What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-08-01 · 281 added, 290 removed, 1110 unchanged (34% of the section changed)

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

As of June 30, 2022, we offered skilled nursing, senior living and rehabilitative care services through 251 skilled nursing and senior living facilities.

As of September 30, 2022, we offered skilled nursing, senior living and rehabilitative care services through 259 skilled nursing and senior living facilities.

Of the 259 facilities, we operated 182 facilities under long-term lease arrangements and have options to purchase 11.

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Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2022:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of September 30, 2022:

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

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Recent Activities

Revolving Credit Facility Amendment — On April 8, 2022, we entered into the Second Amendment to the Third Amended and Restated Credit Facility (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by $250.0 million to an aggregate principal amount of up to $600.0 million.

Pursuant to the Amended Credit Agreement, the Company transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist Securities (Truist).

The interest rates applicable to loans under the Revolving Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the Amended Credit Agreement).

In addition, we will pay a commitment fee on the unused portion of the commitments, which will range from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

As part of the entry into the Amended Credit Agreement, deferred financing costs of $0.6 million were written off and additional deferred financing costs of $3.2 million were capitalized during the three months ended June 30, 2022.

Captive Real Estate Investment Trust — In January of 2022, we formed Standard Bearer Healthcare REIT, Inc.

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

The real estate portfolio in Standard Bearer consists of a select 95 of our 100 owned real estate properties.

During the nine months ended September 30, 2022, we acquired the real estate of eight skilled nursing facilities, all of which were leased to certain of our operating subsidiaries through the Standard Bearer Master Leases for a purchase price of $65.6 million.

Of the eight, three were previously operated and managed by us.

The resulting real estate portfolio in Standard Bearer consists of a select 101 of our 106 owned real estate properties.

Of the 101 owned real estate properties in Standard Bearer, 73 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

During six months ended June 30, 2022, we acquired the real estate of two skilled nursing facilities for a purchase price of $17.4 million and leased these facilities to certain of our operating subsidiaries through the Standard Bearer Master Leases.

Subsequent to June 30, 2022, we expanded our real estate portfolio with the addition of five skilled nursing properties and one campus property with an estimated total purchase price of $47.9 million.

As of June 30, 2022, the fair value of Standard Bearer's real estate portfolio is more than $1.0 billion.

Subsequent to September 30, 2022, we expanded our real estate portfolio with the addition of one skilled nursing property with an estimated total purchase price of $8.0 million.

As of September 30, 2022, the fair value of Standard Bearer's real estate portfolio is approximately $1.1 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.

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In addition, operating expenses incurred by the Service Center on Standard Bearer'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.

During the three and six months ended June 30, 2022, the Service Center management fee was $1.1 million and $2.1 million, respectively, both of which represent 6% of total Standard Bearer rental revenue.

During the three and nine months ended September 30, 2022, the Service Center management fee was $1.1 million and $3.2 million, respectively, both of which represent 6% of total Standard Bearer rental revenue.

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

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As part of the Amended Credit Agreement discussed in Note 16, Debt , the interest rates applicable to loans under the Revolving Credit Facility were amended, such that the rates are, at the Company's option, equal to either a base rate plus a margin ranging from 0.25% to 1.25% per annum or SOFR plus a margin range from 1.25% to 2.25% per annum.

As of June 30, 2022, there is $36.8 million outstanding under the intercompany credit revolver.

As of September 30, 2022, there is $44.8 million outstanding under the intercompany credit revolver.

There is also an intercompany mortgage loan amount of $93.0 million which is subject to a fixed interest rate.

In addition, third party debt held by the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes outstanding in an aggregate amount of $157.3 million, and are included in Standard Bearer.

During the three months ended June 30, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million.

In the second quarter of 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million.

These preferred shares were fully vested at the time of the contributions by the shareholders.

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2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

During the three months ended June 30, 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $6.5 million.

We did not grant any stock options nor restricted shares during the three and six months ended June 30, 2022.

In the second quarter of 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $6.5 million.

We did not grant any stock options nor restricted shares during the three and nine months ended September 30, 2022.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist Securities (Truist).

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business.

In July 2022, the public health emergency (PHE) was extended through October 13, 2022.

In October 2022, the public health emergency (PHE) was extended through January 11, 2023.

Our primary focus continues to be the health and safety of our patients, residents, employees and their respective families.

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We continue to execute on key initiatives to rebuild occupancy lost due to the pandemic.

During the second quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.6% compared to second quarter of 2021 and 0.9% compared to the first quarter of 2022.

During the third quarter of 2022, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the third quarter of 2021 and 1.1% compared to the second quarter of 2022.

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.

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

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.

We did not receive any 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 during the three and six months ended June 30, 2022.

To date, we have returned all Provider Relief Funds that we received and repaid all of the Medicare Accelerated and Advance Payment Program funds received.

During the three and six months ended June 30, 2022, we received an additional $27.3 million and $44.7 million in state relief funding, respectively, and recognized $24.5 million and $42.1 million as revenue, respectively.

During the three and six months ended June 30, 2021, we received an additional $16.8 million and $32.4 million in state relief funding and recognized $16.7 million and $33.2 million, respectively, as revenue.

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

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

During the three and nine months ended September 30, 2022, we received an additional $20.3 million and $65.0 million in state relief funding, respectively, and recognized $21.4 million and $63.5 million as revenue, respectively.

During the three and nine months ended September 30, 2021, we received $17.8 million and $50.3 million in state relief funding and recognized $19.2 million and $52.4 million, respectively, as revenue.

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 paid by December 31, 2021 and the remaining 50% payable 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.

Common Stock Repurchase Program — On February 9, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from February 10, 2022.

During the three months ended June 30, 2022, we repurchased 0.3 million shares of our common stock for $20.0 million.

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

Common Stock Repurchase Program — On July 28, 2022, the Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months from August 2, 2022.

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

In the second quarter of 2022, we repurchased 0.3 million shares of our common stock for $20.0 million.

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

On July 28, 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 beginning August 2, 2022.

