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Item 7. Management’s Discussion and Analysis

2022-02-09 compared with 2021-02-03 · 340 added, 464 removed, 309 unchanged (72% of the section changed)

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Risk Factors and Cautionary Note Regarding Forward-Looking Statements.

For discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this 2021 Form 10-K, refer to “Item 7.

– Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K for the year ended December 31, 2020, that was filed with the Securities and Exchange Commission on February 3, 2021.

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.

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Of the 245 facilities, we operated 176 facilities under long-term lease arrangements and have options to purchase 11 of those 176 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.

Our real estate portfolio includes 100 owned real estate properties, which included 69 facilities operated and managed by us, 32 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019 (Spin-Off), and the Service Center location.

Of the 32 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

Ensign is a holding company with no direct operating assets, employees or revenues.

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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.

We also have a wholly owned captive insurance subsidiary (or the Captive Insurance) 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 and our captive real estate trust owns and operates our real estate portfolio.

Our captive real estate investment trust (Standard Bearer REIT) owns and manages our real estate business.

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, 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.

Recent Activities

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.

Captive Real Estate Investment Trust — On January 1, 2022, we completed our plan to form Standard Bearer REIT.

Standard Bearer REIT is a holding company with subsidiaries that own most of our real estate portfolio.

We expect the REIT structure will allow us to better demonstrate the growing value of our owned real estate and provides us with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties.

We believe this structure will give us new pathways to growth with transactions we would not have considered in the past.

Standard Bearer REIT intends to qualify and elects to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ending December 31, 2022.

The real estate portfolio in Standard Bearer REIT consists of selected 93 of our 100 owned real estate properties.

Of the 93 owned real estate properties in Standard Bearer REIT, 65 facilities are operated by Ensign operating subsidiaries and 30 are leased to and operated by Pennant.

Of the 30 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that we own and operate.

The fair value of Standard Bearer REIT's real estate portfolio is approximately $1.0 billion.

The fair value was determined by a third party independent valuation specialist and incorporated each property's rental income, capitalization rate, rental yield rate and discount rate as appropriate.

On January 1, 2022, as part of the formation of Standard Bearer REIT, certain of our operating subsidiaries and the 65 Standard Bearer REIT subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer REIT Master Leases).

The lease period ranges from 15 to 19 years with three five-year renewal option beyond the initial term, on the same terms and conditions.

The rent structure under the Standard Bearer REIT Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%.

In addition to rent, the operating subsidiaries are required to pay the following:

(1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor);

(2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties;

(3) all insurance required in connection with the leased properties and the business conducted on the leased properties;

(4) all facility maintenance and repair costs;

and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

Total annual rental income under the Standard Bearer REIT Master Lease is approximately $54.0 million.

In addition, as we expand our real estate portfolio through our acquisition strategy, we anticipate that the acquired real estate will be included in Standard Bearer REIT.

Standard Bearer REIT has no employees.

Personnel and service provided to Standard Bearer REIT by the Service Center are pursuant to the management agreement between Standard Bearer REIT and the Service Center.

The management agreement provides for a base management fee and an incentive management fee, payable in cash, among other terms.

The base management fee for each applicable period is equal to 5% of the total revenue of Standard Bearer REIT.

The incentive management fee is equal to 5% of funds from operations (FFO) and is capped at 1% of total revenue.

In addition, operating expenses incurred by the Service Center on Standard Bearer REIT's behalf, which includes the cost of legal, tax, consulting, accounting and other similar services rendered by the Service Center, its advisers or other third parties, are reimbursed by Standard Bearer REIT.

Standard Bearer REIT will obtain its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and a credit revolver between the Ensign Group, Inc., the real estate properties and Standard Bearer REIT and will fund acquisitions and working capital needs.

The interest rate under the credit revolver is 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.

The intercompany mortgage loan amount is $93.0 million.

is currently no outstanding debt under the intercompany credit revolver.

In addition, as the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes are entered into by our real estate properties, these debts in the aggregate amount of $160.0 million are included in Standard Bearer REIT.

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive steps designed to protect the health and safety of our residents and employees and to maintain business continuity.

As the vaccines became accessible in all 50 states, we began to see a significant decline in COVID-19 cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff.

While we saw declining COVID-19 cases during the summer of 2021 as a result of vaccination efforts, introductions of variants have caused spikes in the number of COVID cases.

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.

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.

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.

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.

• 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.

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.

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.

