for the three and six months ended June 30, 2021 and $3,620 and $7,282, respectively, for the three and six months ended June 30, 2020.

Skilled Services

Within our skilled nursing operations, we generate revenue from Medicaid, private pay, managed care and Medicare payors.

4 unchanged sentences

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 March 31, 2021, our real estate portfolio was comprised of 94 real estate properties.

As of June 30, 2021, our real estate portfolio was comprised of 95 real estate properties.

Of these properties, 65 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 March 31, 2021, we generated rental revenues of $15.9 million, of which $11.9 million was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

During the three and six months ended June 30, 2021, we generated rental revenues of $16.0 million and $31.9 million, of which $12.1 million and $24.0 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

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.

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HHS also waived requirements specific to skilled nursing facilities pursuant to its authority under Section 1812(f) of the Social Security Act (Section 1812(f) Waiver, and together with the Section 1135 Waivers, the Emergency Waivers).

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency, CMS has announced that will end several Emergency Waivers that are no longer needed as early as May 10, 2021.

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency, CMS ended several Emergency Waivers that were no longer needed effective May 10, 2021.

Examples of requirements that were waived due to the COVID-19 emergency declaration include the following:

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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.

Some of these states were also publicly reporting COVID-19 outbreaks in facilities.

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.

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Non-compliance with state or federal mandates may result in imposition of fines or other administrative action.

Reporting requirements — Effective May 8, 2020, CMS published an interim final rule requiring skilled nursing facilities to report information related to COVID-19 cases among facility residents and staff directly to the CDC National Health Safety Network no less than weekly.

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

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(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.

The data collected as a result of the CDC National Health Safety Network reporting is publicly available on a dedicated website.

CMS may initiate enforcement activities and/or assess civil monetary penalties for not meeting these reporting requirements.

Effective May 21, 2021, CMS published an interim final ruling requiring long-term care facilities to report weekly COVID-19 vaccination data of both residents and staff to the CDC National Healthcare Safety Network.

Facilities are also required to provide residents and staff with vaccine education and offer vaccines, when available, to residents and staff.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 reporting requirements.

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

Effective June 11, 2021, HHS revised the Post-Payment Notice of Reporting Requirements which are applicable to recipients of Provider Relief Funds.

The revised requirements provide additional information on the data elements that recipients are required to report as part of the post-payment reporting process, as well as the timing of such reporting.

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

Survey Activity and Enforcement — On March 20, 2020, CMS announced the initiation of focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic.

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Vaccine distribution is now widespread in all 50 states.

Medicare presently accounts for approximately 31.7% of our transitional and skilled nursing services revenue year-to-date, being our second-largest payor.

Medicare presently accounts for approximately 29.7% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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

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A skilled nursing facility will receive a notification letter from its Medicare administrator contractor if it was non-compliant with the Quality Reporting Program reporting requirements and is subject to the payment reduction.

Updated performance measures mandated for the SNF QRP for fiscal year 2020 were established in the final SNF PPS rule adopted on August 8, 2019 (FY 2020 SNF PPS Rule).

Updated performance measures mandated for the SNF QRP for fiscal year 2020 were established in the final SNF PPS rule adopted on August 8, 2019 (fiscal year 2020 SNF PPS Rule).

The final rule continues implementation of the SNF QRP measures to improve program interoperability, operational quality and safety.

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Effective October 1, 2018, CMS began withholding 2.0% to fund the SNF-VBP incentive payment pool and will redistribute 60% of the withheld payments back to skilled nursing facilities through the program.

The FY 2020 SNF PPS Rules estimate the economic impact of the SNF-VBP Program to be a reduction of $213.6 million in aggregate payments to skilled nursing facilities during fiscal year 2020.

The fiscal year 2020 SNF PPS Rules estimate the economic impact of the SNF-VBP Program to be a reduction of $213.6 million in aggregate payments to skilled nursing facilities during fiscal year 2020.

The Rule also introduced two new quality measures to assess how health information is shared and adopted a number of standardized patient assessment data elements that assess factors such as cognitive function and mental status, special services, and social determinants of health.

The FY 2021 SNF PPS rule updated the deadlines for baseline period qualify measure quarterly reporting and announced performance periods and standards for the FY 2023 program year, but otherwise made no changes to the measures, scoring or payment policies.

In the FY 2022 program, CMS proposed changes to account for COVID-19 impacting readmission rates and SNF admissions during the performance periods of FY 2020.

The fiscal year 2021 SNF PPS rule updated the deadlines for baseline period quality measure quarterly reporting and announced performance periods and standards for the fiscal year 2023 program year, but otherwise made no changes to the measures, scoring or payment policies.