We did not repurchase any shares during the third quarter of 2022.

Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of June 30, 2022:

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of September 30, 2022:

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

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

During the six months ended June 30, 2022, we expanded our operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of four stand-alone skilled nursing operations.

Of these additions, Standard Bearer acquired the real estate of two of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

In addition, we added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by our affiliated operating subsidiaries.

These new operations added a total of 453 operational skilled nursing beds and 633 operational senior living units to be operated by our affiliated operating subsidiaries.

We also invested in new ancillary services that are complementary to our existing businesses.

Subsequent to June 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of seven stand-alone skilled nursing operations and one campus operation.

Of these additions, Standard Bearer acquired the real estate of three of these operations, which were leased back to Ensign affiliated entities.

These new operations added 1,100 operational skilled nursing beds and 61 operational senior living units to be operated by our affiliated operating subsidiaries.

During the nine months ended September 30, 2022, we expanded our operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of 11 stand-alone skilled nursing operations.

Of these additions, Standard Bearer acquired the real estate of five of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

In addition, we purchased the real estate of three skilled nursing properties which our affiliated operating subsidiaries already operated, further expanding our real estate portfolio.

We also added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by our affiliated operating subsidiaries.

These new operations added a total of 1,553 operational skilled nursing beds and 674 operational senior living units to be operated by our affiliated operating subsidiaries.

Additionally, we invested in new ancillary services that are complementary to our existing businesses.

Subsequent to September 30, 2022, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of nine stand-alone skilled nursing operations.

Of these additions, Standard Bearer acquired the real estate of one of these operations, which was leased back to an Ensign affiliated entity.

These new operations added 1,115 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our acquisitions, see Note 7, Standard Bearer and Note 9, Operation Expansions in the Notes to the Unaudited Condensed Consolidated Financial Statements .

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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

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

Three Months Ended September 30, Nine Months Ended September 30,

Occupancy for skilled services:

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

Three Months Ended June 30,

Three Months Ended September 30,

Skilled Services Other Service Revenue Total Service Revenue

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TOTAL SERVICE REVENUE $ 739,318 $ 642,075 $ 26,565 $ 22,522 $ 765,883 $ 664,597

Three Months Ended June 30,

Three Months Ended September 30,

Skilled Services Other Service Revenue Total Service Revenue

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TOTAL SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

Six Months Ended June 30,

Nine Months Ended September 30,

Skilled Services Other Total Service Revenue

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TOTAL SERVICE REVENUE $ 2,128,567 $ 1,855,993 $ 74,819 $ 66,489 $ 2,203,386 $ 1,922,482

Six Months Ended June 30,

Nine Months Ended September 30,

Skilled Services Other Total Service Revenue

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TOTAL SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP.

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP and other COVID-19 related state funding.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

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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 June 30, 2022, our real estate portfolio within Standard Bearer is comprised of 95 real estate properties.

As of September 30, 2022, our real estate portfolio within Standard Bearer is comprised of 101 real estate properties.

Of these properties, 73 are leased to affiliated skilled nursing facilities wholly-owned and managed by us and 29 are leased to senior living operations wholly-owned and managed by Pennant.

Of the 29 real estate operations leased to Pennant, one senior living operation is located on the same real estate property as a skilled nursing facility that we own and operate.

During the three and six months ended June 30, 2022, we generated rental revenues of $17.6 million and $34.8 million, respectively, of which $13.9 million and $27.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

During the three and nine months ended September 30, 2022, we generated rental revenues of $18.7 million and $53.5 million, respectively, of which $15.0 million and $42.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

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

In addition, we hold majority membership interests in our other ancillary operations.

In addition, we hold majority membership interests in certain of our other ancillary operations.

Payment for these services varies and is based upon the service provided.

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Reducing the priority of those standard or scheduled audit activities allows providers, CMS and other organizations to focus on patient care, including directing audit activities toward infection control.

CMS stated that this reprioritization of its audit activities would be time-limited and it would announce when normal activities would resume after the end of the PHE.

CMS stated that this reprioritization of its audit activities would be time-limited and normal activities began to occur in 2022.

Beginning on May 7, 2021, CMS started to end certain Emergency Waivers related to the COVID-19 pandemic, beginning with waivers regarding data reporting and resident grouping, transfer and discharge.

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and (9) the waiver of an SNF’s normal obligation not to employ any nursing aid longer than 4 months if he or she does not satisfy federal training and certification requirements.

Select Emergency Waivers, including the three-day inpatient hospital qualifying stay, remain in effect.

The Emergency Waivers that did not expire on June 6, 2022, including the three-day inpatient hospital qualifying stay, remain in effect.

As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in LTC Medicare Part B programs.

There may be additional or other Emergency Waivers that will be terminated or allowed to expire, though;

this expiration may occur quickly and with little public notice.

Due to the prevalence of waves of COVID-19 variants in 2021 and continuing into 2022, it is unclear when the remaining Emergency Waivers will expire, or whether previously expired Emergency Waivers will be reinstated, as CMS has not announced the expiration of additional Emergency Waivers since its April 7, 2022 memorandum.

Examples of the Emergency Waivers still in effect as of July 1, 2022 include, but are not limited to the following:

CMS may terminate other Emergency Waivers affecting SNF and other LTC facilities in the future and these terminations may occur quickly and with little public notice.

Due to the prevalence of waves of COVID-19 variants, it is unclear when the remaining Emergency Waivers will expire.

Examples of the Emergency Waivers still in effect as of October 1, 2022 include, but are not limited to the following:

(1) approving temporary transfer, discharge and cohorting of patients to ensure that facilities can separate COVID-19 negative patients from those that are positive for or have been exposed to the virus;

(2) allowing SNFs to provide a skill-in-place program for Medicare beneficiaries who are residents of the SNFs that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay;

(3) waiving the requirement for LTC facilities' directors of food and nutrition services to have specified higher education or other credentials in the areas of food service and management and safety;

and (3) temporarily waiving certain documentation and reporting requirements regarding patient admission, transfer and discharge (e.g., Patients Over Paperwork).