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.

During the year, combined Same Facilities and Transitioning Facilities occupancy declined by 0.4% and skilled mix increased by 0.6% compared to 2020.

In 2020, our occupancy, which was at its highest point prior to the pandemic, started to decline in mid-February and continued to decrease to its lowest point in December 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 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 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.

More specifically as a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facilities occupancy rebounded by 3.1% and 4.8%, respectively, during the second quarter of 2021 compared to the fourth quarter of 2020.

As the Delta variant and the recent Omicron variant become the dominant form of COVID-19 in the U.S.

and elsewhere, many states and areas in which our communities are located are experiencing new COVID-19 caseloads.

The rise of COVID-19 cases in the third quarter of 2021 and continuing through early 2022 has slowed down our census recoveries.

Our monthly occupancy for Same Facilities and Transitioning Facilities grew 85 basis points from July 2021 to December 2021 after growth had accelerated sequentially by 337 basis points from December 2020 to June 2021.

Occupancy at the end of 2021 has recovered 53.8% from the lowest point in 2020.

W e expect sequential monthly occupancy to again grow starting in the first quarter of 2022, but at a slightly more moderated rate.

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 year ended December 31, 2021, we received approximately $11.6 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.

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.

On September 10, 2021, HHS made an additional round of $17.0 billion in Provider Relief Fund available to support healthcare-related expenses or lost revenue attributable to COVID-19.

We have not received any funding related to the additional round of Provider Relief Fund distributions.

During the year ended December 31, 2021 and 2020, we received state relief funding of $70.5 million and $51.9 million and recognized $75.2 million and $45.4 million, respectively, as revenue.

Our unapplied state funding as of December 31, 2021 and 2020 was $1.8 million and $6.5 million, respectively.

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

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.

We recorded $48.3 million of deferred payments of social security taxes as a liability in 2020, of which $24.2 million was paid out in the fourth quarter of 2021 and the remaining liabilities will be paid in the fourth quarter of 2022.

Until the COVID-19 pandemic has been resolved as a public health crisis, it has the potential to cause further and more severe disruption of the global and national economies.

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 and costs of services and supplies 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.

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.

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.

HUD Mortgage Loans — During the year ended December 31, 2021, four of our subsidiaries entered into HUD mortgage loans in the aggregate amount of approximately $45.0 million.

The mortgage loans are insured with HUD, which subjects these subsidiaries to HUD oversight and periodic inspections.

Loan proceeds were used to fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

Common Stock Repurchase Program — On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

During the year ended December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $10.1 million.

Subsequent to December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on February 10, 2022.

Key Performance Indicators

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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.

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.

• 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 — 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.

Like most skilled nursing providers, we measure both patient days and revenue by payor.

• 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 state relief funding, which includes 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.

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Year Ended December 31,

2020 2019 2018

Days 31.7 % 31.7 %

Revenue 52.3 % 53.1 %

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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Year Ended December 31,

Occupancy for transitional and skilled services:

2020 2019 2018

Occupancy for skilled services:

Operational beds at end of period 25,032 23,172

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Occupancy percentage (based on operational beds) 72.8 % 73.5 %

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 have two reportable segments:

(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.

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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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

Skilled Services

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

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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.

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.

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.

As of December 31, 2021, our real estate portfolio comprised of 100 real estate properties.

Of these properties, 69 are leased to affiliated skilled nursing facilities wholly owned and managed by us, 32 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.

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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.

Expenses related to leasing our operations other than rent are included in cost of services.

General and Administrative Expense.

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Furniture and equipment 3 to 10 years

Critical Accounting Policies

Critical Accounting Estimates

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.

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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;

• Income taxes - the estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant

judgments and estimates on the part of management.

For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, “ Summary of Significant Accounting Policies ” of the Notes to Consolidated Financial Statements.

Variable consideration within revenue recognition — Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price.

We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration.

We use the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

If actual amounts of consideration ultimately received differ from our estimates, we adjust these estimates, which would affect net service revenue in the period such variances become known.

Self-insurance for general and professional liability — The self-insured retention and deductible limits for general and professional liability for all states are self-insured through our wholly owned captive insurance subsidiary (the Captive Insurance), the related assets and liabilities of which are included in the accompanying consolidated balance sheets.

Our general and professional liability as of December 31, 2021 and 2020 was $69.7 million and $60.9 million, respectively.

Our policy is to accrue amounts equal to the actuarially estimated 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.