In the fiscal year 2022 program, CMS proposed changes to account for COVID-19 impacting readmission rates and SNF admissions during the performance periods of fiscal year 2020.

These proposed changes would impact the SNF-VBP rate adjustment.

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These amounts were previously associated with the financial limitation amounts.

The Bipartisan Budget Act (BBA) of 2018 repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services.

The Bipartisan Budget Act of 2018 (BBA) repealed those caps while retaining and adding additional limitations to ensure appropriate therapy services.

This policy does not limit the amount of medically necessary Medicare Part B therapy services a beneficiary may receive.

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On November 1, 2019, CMS issued the calendar year 2020 Physician Fee Schedule (PFS) Final Rule establishing that therapy assistant claim modifiers will be required starting in calendar year 2020.

This rule is consistent with the requirement of the Balanced Budget Act (BBA) of 2018, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day.

This rule is consistent with the requirement of the BBA, which requires a 15% payment reduction when a physical therapist assistant (PTA) or occupational therapy assistant (OTA) provides services “in whole or in part” on a given day.

While the modifiers are required to be applied to the claims beginning in calendar year 2020, the 15% therapist assistant payment reduction will not be applied until calendar year 2022.

2 unchanged sentences

the number by which CMS determine all current procedural terminology code payments) by 10.2%.

These changes will effectively lower the reimbursement rate for therapy Medicare Part B specialty providers, specific to our industry by 9% for PT and OT and by 6% for SLP Codes.

These changes lowered the reimbursement rate for therapy Medicare Part B specialty providers, specific to our industry by 9% for PT and OT and by 6% for SLP Codes.

The Consolidated Appropriations Act of 2021 (CAA, also referred to as The Omnibus Appropriations Law) was signed into law on December 27, 2020.

4 unchanged sentences

CMS incorporated the first and second components of the CAA relief into the fiscal year 2021 PFS files which were published on January 5, 2021.

While the 2021 PFS Final Rule reduced the fiscal year 2021 factor to $32.4085 (calendar year conversion factor was $36.0896), subsequently, the CAA restored part of the reductions resulting in the final FY 2021 conversion factor of $34.8931.

This conversion factor rate does not include the 2% sequester which will also qualify as temporary relief for the first quarter of 2021.

On July 13, 2021, CMS issued the calendar year 2022 PFS proposed rule, which proposes to implement the portion of the BBA requiring the use of new modifiers to allow CMS to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole or in part by PT and OT assistants.

Other changes in the proposed rule, including reducing the conversion factor by 3.89%, will have the effect of lowering the reimbursement rate for Part B therapy services specific to our industry by approximately 2%, if implemented.

The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day.

4 unchanged sentences

Subsequently, the calendar year 2021 PFS Final Rule added certain of these PT and OT services to the list of Medicare telehealth services on a temporary basis through the end of the calendar year in which the COVID-19 public health emergency ends.

The PFS Final Rule also increased the frequency limitation on nursing facility telehealth visits from once every 30 days to once every fourteen days.

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

Pursuant to the Emergency Waivers, CMS allowed 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, which is currently in effect through July 20, 2021.

Under the calendar year 2022 PFS proposed rule, these telehealth services would continue to be included on the Medicare telehealth services list until the end of calendar year 2023.

The PFS Final Rule also increased the frequency limitation on nursing facility telehealth visits from once every 30 days to once every fourteen days.

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

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Governmental agencies are devoting increasing attention and resources to such anti-fraud efforts.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced Budget Act of 1997 (BBA) expanded the penalties for healthcare fraud.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced Budget Act of 1997 expanded the penalties for healthcare fraud.

Additionally, in connection with our involvement with federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the FCA, alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports.

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Americans with Disabilities Act

Our facilities must also comply with the American with Disabilities Act, or the ADA, and similar state and local laws to the extent that such facilities are "public accommodations" as defined in those laws.

Our facilities must also comply with the American with Disabilities Act (ADA), and similar state and local laws to the extent that such facilities are "public accommodations" as defined in those laws.

The obligation to comply with the ADA and other similar laws is an ongoing obligation, and we continue to assess our facilities and make appropriate modifications.

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

As vaccines continue to become more readily available and COVID-19 cases are declining in the communities we serve, we have begun to see a recovery in our census during the quarter ended March 31, 2021, compared to the fourth quarter of 2020.

We continue to experience healthy growth and achieve record revenue and net income.

Our total revenue for the quarter increased $37.6 million, or 6.4% while our diluted GAAP earning per share grew more than 17.8%, from $0.73 to $0.86, compared to the first quarter in 2020.

Revenue from our transitional and skilled services collectively increased by 7.7%.