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While the CMS guidance issued in March 2020 directed facilities to severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and most recently updated on March 10, 2022) that broadens visitation and provides guidance on visitation procedures.

On September 23, 2022, CMS updated its guidance regarding visitation to nursing homes, requiring the use of masks or face coverings when the county where the facility is located has a high rate of COVID-19 transmission, encouraged the use of masks or face coverings regardless of COVID-19 transmission status, but allowed residents and visitors to choose not to wear masks or face coverings when alone in the resident's room or in a dedicated visitation area.

This guidance also clarified CMS's guidance for isolation of known or suspected positive cases, exposure to positive cases and encouraged distancing during large group gatherings within the facility.

Testing requirements — Beginning in April 2020, authorities in several states in which our independent operating subsidiaries are located began to mandate widespread COVID-19 testing at all nursing home and LTC facilities.

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

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

On August 26, 2020, CMS issued new parameters for testing, requiring routine monthly testing of all facility staff if the facility’s county positivity rate is less than 5%;

weekly testing if the county positivity rate is between 5% and 10%;

and twice weekly testing if the county positivity rate exceeds 10%.

On April 27, 2021, CMS again issued revised parameters for testing, specifying that the requirement for routine testing of staff applies only to those staff members that are unvaccinated - fully vaccinated staff do not have to be routinely tested.

Federal and state COVID-19 vaccination requirements — On December 11, 2020, the U.S.

Food and Drug Administration (FDA) issued the first emergency use authorization (EUA) for the Pfizer-BioNTech vaccine for the prevention of COVID-19, followed by the second EUA for the use of the Moderna COVID-19 vaccine on December 28, 2020, and the third EUA for the Johnson & Johnson vaccine on February 27, 2021.

Pfizer and Moderna's COVID-19 vaccines have since received full FDA approval.

On August 18, 2021, the Administration announced that CMS was developing an emergency regulation requiring all workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of participation in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, and on the same day the Administration announced that OSHA would introduce an emergency temporary standard (ETS) requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or submit to weekly testing for the virus.

Both CMS’s interim final rule (IFR) and OSHA’s ETS for vaccination were challenged in court and halted from enforcement in certain states.

On November 5, 2021, CMS issued the Omnibus COVID-19 Health Care Staff Vaccination IFR, requiring all eligible staff in certain Medicare and Medicaid participating health facilities to complete their one- or two-injection vaccination sequences by or before January 13, 2022.

CMS's enforcement of this IFR was temporarily blocked in certain states pending appeal to the United States Supreme Court.

By January 20, 2022, decisions of the United States Supreme Court and other courts affirmed CMS’s authority to enforce the IFR in all states, with the last among them, Texas, subject to a deadline of March 21, 2022 for full compliance with the IFR’s vaccination requirements.

Additionally, facilities must test any staff or resident, regardless of vaccination status, who has signs or symptoms of COVID-19.

In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until repeat testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period.

Additional guidance may be issued in connection with this IFR.

In addition to CMS's testing mandates, some states have imposed additional testing requirements for residents and staff, or are enforcing testing mandates under existing or expanded workplace safety regulations.

On April 27, 2021, CMS issued revised parameters for testing, specifying that the requirement for routine testing of staff applies only to those staff members that are unvaccinated - fully vaccinated staff do not have to be routinely tested.

CMS's interim final rule (IFR) released on September 23, 2022 regarding COVID-19 testing stated that routine testing of staff for COVID-19 is no longer generally recommended without exposure to COVID-19.

This guidance clarified that individuals who show symptoms of COVID-19, regardless of vaccination status, should be tested for COVID-19 as soon as possible.

Additionally, this IFR called for testing of residents and staff and investigation of an outbreak when there is a single positive COVID-19 case among residents or staff of the LTC facility.

Federal and state COVID-19 vaccination requirements — As the Pfizer, Moderna, Johnson & Johnson and Novavax vaccines received FDA approval, CMS developed an IFR requiring all workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of participation in the Medicare and Medicaid programs.

In addition, OSHA introduced an emergency temporary standard (ETS) requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or submit to weekly testing for the virus.

Both CMS’s IFR and OSHA’s ETS for vaccination were challenged in court and halted from enforcement in certain states.

In addition to the IFR mandating vaccinations for health facility workers, several states where our independent operating facilities are located have issued vaccine mandates that apply to facility staff.

These vaccine mandates are largely aligned with the Omnibus COVID-19 Health Care Staff Vaccination IFR.

California issued an order on August 5, 2021 (and expanded on September 28, 2021), requiring adult care facilities and direct care workers to be vaccinated as well, and for all affected workers to be fully vaccinated by November 30, 2021.

On February 22, 2022, California's Department of Public Health updated its directive to allow workers who had completed their primary vaccination series and contracted COVID-19 since becoming fully vaccinated to defer the receipt of a vaccine booster dose by up to 90 days after infection with COVID-19;

These vaccine mandates are largely aligned with CMS's requirements.

For example, California issued an order requiring adult care facilities and direct care workers to be vaccinated as well, and for all affected workers to be fully vaccinated by November 30, 2021.

The order was expanded to allow workers who had completed their primary vaccination series and contracted COVID-19 since becoming fully vaccinated to defer the receipt of a vaccine booster dose by up to 90 days after infection with COVID-19;

otherwise, booster vaccine doses were required to be completed by March 1, 2022.

Reporting requirements — Effective May 8, 2020, CMS published an IFR requiring SNFs to report information related to COVID-19 cases among facility residents and staff directly to the CDC National Health Safety Network no less than weekly;

the reported information is made publicly available on a dedicated website.

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

This resident/family/representative notification is required to take place by 5:00 p.m.

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

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

Effective May 21, 2021, CMS published an IFR requiring LTC facilities to report weekly COVID-19 vaccination data of both residents and staff to the CDC National Healthcare Safety Network.