We develop information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluate the estimates for claim loss exposure on a quarterly basis.

We use actuarial valuations to estimate the liability based on historical experience and industry information.

Results of Operations

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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.

As vaccines became available in the communities we serve, we began to see a recovery in our census during the first quarter of 2021, which has improved throughout 2021.

Despite the emergence of COVID-19 variants in late 2021, which has led to spikes in COVID-19 caseloads and slowed down our census recoveries starting in the beginning of the third quarter of 2021, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the year ended December 31, 2021 continued to be impacted by COVID-19.

The Emergency Waivers 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, continued into 2021 and remain in effect at the beginning of 2022.

In addition, we continued to receive state relief funding in selected states, which has been designed to enhance reimbursement to provide additional funding to cover COVID-19 related expenses.

For the year ended December 31, 2021, we recorded state relief revenue of $75.2 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.

Since 2016, our total revenue increased $1.2 billion, or 82.8%, representing a 12.8% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.86 from 2016 to $3.42, representing a 35.2% 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%.

Revenue from our skilled services collectively increased by 10.3%.

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.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and cash generated from strong fiscal year performance.

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

Year Ended December 31,

2020 2019 2018

Service revenue 99.4 % 99.4 %

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Cost of services 76.9 77.6

Return of unclaimed class action settlement — — (0.1)

Rent—cost of services 5.3 5.4

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Interest expense (0.3) (0.4)

Interest and other income 0.2 0.1 0.1

Other income 0.2 0.2

Other expense, net (0.1) (0.2)

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Provision for income taxes 2.3 2.0

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 7.5 7.1

net income attributable to noncontrolling interests in continuing operations — — —

Net income attributable to noncontrolling interests in discontinued operations — — —

net income attributable to noncontrolling interests 0.1 —

Net income attributable to The Ensign Group, Inc.

Year Ended December 31,

Segment Income (1)

(In thousands)

Skilled services $ 373,603 $ 327,812

Real estate (2)

$ 35,986 $ 31,323

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:

Non-GAAP Financial Measures:

Performance Metrics

EBITDA $ 313,377 $ 276,840

Adjusted EBITDA $ 336,572 $ 292,751

FFO for real estate segment $ 55,712 $ 49,541

Valuation Metric

Adjusted EBITDAR $ 475,905

(1) Segment income represents operating results of the reportable segments excluding gain and loss on sale of assets, impairment charges and provision for income taxes.

Segment income is reconciled to the Consolidated Statement of Income in Note 7, Business Segments in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

(2) Real estate segment income includes rental revenue from Ensign affiliated tenants and related expenses.

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

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Securities Exchange Act of 1934, as amended (the Exchange Act), define and prescribe the conditions for use of certain non-GAAP financial information.

These Non-GAAP Financial Measures are used in addition to and in conjunction with results presented in accordance with GAAP.

These Non-GAAP Financial Measures should not be relied upon to the exclusion of GAAP financial measures.

These Non-GAAP Financial Measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

We believe the presentation of certain Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because:

• they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired;

• they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

We use the Non-GAAP Financial Measures:

• as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;

• to allocate resources to enhance the financial performance of our business;

• to assess the value of a potential acquisition;

• to assess the value of a transformed operation's performance;

• to evaluate the effectiveness of our operational strategies;

• to compare our operating performance to that of our competitors.

We use certain Non-GAAP Financial Measures to compare the operating performance of each operation.

These measures are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the amount of debt that we have incurred, whether an operation is owned or leased, the date of acquisition of a facility or business, and the tax law of the state in which a business unit operates.

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Adjusted EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, the Non-GAAP Financial Measures have no standardized meaning defined by GAAP.

Therefore, certain of our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP.

Some of these limitations are:

• they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;

• they do not reflect changes in, or cash requirements for, our working capital needs;

• they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect rent expenses, which are necessary to operate our leased operations, in the case of Adjusted EBITDAR;

• they do not reflect any income tax payments we may be required to make;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and do not reflect any cash requirements for such replacements;

• other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.

We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure.

Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures with other companies’ Non-GAAP financial measures having the same or similar names.

These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP.

We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our consolidated financial statements and related notes included elsewhere in this document.

We use the following Non-GAAP financial measures that we believe are useful to investors as key valuation and operating performance measures:

PERFORMANCE MEASURES:

We believe EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization.

Adjusted EBITDA

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA.