As vaccines continue to become more readily available and COVID-19 cases are declining in the communities we serve, we began to see a recovery in our census during the first quarter of 2021 and our improved occupancy levels continued into the second quarter of 2021.

As a result, we continue to experience healthy growth and achieve record revenue and net income.

Our total revenue for the quarter increased $53.8 million, or 9.2% while our diluted GAAP earning per share grew by 19.2%, from $0.73 to $0.87, compared to the second quarter in 2020.

Revenue from our skilled services collectively increased by 10.1%.

See Recent Activities for further information.

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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 March 31,

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

2021 2020 2021 2020

Service revenue 99.4 % 99.4 % 99.4 % 99.4 %

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Net income attributable to The Ensign Group, Inc.

Three Months Ended March 31,

7.7 % 6.8 % 7.8 % 7.0 %

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

2021 2020 2021 2020

Segment Income (1)

(In thousands)

Transitional and skilled services $ 88,931 $ 80,591

Skilled services $ 90,010 $ 78,302 $ 178,941 $ 158,893

Real estate (2)

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• stock-based compensation expense;

• costs incurred related to real estate due diligence;

• costs incurred related to new systems implementation;

• gain on sale of assets;

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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,

2021 2020 2021 2020

Consolidated statements of income data:

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Gain on sale of assets — — (540) —

Costs incurred related to real estate due diligence 171 — 171 —

Acquisition related costs(b) 152 34 188 83

Costs incurred related to new systems implementation 76 — 76 —

Rent related to items above — 25 38 47

6 unchanged sentences

(b) Costs incurred to acquire operations which are not capitalizable.

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

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:

Three Months Ended March 31, 2021

Transitional and skilled services Real estate All Other Eliminations Consolidated

Three Months Ended June 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

Total revenue 612,882 16,031 21,727 (12,104) $ 638,536

1 unchanged sentence

Segment income (loss) 90,010 8,891 (34,560) — 64,341

Gain from sale of real estate (1)

Income before provision for income taxes $ 64,341

(1) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries and impairment charges from operations.

Three Months Ended March 31, 2020

Transitional and skilled services Real estate All Other Eliminations Consolidated

Three Months Ended June 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 556,677 $ 15,009 $ 24,402 $ (11,389) $ 584,699

2 unchanged sentences

Income before provision for income taxes $ 54,223

Our total revenue increased $37.6 million, or 6.4%, compared to the three months ended March 31, 2020.

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

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $19.1 million during the three months ended March 31, 2021, when compared to the same period in 2020.

In addition, we recorded $16.5 million of state relief revenue, which correlated directly to the additional COVID-19 related expenses incurred.

Our total revenue increased $53.8 million, or 9.2%, compared to the three months ended June 30, 2020.

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

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $27.9 million during the three months ended June 30, 2021, when compared to the same period in 2020.

In addition, we recorded $16.7 million of state relief revenue in the second quarter of 2021 compared to $12.4 million in the same period in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief 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, 2021 and 2020:

Three Months Ended March 31,

Skilled Services

The following table presents the skilled services revenue and key performance metrics by category during the three months ended June 30, 2021 and 2020:

Three Months Ended June 30,

2021 2020 Change % Change

1 unchanged sentence

(Dollars in thousands)

Transitional and skilled revenue (4)

$ 601,036 $ 558,304 $ 42,732 7.7 %

Skilled services revenue $ 612,882 $ 556,677 $ 56,205 10.1 %

Number of facilities at period end 209 195 14 7.2 %

1 unchanged sentence

Actual patient days 1,599,707 1,530,286 69,421 4.5 %

1,509,600 1,643,390 (133,790) (8.1) %

Occupancy percentage — Operational beds 72.7 % 73.4 % (0.7) %

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Skilled mix by nursing revenue 51.4 % 51.4 % — %

Three Months Ended March 31,

Three Months Ended June 30,

2021 2020 Change % Change

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(Dollars in thousands)

Transitional and skilled revenue (4)

$ 491,790 $ 476,896 $ 14,894 3.1 %

Skilled services revenue $ 492,510 $ 468,023 $ 24,487 5.2 %

Number of facilities at period end 165 165 — — %

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Actual patient days 1,264,220 1,262,224 1,996 0.2 %

1,219,693 1,371,803 (152,110) (11.1) %

Occupancy percentage — Operational beds 73.9 % 73.9 % — %

1 unchanged sentence

Skilled mix by nursing revenue 53.2 % 52.8 % 0.4 %

Three Months Ended March 31,

Three Months Ended June 30,

2021 2020 Change % Change

1 unchanged sentence

(Dollars in thousands)

Transitional and skilled revenue (4)