Reporting requirements — In accordance with CMS reporting guidance, SNFs are required to report to the CDC National Health Safety Network certain information related to COVID-19 cases on a weekly basis.

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

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

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

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

Effective August 23, 2021, CMS published an IFR incorporating comments on its May 21, 2021 IFR which continued the obligation for LTC and intermediate care facilities to report COVID-19 vaccination data for both residents and staff to the CDC National Healthcare Safety Network.

This new IFR requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff, and to educate residents and staff concerning the benefits, risks, and potential side effects associated with the vaccine.

This IFR also addresses responses to vaccination refusal by residents and staff in compliance with U.S.

Equal Employment Opportunity Commission guidance.

The IFR published on August 23, 2021 requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff and to educate residents and staff concerning the benefits, risks and potential side effects associated with the vaccine.

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

We do not believe these COVID-19 related requirements will have a material impact on our condensed consolidated financial statements.

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

CMS prioritized infection control surveys over annual recertification and complaint surveys at the non-immediate jeopardy level, confirming its commitment to infection prevention and control in the skilled nursing industry.

Effective August 17, 2020, CMS provided guidance authorizing resumption of traditional survey activity.

On June 1, 2020 (and updated in January 2021), CMS introduced an enhanced enforcement program with respect to infection control deficiencies.

The program contemplates more significant remedies against facilities with a prior history of infection control deficiencies and imposes more stringent penalties with deficiencies identified at a higher scope and severity.

In February of 2022, CMS updated this tool to refocus its attention toward the traditional survey process while preventing the spread of COVID-19 variants, considering the IFR, and amending prior guidance to reflect patients and residents’ rights to receive visitors.

The spectrum of remedies available to CMS for imposition on SNFs in connection with this enhancement includes increased monetary fines, shortened time periods to return to compliance, and other administrative penalties.

Survey Activity and Enforcement — In response to the COVID-19 pandemic environment, CMS included infection controls as part of its survey process along with updating its patients' and residents' rights to receive visitor guidance.

The spectrum of remedies available to CMS for imposition includes increased monetary fines, shortened time periods to return to compliance and other administrative penalties for deficiencies.

Medicare presently accounts for approximately 28.7% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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Under the SNF PPS PDPM system, the payment to SNFs and nursing homes is based heavily on the patient’s condition rather than the specific services provided by each SNF.

On August 4, 2021, CMS published the SNF PPS final rule for fiscal year 2022, which included a 1.2% net market basket increase in payment to SNFs, and reduced the negative impact of readmissions for providers with more than 25 stays by returning 60% of the 2% withheld by CMS regardless of that provider’s performance measures.

Providers with lower volume and fewer than 25 stays will not have any adjustments made to their payment.

Skilled Nursing Facility - Quality Reporting Program (SNF QRP)

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) imposed new data reporting requirements for certain Post-Acute-Care (PAC) providers.

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) provided data reporting requirements for certain Post-Acute-Care (PAC) providers.

The IMPACT Act requires that each SNF submit their quality measures data.

Beginning with fiscal year 2018, and each subsequent year, if a SNF does not submit required quality data, their payment rates are reduced by 2.0% for each such fiscal year.

If a SNF does not submit required quality data, their payment rates are reduced by 2.0% for each such fiscal year.

Application of the 2.0% reduction may result in payment rates for a fiscal year being less than the preceding fiscal year.

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they will only apply for the fiscal year involved.

A SNF's MAC will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting Program reporting requirements.

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

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

Specifically, the rule adopts a number of standardized patient assessment data elements.

A SNF's Medicare Administrative Contractor will issue the facility a notice of non-compliance if it does not satisfy its Quality Reporting Program (QPR) reporting requirements.

The SNF QRP standardized a number of standardized patient assessment data elements.

The SNF QRP applies to freestanding SNFs, SNFs affiliated with acute care facilities and all non-critical access hospital swing-bed rural hospitals.

The additional data elements adopted in the 2020 SNF PPS Rule were retained through the 2022 SNF PPS Rule, although the collection and reporting of this data to CMS is delayed for at least two full fiscal years after the end of the PHE.

On July 29, 2021, CMS issued a final rule for the SNF QRP that adopted two new reporting measures and updated the specifications for another measure.

On July 29, 2021, two new reporting measures were required under the SNF QRP.

Starting with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF Healthcare-Associated Infections (HAI) measure, which tracks the number of infections requiring hospitalization following a medical intervention, and the COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which tracks vaccination of staff in order to assess whether SNFs are taking steps to limit the spread of COVID-19.

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On July 29, 2022, CMS announced the adoption of a process measure for influenza vaccination coverage among healthcare personnel within SNFs.

This measure will be determined by the percentage of SNF healthcare personnel who receive an influence vaccine any time from when it first became available through March 31 of the following year.

This measure will be determined by the percentage of SNF healthcare personnel who receive an influenza vaccine any time from when it first became available through March 31 of the following year.

SNFs will begin submitting this data to CMS through the CDC National Healthcare Safety Network beginning on October 1, 2022 through March 31, 2023.

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Under the final rule, effective October 1, 2020, the aggregate payments to SNFs increased by 2.2% for fiscal year 2021, compared to fiscal year 2020.

This estimated increase is attributable to a 2.2% market basket increase factor.

This estimated increase is attributable to a net 2.2% market basket increase factor.

On July 29, 2022, CMS issued a final rule for fiscal year 2023 that updates the Medicare payment rates to aggregate net market basket increased by 2.7%.

The increase is resulted from the 5.1% update to the market basket, which is based on a 3.9% current year market basket increase plus a 1.5% market basket error adjustment, less a 0.3% productivity adjustment and a negative 2.3% adjustment as a result of the recalibrated parity adjustment.

The recalibrated parity adjustment is being phased in at a rate of 2.3% per year over two years.

On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for SNFs.

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This increase is attributable to a 2.7% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.7% point reduction for multifactor productivity adjustment.

On July 29, 2022, CMS issued a final rule for fiscal year 2023 that updates the Medicare payment rates to aggregate net market basket increased by 2.7%.