We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP net income attributable to The Ensign Group, Inc., is beneficial to an investor’s complete understanding of our operating performance.

Adjusted EBITDA is EBITDA adjusted for non-core business items, which for the reported periods includes, to the extent applicable:

• stock-based compensation expense;

• costs incurred related to real estate due diligence;

• business interruption gain;

• results related to operations not at full capacity;

• gain on sale of assets;

• acquisition related costs;

• costs incurred related to new systems implementation.

Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance of our real estate segment.

Historical cost accounting for real estate assets in accordance with U.S.

GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation.

However, since real estate values have historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient.

In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income.

We define (in accordance with the definition used by NAREIT) FFO to consist of real estate segment income, excluding depreciation and amortization related to real estate, gains or losses from sales of real estate, insurance recoveries related to real estate and impairment of depreciable real estate assets.

VALUATION MEASURE:

Adjusted EBITDAR

We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions.

It is also a commonly used measure by our management, research analysts and investors, to compare the enterprise value of different companies in the healthcare industry, without regard to differences in capital structures and leasing arrangements.

Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense.

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR.

We calculate Adjusted EBITDAR by excluding rent-cost of services from Adjusted EBITDA.

We believe the use of Adjusted EBITDAR allows the investor to compare operational results of companies who have operating and capital leases.

A significant portion of capital lease expenditures are recorded in interest, whereas operating lease expenditures are recorded in rent expense.

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

Year Ended December 31,

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

Consolidated statements of income data:

(In thousands)

Net income $ 197,725 $ 171,364

net income attributable to noncontrolling interests 3,073 886

Interest expense, net 2,461 5,549

Provision for income taxes 60,279 46,242

Depreciation and amortization 55,985 54,571

EBITDA $ 313,377 $ 276,840

Stock-based compensation 18,678 14,524

Legal, transactional and other costs(a) 5,689 —

Business interruptions gain and gain on sale of assets (2,365) —

Results related to operations not at full capacity 585 1,183

Acquisition related costs(b) 384 104

Costs incurred related to new systems implementation 186 —

Rent related to items above 38 100

Adjusted EBITDA $ 336,572 $ 292,751

Rent—cost of services 139,371 129,926

rent related to items above (38) (100)

Adjusted rent 139,333 129,826

Adjusted EBITDAR $ 475,905

(a) Legal, transactional and other costs incurred related to the formation of Standard Bearer REIT and other real estate related activities.

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

Year Ended December 31, 2021 Compared to the Year Ended December 31, 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:

Year Ended December 31, 2021

Transitional and skilled services Real estate All Other Eliminations Consolidated

Skilled services Real estate All Other (1)

Eliminations Consolidated

Total revenue $ 2,523,234 $ 65,536 $ 88,242 $ (49,551) $ 2,627,461

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Segment income (loss) 373,603 35,986 (152,025) — 257,564

Loss from sale of real estate and impairment charges (1,425)

Gain from sale of real estate (2)

Income before provision for income taxes $ 258,004

(1) General and administrative expense is included in the "all other" category.

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

Year Ended December 31, 2020

Transitional and skilled services Real estate All Other Eliminations Consolidated

Skilled services Real estate All Other (1)

Eliminations Consolidated

Total revenue $ 2,288,182 $ 61,275 $ 99,257 $ (46,118) $ 2,402,596

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Income before provision for income taxes $ 217,606

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Transitional and Skilled Services Segment

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:

(1) General and administrative expense is included in the "all other" category.

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

Our total revenue increased $224.9 million, or 9.4%, compared to the year ended December 31, 2020.

The increase in revenue from same facility and transitioning operations was primarily driven by the increase in skilled service revenue per patient day, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $126.1 million during the year ended December 31, 2021, when compared to the same period in 2020.

In addition, we recorded $75.2 million of state relief revenue during the year ended in 2021 compared to $45.4 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 years ended December 31, 2021 and 2020:

Year Ended December 31,

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(Dollars in thousands)

Transitional and skilled revenue $ 2,288,182 1,934,243 $ 353,939 18.3 %

Skilled services revenue $ 2,523,234 2,288,182 $ 235,052 10.3 %

Number of facilities at period end 214 197 17 8.6 %

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(Dollars in thousands)

Transitional and skilled revenue $ 1,787,138 $ 1,650,515 $ 136,623 8.3 %

Skilled services revenue $ 2,006,609 $ 1,926,574 $ 80,035 4.2 %

Number of facilities at period end 165 165 — — %

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(Dollars in thousands)

Transitional and skilled revenue $ 208,657 $ 185,895 $ 22,762 12.2 %

Skilled services revenue $ 368,849 $ 338,138 $ 30,711 9.1 %

Number of facilities at period end 27 27 — — %

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(Dollars in thousands)

Transitional and skilled revenue $ 292,387 $ 88,818 $ 203,569 NM

Skilled services revenue $ 147,776 $ 23,470 $ 124,306 NM

Number of facilities at period end 22 5 17 NM

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Skilled mix by nursing revenue 39.0 % 32.1 % 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.