$ 89,025 $ 79,027 $ 9,998 12.7 %

Skilled services revenue $ 88,617 $ 83,356 $ 5,261 6.3 %

Number of facilities at period end 27 27 — — %

1 unchanged sentence

Actual patient days 243,576 250,988 (7,412) (3.0) %

235,668 263,341 (27,673) (10.5) %

Occupancy percentage — Operational beds 68.4 % 70.9 % (2.5) %

1 unchanged sentence

Skilled mix by nursing revenue 46.3 % 44.6 % 1.7 %

Three Months Ended March 31,

Three Months Ended June 30,

2021 2020 Change % Change

1 unchanged sentence

(Dollars in thousands)

Transitional and skilled revenue (4)

$ 20,221 $ 2,381 $ 17,840 NM

Skilled services revenue $ 31,755 $ 5,298 $ 26,457 NM

Number of facilities at period end 17 3 14 NM

Number of campuses at period end* 1 — 1 NM

Actual patient days (4)

54,239 8,246 45,993 NM

Actual patient days 91,911 17,074 74,837 NM

Occupancy percentage — Operational beds 68.4 % 76.0 % NM

3 unchanged sentences

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

In the second quarter of 2021, we converted a campus into a skilled nursing facility.

(1) Same Facility results represent all facilities purchased prior to January 1, 2018.

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.

(4) The first quarter of 2021 included 90 days compared to 91 days for the same period in 2020 as a result of the leap year.

Transitional and skilled services revenue increased $42.7 million, or 7.7%, compared to the three months ended March 31, 2020.

Of the $42.7 million increase, Medicare revenue increased $34.7 million , or 22.3%, Medicaid custodial revenue increased $6.8 million, or 3.1%, Medicaid skilled revenue increased $4.0 million, or 11.1%, and managed care revenue increased by $6.3 million, or 6.2%.

Private and other revenue decreased $9.1 million, or 20.7%.

The increase in revenue was primarily driven by strong performance across our transitional and skilled services operations.

Skilled services revenue increased $56.2 million, or 10.1%, compared to the three months ended June 30, 2020.

Of the $56.2 million increase, Medicaid custodial revenue increased $24.7 million, or 11.1%, Medicaid skilled revenue increased $6.4 million, or 17.5%, and managed care revenue increased by $30.6 million, or 37.2%.

This is partially offset by the decreases in Medicare revenue of $5.0 million , or 2.9%, and private and other revenue of $0.5 million, or 1.3%.

The increase in revenue was primarily driven by strong performance across our skilled services operations.

The negative impact of COVID-19 on our census started in March 2020 and continues in 2021.

Our occupancy decreased by 8.3% compared to the same period in the prior year.

The decline is partially offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $14.9 million, or 3.1% due to greater patient acuity and skilled days, even while occupancy and census declined by 8.2% and 11.1%, respectively, due to COVID-19.

The decline in our occupancy is mainly in our non-skilled patient days, which is being primarily offset by a shift to higher Medicare census, which also drove up skilled mix days and revenue.

Our skilled mix days increased by 4.4% coupled with an increase from our skilled revenue daily rate of 6.1%, which included the impact of 2% sequestration reversal and 2.2% net market basket Medicare rates.

This resulted in an increase in skilled mix revenue of $18.0 million .

We continued to experience decreased Medicaid custodial and private patient census days related to COVID-19.

Our Medicaid census decreased by 15.0%, but was offset by an increase in our Medicaid daily rate of 8.6% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

In addition, included in total revenue for Same Facilities is $13.8 million of Medicaid revenue related to state relief funding.

Revenue generated by our Transitioning Facilities increased $10.0 million , or 12.7% , primarily due to increases in our daily rate and skilled mix days compared to the three months ended March 31, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we experienced and continued to see a shift toward higher acuity patients, as demonstrated by increased census in all skilled payors .

As a result, skilled mix revenue increased by $12.6 million, or 43.7%, compared to the three months ended March 31, 2020.

Our skilled days increased by 32.3%, resulting in an increase in our skilled mix revenue daily rate of 8.6% .

Transitional and skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $17.8 million compared to the three months ended March 31, 2020 .

We acquired seven operations between April 1, 2020 and March 31, 2021 across three states.

Our consolidated occupancy decreased by 0.7%, which includes operations acquired at lower occupancy compared to the same period in the prior year.

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

Revenue in our Same Facilities increased $24.5 million, or 5.2% due to higher patient acuity, skilled days and total patient days.

Our skilled days increased by 4.7%, which resulted in an increase in skilled mix revenue of $9.7 million .

Managed care skilled days increased by 33.9% coupled with an increase from our revenue daily rate of 1.8%, resulting in an increase in Managed Care revenue of $23.4 million.