The increase is resulted from the 5.1% update to the payment rates, which is based on a 3.9% market basket increase plus a 1.5% point market basket error adjustment and less a 0.3% point productivity adjustment as well as a negative 2.3% as a result of the recalibrated parity adjustment.

The recalibrated parity adjustment is being phased in over two years.

Sequestration of Medicare Rates

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To pay for the change, Congress would increase the sequester cuts by one year to fiscal year 2030.

As of July 1, 2022, Medicare's sequestration cuts have reverted to 2%, which was the sequestration rate in effect before the COVID-19 PHE commenced.

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

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CMS annually adjusts its payment rules for SNFs using the SNF-VBP Program.

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

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

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

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

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

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

On July 29, 2021, CMS published its final rule for the fiscal year 2022 program in the Federal Register, adopting the proposed changes for measuring the performance period and amending the data to be reported to CMS, which impacted the SNF-VBP Program rate adjustment.

To fund the SNF-VBP Program incentive payment pool, CMS withheld 2% of Medicare payments and will redistribute 60% of the withheld payments back to SNFs through the program.

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

On July 29, 2021, CMS finalized its changes for measuring the performance period and amending the data to be reported to CMS, which impacted the SNF-VBP Program rate adjustment to account for COVID-19 impacting readmission rates and SNF admissions during the performance periods of fiscal year 2020.

The deadlines for baseline period quality measure quarterly reporting and performance periods and standards will start in 2023 program year.

On July 29, 2022, CMS released the final rule electing to not apply the SNF 30-Day All-Cause Readmission Measure (SNFRM) as part of performance scoring for fiscal year 2023.

CMS will still publicly report the SNFRM, but it will not affect SNF payments.

The final rule for the fiscal year 2023 SNF PPS also provided for SNF-VBP program expansion beyond the use of its single, all-cause hospital readmission measure to determine payment, with the inclusion of measures in fiscal year 2026 for SNF healthcare associated infections requiring hospitalization (SNF HAI) and total nursing hours per resident day measures, and in fiscal year 2027, the discharge to community post acute care measure for SNFs, which assesses the rate of successful discharges to the community from a SNF setting.

On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTCs and SNFs.

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Following studies by CMS, proposed rules that may affect the SNF-VBP Program are expected by early 2023, with final rules to follow after a notice-and-comment period.

On July 29, 2022 final rule, CMS released the final rule electing to not apply the SNF 30-Day All-Cause Readmission Measure (SNFRM) as part of performance scoring for fiscal year 2023.

CMS will still publicly report the SNFRM, but it will not affect SNF payment.

The final rule for the fiscal year 2023 SNF PPS also provided for SNF-VBP program expansion beyond the use of its single, all-cause hospital readmission measure to determine payment, with the inclusion of measures in fiscal year 2026 for SNF healthcare associated infections requiring hospitalization (SNF HAI) and total nursing hours per resident day measures, and in fiscal year 2027 the discharge to community -post acute care measure for SNFs, which assesses the right of successful discharges to community from a SNF setting.

Part B Rehabilitation Requirements

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The BBA establishes coding modifier requirements to obtain payments beyond the updated KX modifier thresholds, discussed below, and reaffirms the specific $3,000 claim audit threshold requirements for the Medicare Administrative Contractors.

For PT and SLP combined the threshold for coding modifier requirements is $2,110 for 2021, compared to $2,080 for 2020.

For PT and SLP combined the threshold for coding modifier requirements is $2,110 for 2021.

The KX Modifier threshold is set at $2,150 for CY 2022 with the same threshold for OT services.

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This conversion factor rate does not include the 2% sequester which was suspended until April 1, 2022 and then was implemented as a 1% sequestration until June 30, 2022.

As of July 1, 2022, Medicare's sequestration cuts have reverted to 2%, which was the sequestration rate in effect before the COVID-19 PHE commenced.

On November 19, 2021, CMS published the 2022 PFS, which required the use of new modifiers (the CO modifier) to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole, or in part by PT and OT assistants.

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On July 7, 2022, CMS issued a proposed rule for the calendar year 2023 PFS that would result in calendar year 2022’s 3% increase in physician fee schedule payments expiring for calendar year 2023.

Additionally, the proposed 2023 PFS includes a 4.4% negative adjustment to the conversion factor in addition to the 1.0% negative base rate for an aggregate negative adjustment of 5.4%.

As a result, the proposed calendar year 2023 PFS conversion factor is $33.08, a decrease of $1.53 from the calendar year 2022 PFS conversion factor of $34.61.

A final rule setting the calendar year 2023 physician fee schedule is expected in the second half of 2022.

A final rule setting the calendar year 2023 physician fee schedule is expected in the fourth quarter of 2022.

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

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Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services were provided by a physician from an alternate location, effective March 6, 2020 and ending on May 7, 2022.

This Emergency Waiver for telehealth services was included within the Emergency Waivers CMS announced it was terminating within 30 days from April 7, 2022.

Our Facilities have thus ceased using these telemedicine Emergency Waivers upon their termination.

On July 7, 2022, CMS proposed the calendar year 2023 Physician Fee Schedule to include a 4.4% negative adjustment to the conversion fact or in addition to the 1% negative base rate for an aggregate negative adjustment of 5.4%.

Programs of All-Inclusive Care for the Elderly

CMS issued a final rule on June 3, 2019, which updates the requirements for the Programs of All-Inclusive Care for the Elderly (PACE) under the Medicare and Medicaid programs.

The regulation is intended to provide greater operational flexibility, remove redundancies and outdated information and codify existing programs.

The requirements under the Programs of All-Inclusive Care for the Elderly (PACE) provide greater operational flexibility and update information under the Medicare and Medicaid programs.

Such flexibility includes:

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Further, non-physician primary care providers can provide certain services in place of primary care physicians.