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.

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

(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.

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.

S killed services revenue increased $235.1 million, or 10.3%, compared to the year ended December 31, 2020.

The primary changes were from increases in managed care revenue of $89.6 million or 24.4%, Medicaid custodial revenue of $120.1 million or 13.5%, other skilled revenue of $22.9 million or 15.3%, and private and other payors revenue increased by $2.7 million, or 1.7%.

Medicare revenue remained consistent from the prior year.

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 mid-February 2020 and continued into the first quarter of 2021.

Census began to recover in the second quarter of 2021 and continued throughout 2021.

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

Consolidated patient days increased due to transitioning and newly acquired operations.

The decline in consolidated occupancy was offset by the increase in average daily revenue rates and skilled days due to a shift in higher acuity.

As COVID-19 cases decline, we have experienced a recovery in our census, which includes the return of our long-term care patients.

This has a direct impact on our skilled days percentage as our long-term care patient days continue to climb and make up a higher percentage of the total patient days.

Our ancillary revenue services also increased by 37.9%.

Revenue in our Same Facilities increased $80.0 million, or 4.2% due to higher average daily revenue rates due to a shift toward higher acuity patients, offset by the decrease in occupancy of 0.5%, which primarily declined in the first three months in 2021 and has steadily increased since April 2021.

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

Total revenue for Same Facilities included $58.4 million and $37.2 million of Medicaid revenue related to state relief funding for the years ended December 31, 2021 and 2020, respectively.

Managed care revenue increased by $63.0 million or 19.8%, driven by increases in managed care days as our partnership with various managed care organizations, hospitals and the local communities strengthened.

Revenue generated by our Transitioning Facilities increased $30.7 million, or 9.1%, primarily due to increases in our daily rate and skilled mix days compared to the year ended December 31, 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 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 addition, we experienced a shift toward higher acuity patients as our skilled days increased by 10.1% .

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $124.3 million compared to the year ended December 31, 2020.

We acquired 17 operations between January 1, 2021 and December 31, 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.

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Total skilled nursing revenue $ 361.43 $ 352.69 $ 331.38 $ 314.49 $ 314.76 $ 297.01 $ 353.79 $ 345.92

(1) These rates exclude state relief revenue we recognized and include sequestration reversal of 2%.

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

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.7% and 4.8%, respectively, compared to the year ended December 31, 2020.

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.

The increase is attributable to the 1.2% net market basket increase that became effective in October 2021 coupled with our continued shift towards higher acuity patients.

Included in revenue for the year ended December 31, 2021 is the twelve-month impact of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through April 1, 2022.

Revenue for the year ended December 31, 2020 included eight months of impact from the temporary suspension of the 2% Medicare sequestration.

Our average Medicaid rates increased 4.1% 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.

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2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Revenue:

Percentage of Skilled Nursing Revenue:

Medicare 26.2 % 29.8 % 26.8 % 30.5 % 23.5 % 23.1 % 26.1 % 29.8 %

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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,

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2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Days:

Percentage of Skilled Nursing Days:

Medicare 13.7 % 15.8 % 13.1 % 14.8 % 11.0 % 13.2 % 13.5 % 15.6 %

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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):

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

Year Ended December 31, Change

2 unchanged sentences

Revenue percentage 77.1 % 77.4 % (0.3) %

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.

Cost of services related to our skilled services segment increased $174.1 million, or 9.8%, due primarily to additional costs at new acquisitions, which accounted for $97.1 million of the increase.

Cost of services as a percentage of revenue decreased by 0.3% to 77.1%.

We experienced a decrease in cost associated with operational improvements.

Real Estate Segment

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Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million, or 7.0% to $65.5 million, compared to the year ended December 31, 2020.

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.

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

Our FFO increased $6.2 million, or 12.5% to $55.7 million, compared to the year ended December 31, 2020.