Medicaid custodial and private patient census days decreased due to COVID-19.

This was offset by an increase in our Medicaid daily rate of 5.2% 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 $5.3 million , or 6.3% , primarily due to an increase in our skilled mix days compared to the three months ended June 30, 2020, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

The acuity gains were partially offset by the decline in occupancy of non-skilled patient days.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $26.5 million compared to the three months ended June 30, 2020 .

We acquired fifteen operations between July 1, 2020 and June 30, 2021 across 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.

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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

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(1) These rates exclude additional FMAP we recognized and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 4.3% and 8.0%, respectively, compared to the three months ended March 31, 2020.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.2% and 5.0%, respectively, compared to the three months ended June 30, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020 coupled with our continued shift towards higher acuity patients.

Included in revenue for the three months ended March 31, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and will go through March 31, 2021.

On April 14, 2021, through passage of An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes, Congress extended the suspension of the 2.0% payment adjustment through December 31, 2021.

Included in revenue for the three months ended June 30, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Our average Medicaid rates increased 5.4% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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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

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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

10 unchanged sentences

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):

Three Months Ended March 31, Change

The following table sets forth total cost of services for our Skilled services segment for the periods indicated (dollars in thousands):

Three Months Ended June 30, Change

2021 2020 $ %

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Revenue percentage 77.0 % 77.4 % (0.4) %

Cost of services related to our transitional and skilled services segment increased $32.4 million, or 7.5%, primarily due to additional costs related to new acquisitions, which accounted for $13.4 million of the increase to cost of services.

Cost of services related to our Skilled services segment increased $41.2 million, or 9.6%, primarily due to additional costs related to new acquisitions, which accounted for $20.7 million of the increase to cost of services.

Cost of services as a percentage of revenue decreased to 77.0% from 77.4%, a decrease of 0.4%.

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.

We experienced a decrease in cost associated with operational improvements.

Real Estate Segment

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2021 2020 $ %

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Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $0.9 million, or 6.3%, to $15.9 million, compared to the three months ended March 31, 2020.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $1.0 million, or 6.8%, to $16.0 million, compared to the three months ended June 30, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $2.7 million, or 24.7% to $13.5 million, compared to the three months ended March 31, 2020.

Our FFO increased $1.3 million, or 10.5% to $13.7 million, compared to the three months ended June 30, 2020.

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 decreased by $5.4 million, or 19.6%, to $22.2 million, compared to the three months ended March 31, 2020.

Our other revenue decreased by $2.7 million, or 11.0%, to $21.7 million, compared to the three months ended June 30, 2020.

Other revenue for 2021 includes senior living revenue of $12.0 million and revenue from other ancillary services of $9.7 million.

2 unchanged sentences

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.3%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense — G eneral and administrative expense increased $2.0 million or 6.3%, to $34.3 million.

Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.4%, primarily due the growth in revenue outpacing the increase in rent expense.

General and administrative expense — General and administrative expense increased $5.5 million or 17.4%, to $36.9 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth.

In addition, general and administrative expense as a percentage of revenue remained consistent at 5.5%.

Depreciation and amortization — Depreciation and amortization expense decreased $0.1 million, or 0.4%, to $13.7 million.

General and administrative expense as a percentage of revenue increased by 0.4% to 5.8%.

Depreciation and amortization — Depreciation and amortization expense increased $0.2 million, or 1.4%, to $13.8 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 2.2%, as a percentage of revenue.

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Other expense primarily includes interest expense related to debt.

During the quarter, we were able to utilize the funds available from the deferral of social security taxes to reduce the amount outstanding on our revolving credit facility.

The deferral of taxes are due to be repaid in part by the end of fiscal year 2021, with the remaining half due at the end of fiscal year 2022.

Provision for income taxes — Our effective tax rate was 20.6% for the three months ended March 31, 2021, compared to 23.5% for the same period in 2020.

The lower effective tax rate reflects an increase in additional tax benefit from share-based payment awards.

The lower effective tax rate was partially offset by increases in certain non-taxable and non-deductible items.

Provision for income taxes — Our effective tax rate was 21.4% for the three months ended June 30, 2021, compared to 25.0% for the same period in 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

The 2021 reporting period had a larger excess tax benefit from stock-based compensation compared to 2020.

See Note 14, Income Taxes , in the Notes to the Condensed Consolidated Financial Statements for further discussion.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

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:

Six Months Ended June 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 1,213,918 $ 31,910 $ 43,967 $ (24,006) $ 1,265,789

Total expenses, including other expense, net 1,034,977 14,198 113,933 (24,006) 1,139,102

Segment income (loss) 178,941 17,712 (69,966) — 126,687

Gain from sale of real estate (1)

Income before provision for income taxes $ 127,127

(1) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries and impairment charges from operations.