On October 21, 2021, CMS published an extension of the timeline to complete further final rulemaking for the PACE program until November 1, 2022, based on a proposed rule published on November 1, 2018, regarding policy and technical changes to Medicare Advantage, Medicare Prescription Drug Benefit, PACE, Medicaid FFS, and Medicaid managed care programs for 2020 and 2021.

Based on completed studies, public comments, and the intervening COVID-19 pandemic that required CMS’s focus, CMS extended the timeline to issue a final rule regarding new policy and technical changes to the PACE program until November of 2022.

The November 2018 proposed rule suggests changes to payment and appeals of disputes within the PACE program which may affect our business.

On October 21, 2021, CMS published an extension of the timeline to complete further final rulemaking for the PACE program until November 1, 2022, which focuses on policy and technical changes to Medicare Advantage, Medicare Prescription Drug Benefit, PACE, Medicaid FFS and Medicaid managed care programs.

Decisions Regarding Skilled Nursing Facility Payment

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The upcoming Congressional elections in the United States and policies implemented by the current and former Presidential administration have resulted in significant changes in legislation, regulation, implementation of Medicare, Medicaid and government policy.

The 2022 midterm elections may significantly alter the current regulatory framework and impact our business and the health care industry.

In August of 2022, Congress passed and the Biden-Harris Administration signed into law the Inflation Reduction Act of 2022 (IRA), which continued and expanded certain provisions of the ACA.

Among other things, the IRA extended premium subsidies paid by the federal government, which were scheduled to expire at the end of 2022, until the end of 2024, resulting in subsidies being available to offset or reduce the costs of private health insurance policies for older persons on fixed incomes or with limited savings.

This may aid older patients in obtaining or keeping their health insurance in order to pay for long-term care services.

Other healthcare-related provisions of the IRA include phased-in provisions for Medicare to negotiate the prices of certain prescription drugs, limiting the out-of-pocket cost of prescribed drugs to Medicare Part D recipients to $2,000 per year (in addition to a monthly cap on out-of-pocket prescription drug expenses) and limiting the monthly cost of insulin to $35.

The 2022 midterm elections may significantly alter the current regulatory framework and impact our business and the health care industry, including any further extensions or expansions of certain ACA provisions.

We continually monitor these developments so we can respond to the changing regulatory environment impacting our business.

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CMS has requirements that providers, including SNFs and other LTC facilities must meet in order to participate in the Medicare and Medicaid Programs.

Some requirements can be burdensome and costly, and in recent years, CMS has modified these requirements.

For example, beginning in 2016, SNFs were required to comply with emergency preparedness requirements, which requirements have since been strengthened via promulgation of additional rules.

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

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

Some of these requirements can be burdensome and costly.

As part of participating in the Medicare and Medicaid programs, there are specific requirements on the use of pre-dispute, binding arbitration agreements by LTC facilities, including requiring the use of plain language in drafting;

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

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While legislative action is possible in the future, federal and state regulations remain our primary source of authority over the use of pre-dispute binding arbitration agreements.

As discussed under the “Coronavirus” heading above, the Administration announced that CMS and OSHA would implement emergency rules requiring all workers within all Medicare and Medicaid-participating nursing homes, and all employees of companies with more than 100 employees, to be fully vaccinated against COVID-19.

Significant litigation followed, including enforcement of both the CMS and OSHA vaccination mandates being halted by certain courts.

On January 13, 2022, the United States Supreme Court held that the OSHA vaccination mandate could not be enforced against large employers, but that the CMS vaccination mandate could be enforced upon Medicare- and Medicaid-participating facilities.

Those states except Texas where the CMS rule had been halted against enforcement then had to enforce the rule.

On January 20, 2022, the United States District Court for the Northern District of Texas dismissed the block of the CMS's vaccination IFR in Texas.

That same day, CMS became empowered to enforce the IFR in Texas and set a deadline of March 21, 2022 for full compliance with its vaccination requirements.

Since CMS became empowered to enforce the IFR in Texas, there has not been any administrative or legislative action to change the applicability or enforcement of this IFR.

On June 29, 2022, CMS announced updated guidance for Phase 2 and 3 of the Requirements of Participation.

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In addition, CMS updated the Requirements of Participation to include revising existing qualification requirements for directors of food and nutrition services in LTC facilities, grandfathering directors with two or more years of experience and certain minimum training in food safety so that they may continue in that role without obtaining specific educational and certification requirements.

On September 26 and 27, 2022, CMS updated its survey resources for LTC facilities, including with respect to staff vaccine measurements.

These included updating the survey pathway for infection prevention control and immunization and the focused infection control survey folder for infection prevention control and immunization, focusing on updated COVID-19 testing protocols.

These updates provided more information for state surveyors to evaluate LTC facilities’ compliance with the Medicare Requirements of Participation, as well as guidance for facilities on compliance with these requirements based on how surveyors would measure and evaluate their performance.

On September 27, 2022, CMS also provided a summary of its major software enhancements, describing the tools updated and used by CMS to measure and evaluate LTC facilities’ compliance with the Medicare Requirements of Participation.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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The FCA clarifies that if an item or service is provided in violation of the AKS, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim.

Civil monetary penalties under the FCA range from approximately $11 thousand to $23 thousand per violation and are adjusted annually for inflation.

Civil monetary penalties under the FCA range from approximately $11 to $23 thousand per violation and are adjusted annually for inflation.

Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery.

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Federal Healthcare Reform

Five-Star Quality Reporting Metrics - In 2015, CMS released a final rule addressing, among other things, implementation of certain provisions of Medicare Access and CHIP Reauthorization Act of 2015, which changed the way Medicare-participating providers are paid by implementing the Quality Payment Program (QPP).

QPP created new paths for payment based on the Merit-based Incentive Payment System (MIPS) or the use of Alternative Payment Models (APM), which relied on quality data CMS gathered and evaluated using the Five-Star Quality Rating system, which includes a rating of one to five in various categories.

Five-Star Quality Reporting Metrics - The Quality Payment Program (QPP) was created under the Medicare Access and Children's Health Insurance Program (CHIP) Reauthorization Act of 2015.