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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.

Our other revenue decreased by $11.0 million, or 11.1% to $88.2 million, compared to the year ended December 31, 2020.

Other revenue for 2021 includes senior living revenue of $48.4 million and revenue from other ancillary services of $39.8 million.

The increase in other revenue is primarily due to acquisitions of facilities.

The decrease in 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 0.7% 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.

Our rent — cost of services as a percentage of total revenue decreased by 0.1% to 5.3%, primarily due to the growth in revenue outpacing the increase in rent expense.

General and administrative expense.

General and administrative expense increased $22.0 million or 17.0%, to $151.8 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.

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) %

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.

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%.

• 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.

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 %

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.

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.

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.

This increase was primarily due to increases in wages and benefits due to enhanced performance and growth, as well as expenses incurred related to the formation of Standard Bearer REIT of $5.7 million.

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

Depreciation and amortization .

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

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

Other expense primarily includes interest expense related to borrowings under mortgage debt.

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

Provision for income taxes.

Our effective tax rate was 23.4% for the year ended December 31, 2021, compared to 21.3% for the same period in 2020.

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.

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.

See Note 14, Income Taxes , in the Notes to the 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.

Our liquidity as of December 31, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds and deferral of the employer portion of social security taxes.

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.

Cash paid to fund acquisitions was $104.1 million and $11.0 million for the years ended December 31, 2021 and 2020, respectively.

Total capital expenditures for property and equipment were $69.6 million and $50.3 million for the years ended December 31, 2021 and 2020, respectively.

We currently have approximately $70.0 million budgeted for renovation projects for 2022.

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In addition, as of December 31, 2021, we held debt security investments of approximately $50.3 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.

We believe our debt security investments that were in an unrealized loss position as of December 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.

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 December 31, 2021, 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:

On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

During the year ended December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $10.1 million.

Subsequent to December 31, 2021, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

The share repurchase programs do not obligate us to acquire any specific number of shares.

Under these programs, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

The following table presents selected data 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

Operating activities $ 275,684 $ 373,351

Investing activities (173,907) (58,666)

Financing activities (76,138) (137,298)

Net increase in cash and cash equivalents 25,639 177,387

Cash and cash equivalents beginning of period 236,562 59,175

Cash and cash equivalents at end of period $ 262,201 $ 236,562

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.

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

The $97.7 million decrease in cash provided by operating activities for the year ended December 31, 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 a payment on the deferred employer portion of social security taxes in December 2021, timing of accounts receivable collections and payment of income taxes and expenses.

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.

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

The $115.2 million increase in cash used in investing activities for the year ended December 31, 2021, compared to the same period in 2020, was primarily due to an increase in cash used for acquisitions and capital expenditures of $93.1 million and $19.2 million, respectively, which are partially offset by an increase in cash from insurance proceeds of $6.1 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

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 $61.2 million decrease in cash used in financing activities for the year ended December 31, 2021, compared to the same period in 2020, was primarily due to the proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds offset by net borrowing activity.

A discussion of our cash flows for the year ended December 31, 2019 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our

Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 3, 2021.

Material cash requirements from known contractual and other obligations

Total long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows:

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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.

As of December 31, 2021, we had approximately $6.7 million on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $0.9 million from 2020.

Subsequent to December 31, 2021, we amended our Credit Facility to include Standard Bearer REIT as a co-borrower.

All existing terms and conditions remained the same.

As of December 31, 2021, and February 4, 2022, there was no outstanding debt under the Credit Facility.

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.

During the year ended December 31, 2021, four of our subsidiaries entered into HUD mortgage loans in the aggregate amount of $45.0 million.

As a result, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $156.6 million, as of December 31, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 3.1% to 4.2%, including fixed interest rates range of 2.4% 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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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 notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the notes are ten months and 12 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.

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Additionally, four of the 95 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.

In the third quarter of 2021, we also added two operations and extended the term for one of the Master Leases for an additional 17 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million and $63.4 million, respectively, to reflect the new lease obligations.

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.

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.

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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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.

The CID covered the period from October 3, 2013 through 2018, 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 through 2018, 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.

Department of Justice and promptly responded to its requests for information;

in April 2020, we were advised that the U.S.

Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

We have historically derived a substantial portion of our revenue from the Medicare program.

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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.

To date, we have generally been able

to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses.

There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

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-K

Item 7. Management’s Discussion and Analysis