Six Months Ended June 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

Total revenue $ 1,114,981 $ 29,953 $ 52,049 $ (22,671) $ 1,174,312

Total expenses, including other expense, net 956,088 15,834 117,012 (22,671) 1,066,263

Segment income (loss) 158,893 14,119 (64,963) — 108,049

Income before provision for income taxes $ 108,049

Our total revenue increased $91.5 million, or 7.8%, compared to the six months ended June 30, 2020.

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

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $46.9 million during the six months ended June 30, 2021, when compared to the same period in 2020.

In addition, we recorded $33.2 million of state relief revenue during the first half of 2021 compared to $13.1 million in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

2021 2020 Change % Change

Total Facility Results:

(Dollars in thousands)

Skilled services revenue $ 1,213,918 1,114,981 $ 98,937 8.9 %

Number of facilities at period end 209 195 14 7.2 %

Number of campuses at period end* 22 21 1 4.8 %

Actual patient days 3,109,307 3,173,676 (64,369) (2.0) %

Occupancy percentage — Operational beds 71.9 % 76.4 % (4.5) %

Skilled mix by nursing days 32.6 % 29.5 % 3.1 %

Skilled mix by nursing revenue 53.5 % 50.8 % 2.7 %

Six Months Ended June 30,

2021 2020 Change % Change

Same Facility Results(1):

(Dollars in thousands)

Skilled services revenue $ 984,300 $ 944,919 $ 39,381 4.2 %

Number of facilities at period end 165 165 — — %

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

Actual patient days 2,483,913 2,634,027 (150,114) (5.7) %

Occupancy percentage — Operational beds 73.1 % 77.1 % (4.0) %

Skilled mix by nursing days 33.9 % 31.0 % 2.9 %

Skilled mix by nursing revenue 54.9 % 52.5 % 2.4 %

Six Months Ended June 30,

2021 2020 Change % Change

Transitioning Facility Results(2):

(Dollars in thousands)

Skilled services revenue $ 177,642 $ 162,383 $ 15,259 9.4 %

Number of facilities at period end 27 27 — — %

Number of campuses at period end* 6 6 — — %

Actual patient days 479,244 514,329 (35,085) (6.8) %

Occupancy percentage — Operational beds 67.6 % 72.8 % (5.2) %

Skilled mix by nursing days 28.7 % 22.3 % 6.4 %

Skilled mix by nursing revenue 48.8 % 41.7 % 7.1 %

Six Months Ended June 30,

2021 2020 Change % Change

Recently Acquired Facility Results(3):

(Dollars in thousands)

Skilled services revenue $ 51,976 $ 7,679 $ 44,297 NM

Number of facilities at period end 17 3 14 NM

Number of campuses at period end* 1 — 1 NM

Actual patient days 146,150 25,320 120,830 NM

Occupancy percentage — Operational beds 67.8 % 75.2 % NM

Skilled mix by nursing days 22.9 % 16.6 % NM

Skilled mix by nursing revenue 41.9 % 30.5 % 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.

In the first half of 2021, we converted two campuses into two skilled nursing facilities.

(1) Same Facility results represent all facilities purchased prior to January 1, 2018.

(2) Transitioning Facility results represent all facilities purchased from January 1, 2018 to December 31, 2019.

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.

S killed services revenue increased $98.9 million, or 8.9%, compared to the six months ended June 30, 2020.

Of the $98.9 million increase, Managed care revenue increased $37.0 million, or 20.1%, Medicare revenue increased $29.7 million, or 9.0%, Medicaid custodial revenue increased $31.5 million , or 7.1% and Medicaid skilled revenue increased $10.3 million , or 14.3%.

This is partially offset by the decrease in private and other revenue of $9.6 million , or 11.4%.

The increase in revenue was primarily driven by strong performance across our skilled services operations.

The negative impact of COVID-19 on our census started in March 2020 and continues in 2021.

Our consolidated occupancy decreased by 4.5%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

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

Revenue in our Same Facilities increased $39.4 million, or 4.2% due to greater patient acuity and skilled days, even while occupancy declined by 4.0%, due to COVID-19.

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

Total revenue for Same Facilities included $26.8 million and $11.0 million of Medicaid revenue related to state relief funding for the six months ended June 30, 2021 and 2020, respectively.

The revenue increase was driven by higher skilled mix from managed care coupled with higher Medicare revenue, all of which was partially offset by Medicaid and private revenue decrease.