This program was based on the Merit-based Incentive Payment System (MIPS) or the use of Alternative Payment Models (APM), which relied on quality data CMS gathered and evaluated using the Five-Star Quality Rating system, which includes a rating of one to five in various categories.

These categories include (but are not limited to) the results of surveys conducted by state inspectors, other health inspection outcomes, staffing, spending, readmissions and stay durations;

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Since 2020, CMS’s measurement of the data reported by providers, including SNFs, has become more competitive and resulted in a reduction of four- and five-star rankings available under CMS’s Five-Star Quality Rating system.

Beginning in January 2020, CMS began displaying the ratings under this Five-Star Quality reporting system for nursing homes on its consumer-based Nursing Home Compare website.

The Five-Star Quality reporting system for nursing homes is displayed on CMS's consumer-based Nursing Home Compare website.

CMS also displays a consumer alert icon next to nursing homes that have been cited for incidents of abuse, neglect, or exploitation on the Nursing Home Compare website, which is updated monthly with CMS’s refresh of survey inspection results on that website.

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These safety inspections collected different information than traditional surveys and as a result these survey results were not incorporated in CMS’s Five-Star Quality ratings for SNFs from March through December 2020.

CMS resumed calculating nursing homes’ s health inspection ratings on January 27, 2021 and has continued to include this measure in subsequent updates.

CMS resumed calculating nursing homes’ health inspection ratings on January 27, 2021 and has continued to include this measure in subsequent updates.

Similarly, although staff reporting requirements were waived for the first and second quarters of 2020, this waiver ended on June 25, 2020.

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This data is adjusted based on a facility's case mixture and evaluated on a quarterly basis.

Proposed Legislation Concerning Nursing Home Supervision - On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in the U.S.

Proposed Federal Legislation Concerning Nursing Home Supervision - On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in the U.S.

Senate and was intended to update federal nursing home policy to improve quality of care and oversight.

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H.R.598, was introduced and referred to the Ways and Means Committee’s Healthcare Subcommittee on February 2, 2021.

As of July 29, 2022, no further action has been taken on this bill.

As of September 30, 2022, no further action has been taken on this bill.

Proposed State Legislation Concerning Nursing Home Supervision - California passed into law AB 35, which changes the limitations, or “caps,” on non-economic damages that can be awarded in medical negligence cases filed against healthcare providers (including skilled nursing and long-term care facilities).

Beginning on January 1, 2023, non-economic damages (i.e.

pain and suffering) available to plaintiffs suing healthcare providers in medical malpractice and professional negligence cases will be increased from $250,000 to $350,000, and will then increase by $40,000 per year over the following ten years up to a $750,000 cap.

Once the limit reaches $750,000, a 2% annual inflationary adjustment will all attach beginning on January 1.

In wrongful death cases that arise from claims of medical malpractice and professional negligence, the cap on non-economic damages will increase from $250,000 to $500,000 on January 1, 2023, and increase every year thereafter for ten years until the cap on non-economic damages in such cases is $1 million;

thereafter, this cap will also be subject to an annual 2% increase to reflect changes in the cost of living.

The caps are separate as to each claim, meaning that there is one cap for negligence and one cap for wrongful death.

The new limits on non-economic damages apply prospectively to lawsuits filed on and after January 1, 2023.

On September 27, 2022, California’s Governor signed into law AB 1502, also known as the Skilled Nursing Facility Ownership and Management Reform Act of 2022.

This law will affect new license applications for SNFs, and is expected to effect on July 1, 2023.

AB 1502 increases the oversight authority of the California Department of Public Health, and changes several provisions regarding SNF licensing in the State of California.

First, the law eliminates previous regulatory provisions that permitted SNFs to operate in advance of receiving their formal license from the State.

AB 1502 also requires SNF license applicants to disclose additional information to the Department of Public Health in connection with a license application, and requires the Department of Public Health to consider more data regarding the applicant’s prior operations before issuing it a license.

This date includes but is not limited to:

prior citations;

sanctions imposed by CMS;

legal proceedings commenced by other State or Federal authorities;

findings made regarding the applicant by agencies or courts;

and actions taken against other facilities owned, operated, or managed by the applicant.

The same analysis described above is intended to apply to applications for a change in ownership or a change in management of a skilled nursing facility.

AB 1502 authorizes the Department of Public Health to impose civil penalties of up to $10,000, and other enforcement action as appropriate, upon applicants that fail to comply with the law’s requirements.

Proposed and Anticipated Administrative Action - On February 28, 2022, the Administration published a fact sheet stating its priorities for making changes to senior care, including potential changes to regulations affecting LTC and SNF facilities.

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On June 29, 2022, CMS published guidance to surveyors for consistently evaluating Phase 2 and 3 Requirements of Participation for LTC facilities, addressing topics including infection control, resident safety, arbitration of disputes, nurse staffing and mental health disorders.

On September 22, 2022, CMS issued an IFR addressing nursing home visitation, including recommending the use of masks and face coverings to combat the transmission of COVID-19 and testing of symptomatic nursing home staff and residents regardless of COVID-19 vaccination status.

Monitoring Compliance in Our Facilities

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A facility “graduates” from the program once it demonstrates significant improvements in quality of care that are continued over a defined period of time.

On October 21, 2022, CMS issued a Memorandum identifying the changes it intends to make in connection with the oversight of those facilities that fall under the SFF Program.

These proposed measures included increased penalties for SFFs that fail to improve their performance upon further inspection by CMS, increasing the standards SFFs must meet to graduate from the SFF program, maintaining heightened oversight of any SFF for a period of three years after it graduates and increasing the technical assistance CMS provides to SFFs.

The CMS Memorandum also identifies grants that will be available to aid in the hiring, training and education of personnel involved in resident care, including licensed practical nurses and registered nurses.

In addition to the communication from CMS, the White House also issued a fact sheet covering these same issues on October 21, 2022.