Revenue generated by our Transitioning Facilities increased $15.3 million, or 9.4%, primarily due to increases in our daily rate and skilled mix days compared to the six months ended June 30, 2020 , 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 19.8% , coupled with an increase from our skilled mix revenue daily rate of 3.6%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $44.3 million compared to the six months ended June 30, 2020.

We acquired fifteen operations between July 1, 2020 and June 30, 2021 across five states.

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) :

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2021 2020 2021 2020 2021 2020 2021 2020

Skilled Nursing Average Daily

Revenue Rates:

Medicare $ 689.79 $ 664.78 $ 675.46 $ 634.74 $ 702.48 $ 551.59 $ 688.12 $ 659.51

Managed care 505.52 485.29 480.65 456.52 436.73 401.35 500.60 481.46

Other skilled 544.03 530.55 410.61 338.52 512.75 — 531.74 522.09

Total skilled revenue 589.97 573.61 568.53 549.01 592.65 517.00 587.15 570.34

Medicaid 250.01 233.78 240.10 221.07 241.82 235.53 247.95 231.54

Private and other payors 238.07 233.28 238.89 217.76 253.90 232.05 238.98 230.38

Total skilled nursing revenue $ 364.03 $ 339.15 $ 334.18 $ 293.79 $ 323.27 $ 281.70 $ 357.51 $ 331.33

(1) These rates exclude additional FMAP we recognized and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.8% and 6.4%, respectively, compared to the six months ended June 30, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020 coupled with our continued shift towards higher acuity patients.

Included in revenue for the six months ended June 30, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Our average Medicaid rates increased 7.1% 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 state relief revenue we recorded.

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:

Six Months Ended June 30,

Same Facility Transitioning Acquisitions Total

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Revenue:

Medicare 27.2 % 27.3 % 28.2 % 26.8 % 26.0 % 25.1 % 27.3 % 27.2 %

Managed care 19.2 16.9 17.3 13.5 7.8 5.4 18.5 16.3

Other skilled 8.5 8.3 3.3 1.4 8.1 — 7.7 7.3

Skilled mix 54.9 52.5 48.8 41.7 41.9 30.5 53.5 50.8

Private and other payors 6.4 7.5 7.4 9.6 8.0 15.7 6.5 7.9

Medicaid 38.7 40.0 43.8 48.7 50.1 53.8 40.0 41.3

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

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Days:

Medicare 14.3 % 13.9 % 13.9 % 12.4 % 12.0 % 12.8 % 14.2 % 13.7 %

Managed care 13.9 11.8 12.0 8.7 5.8 3.8 13.2 11.2

Other skilled 5.7 5.3 2.8 1.2 5.1 — 5.2 4.6

Skilled mix 33.9 31.0 28.7 22.3 22.9 16.6 32.6 29.5

Private and other payors 9.7 11.0 10.4 13.0 10.2 19.1 9.8 11.4

Medicaid 56.4 58.0 60.9 64.7 66.9 64.3 57.6 59.1

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 skilled services segment for the periods indicated (dollars in thousands):

Six Months Ended June 30, Change

2021 2020 $ %

Cost of service $ 935,177 $ 861,587 $ 73,590 8.5 %

Revenue percentage 77.0 % 77.3 % (0.3) %

Cost of services related to our skilled services segment increased $73.6 million, or 8.5%, due primarily to additional costs at new acquisitions, which accounted for $34.1 million of the increase.

Cost of services as a percentage of revenue decreased to 77.0% from 77.3%, a decrease of 0.3%.

We experienced a decrease in cost associated with operational improvements.

Real Estate Segment

Six Months Ended June 30, Change

2021 2020 $ %

Rental revenue generated from third-party tenants $ 7,904 $ 7,282 $ 622 8.5 %

Rental revenue generated from Ensign affiliated operations 24,006 22,671 1,335 5.9

Total rental revenue $ 31,910 $ 29,953 $ 1,957 6.5 %

Segment income 17,712 14,119 3,593 25.4

Depreciation and amortization 9,477 9,102 375 4.1

FFO $ 27,189 $ 23,221 $ 3,968 17.1 %

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.0 million, or 6.5% to $31.9 million, compared to the six months ended June 30, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $4.0 million, or 17.1% to $27.2 million, compared to the six months ended June 30, 2020.

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 decreased by $8.1 million, or 15.5% to $44.0 million, compared to the six months ended June 30, 2020.

Other revenue for 2021 includes senior living revenue of $23.8 million and revenue from other ancillary services of $20.2 million.

The decrease in other revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary services.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.1% to 5.4%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $7.5 million or 11.8%, to $71.2 million.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth.

General and administrative expense increased by 0.1% to 5.5%, as a percentage of revenue.

Depreciation and amortization .

Depreciation and amortization expense increased $0.1 million, or 0.5%, to $27.5 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 2.2%, as a percentage of revenue.

Other expense, net.

Other expense, net as a percentage of revenue decreased by 0.1%, to 0.2%.

Other expense primarily includes interest expense related to borrowings under our Credit Facility.

As there was no outstanding debt under the Credit Facility, interest expense decreased.

Provision for income taxes.

Our effective tax rate was 21.0% for the six months ended June 30, 2021, compared to 24.2% for the same period in 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

The 2021 reporting period had a larger excess tax benefit from stock-based compensation compared to 2020.

See Note 14, Income Taxes , in the Notes to the Condensed 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 March 31, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

Our liquidity as of June 30, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

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.

Total capital expenditures for property and equipment were $15.3 million and $15.8 million for the three months ended March 31, 2021 and 2020, respectively.

Total capital expenditures for property and equipment were $33.8 million and $27.1 million for the six months ended June 30, 2021 and 2020, respectively.

We currently have approximately $65.0 million budgeted for renovation projects for 2021.

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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, 2021 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of June 30, 2021 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of March 31, 2021, we held debt security investments of approximately $49.0 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, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

In addition, as of June 30, 2021, 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, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

As mentioned above, our primary sources of cash is 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, 2021, 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, 2021, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

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

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by/(used in):

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

The $7.2 million increase in cash provided by operating activities for the three months ended March 31, 2021 compared to the same period in 2020, w as primarily due to higher net income and changes in working capital.

Changes in working capital was driven by strong accounts receivable collections and timing of accounts payable , which is partially offset by the timing of accrued wages and related liabilities and prepaid expenses and other assets.

The $65.7 million decrease in cash provided by operating activities for the six months ended June 30, 2021 compared to the same period in 2020, w as primarily due to changes in working capital partially offset by higher net income.

Changes in working capital was driven by timing of accounts receivable collections, prepayment of income taxes, timing of prepaid expenses and other assets and accrued wages and related liabilities, which are partially offset by the timing of accounts payable payments.

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for acquisitions.

The $3.3 million decrease in cash used in investing activities for the three months ended March 31, 2021 compared to the same period in 2020, was primarily due to an increase in cash from insurance proceeds of $6.3 million which was partially offset by an increase in purchases of investments, net of maturities, of $3.8 million.

The $12.5 million increase in cash used in investing activities for the six months ended June 30, 2021 compared to the same period in 2020, was primarily due to an increase in cash used for acquisitions of $11.2 million, coupled with an increase in capital expenditures of $6.7 million, which is partially offset by an increase in cash from insurance proceeds of $6.7 million.

Financing Activities

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

The decrease in cash provided by financing activities for the three months ended March 31, 2021 compared to the same period in 2020 of $95.6 million was primarily due to the repayment of the Medicare Accelerated and Advance Payment Program funds of $102.0 million.

The $102.4 million increase in cash used in financing activities for the six months ended June 30, 2021 compared to the same period in 2020, was primarily due to the repayment of the Medicare Accelerated and Advance Payment Program funds of $102.0 million.

Credit Facility with a Lending Consortium Arranged by Truist

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Mortgage Loans and Promissory Notes

As of March 31, 2021, 19 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $113.3 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.

As of June 30, 2021, 19 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $112.9 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 2.8% to 4.2%, including fixed interest rates range of 2.6% to 3.3% per annum.

Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment.

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

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

The note bears a fixed interest rate of 5.3% per annum and the term of the note is 12 years.

The note 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.

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

The notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the notes are 10 months and twelve years, 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

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Additionally, four of the 93 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million to reflect the new lease obligation.

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.

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Most of these leases contain renewal options, certain of which involve rent increases.

Forty of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under seven separate master lease arrangements.

Forty-three of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under eight 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.

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

We are currently evaluating the impact of ASU.

2020-04 on our financial position, results of operations and liquidity.

We are currently evaluating the impact of ASU 2020-04 on our financial position, results of operations and liquidity.

In November 2020, the SEC issued final rules 33-10890 and 34-90459 “ Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information ,” which modernizes and simplifies certain disclosure requirements of Regulation S-K.

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We are currently evaluating the impact of the disclosure changes in our annual and quarterly reports.

In July 2021, the FASB issued ASU 2021-05 “ Lessors—Certain Leases with Variable Lease Payments (Topic 842), ” which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate.

This guidance is effective for annual periods beginning after December 15, 2021, which will be our fiscal year 2022, with early adoption permitted.

We have not yet determined the effect of the ASU on our results of operations, financial condition or cash flows.

Off-Balance Sheet Arrangements

As of March 31, 2021, we had approximately $7.6 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

As of June 30, 2021, we had approximately $7.6 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