The fact sheet further identified measures the Administration is taking to increase staffing requirements, halt illegal or improper debt collection activities, increase transparency in facility ownership and operation (including SNF performance), and tie reimbursement to the quality of performance.

Sanctions such as denial of payment for new admissions often are scheduled to go into effect before surveyors return to verify compliance.

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Proposed rules based on these directives and studies are expected in approximately one year, with final rules to follow a notice-and-comment period required by law.

On April 11, 2022, the CMS issued a proposed rule that requested information to be used for study and potential rulemaking.

Regulations Regarding Financial Arrangements

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Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities.

Violations of the AKS can result in criminal penalties of up to $112 thousand and ten years imprisonment.

Violations of the AKS can also result in civil monetary penalties of up to $112 thousand per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

Violations of the AKS can result in criminal penalties of up to $0.1 million and ten years imprisonment.

Violations of the AKS can also result in civil monetary penalties of up to $0.1 million per violation and an assessment of up to three times the total amount of remuneration offered, paid, solicited, or received.

Violation of the AKS may also result in an individual's or organization's exclusion from future participation in federal healthcare programs.

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

We saw a recovery in our census starting in the first quarter of 2021 and has continued into 2022.

Despite the emergence of COVID-19 variants in the first quarter of 2022, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the three months ended June 30, 2022 continues 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 SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits, remained in effect in the first half 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 three and six months ended June 30, 2022, we recorded state relief revenue of $24.5 million and $42.1 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

We saw a recovery in our census starting in the first quarter of 2021, which has continued into 2022.

Despite the emergence of COVID-19 variants and subvariants beginning in the first and third quarters of 2022, we continue to experience healthy growth in both revenue and operational earnings.

Our net revenue for the three months ended September 30, 2022 continues to be impacted by COVID-19, with the emergence of COVID-19 subvariants beginning in July 2022.

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 three and nine months ended September 30, 2022, we recorded state relief revenue of $21.4 million and $63.5 million, respectively, which directly offset against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Our total revenue for the quarter increased $94.0 million, or 14.7% while our diluted GAAP earning per share grew by 16.1%, from $0.87 to $1.01, compared to the second quarter in 2021.

In addition, the Emergency Waivers issued by CMS, including a waiver for the requirement to have a three-day stay in a hospital to receive Medicare coverage of a skilled nursing stay, as well as, the authorization of renewed SNF coverage without having to start a new benefit period for certain beneficiaries who recently exhausted their SNF benefits, remained in effect through the current quarter.

Our total revenue for the quarter increased $101.5 million, or 15.2% while our diluted GAAP earning per share grew by 19.3%, from $0.83 to $0.99, compared to the third quarter in 2021.

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 skilled services collectively increased by 14.6%.

We have refocused on operational fundamentals including identifying non-clinical areas where we can manage spending.

These fundamentals coupled with the increase in occupancy and expansion to our operations resulted in a strong second quarter.

Additionally, we continue to seek out opportunities to expand our operations and real estate, adding 17 new operations and eight real estate properties, three of which we previously operated, during the nine months ended September 30, 2022.

These expansions coupled with our refocused operational fundamentals and increase in occupancy resulted in a strong third quarter.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Interest expense (0.2) (0.2) (0.3) (0.3)

Other (expense) income (0.3) 0.2 (0.2) 0.1

Other income (expense) — — (0.2) 0.1

Other expense, net (0.2) (0.2) (0.5) (0.2)

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7.3 % 7.1 % 7.4 % 7.5 %

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Adjusted EBITDAR $ 135,495 $ 397,310

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

Included in segment income for Standard Bearer for the three and six months ended June 30, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

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

Included in segment income for Standard Bearer for the three and nine months ended September 30, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

Segment income is reconciled to the Condensed Consolidated Statement of Income in Note 8, Business Segments in Notes to Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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• stock-based compensation expense;

• real estate transactions and other related costs;

• legal finding;

• acquisition related costs, costs incurred related to new systems implementation and other costs;

• acquisition related costs;

• costs incurred related to new systems implementation;

• results related to operations not at full capacity;

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Net income $ 56,242 $ 48,344 $ 164,133 $ 148,764

net (loss) income attributable to noncontrolling interests 112 1,158 (140) 1,789

net income (loss) attributable to noncontrolling interests

63 1,063 (77) 2,852

Other expense, net 1,832 1,461 9,991 2,867

4 unchanged sentences

Stock-based compensation 5,898 5,082 16,681 13,769

Legal finding(a) — — 3,353 —

Real estate transactions and other related costs(a)

Legal finding(b)

859 — 4,212 —

Gain on sale of assets (900) — (3,467) (540)

Results related to operations not at full capacity — — — 584

Acquisition related costs, new systems implementation costs and other costs(b)

Acquisition related costs(c)

245 145 416 333

Costs incurred related to new systems implementation

321 41 390 117

Rent related to items above — — — 38

4 unchanged sentences

Adjusted EBITDAR $ 135,495 $ 397,310

(a) Legal finding against our non-emergent transportation subsidiary.

(b) Costs incurred to acquire operations and system implementation costs that are not capitalizable.

Other costs includes legal, transactional and other costs

incurred related to the formation of Standard Bearer and other real estate related activities.

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

(a) Real estate transactions and other related costs include costs incurred related to the formation of Standard Bearer and other real estate related activities.

(b) Legal finding against our non-emergent transportation subsidiary.

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated.

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

5 unchanged sentences

Income before provision for income taxes $ 72,455

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

4 unchanged sentences

Income before provision for income taxes $ 64,857

Our total revenue increased $94.0 million, or 14.7%, compared to the three months ended June 30, 2021.

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

Total revenue from operations acquired on or subsequent to January 1, 2021 increased our consolidated revenue by $41.1 million during the three months ended June 30, 2022, when compared to the same period in 2021.

In addition, we recorded $24.5 million of state relief revenue in the second quarter of 2022 compared to $16.7 million in the same period in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

Our total revenue increased $101.5 million, or 15.2%, compared to the three months ended September 30, 2021.

The increase in revenue was primarily driven by an increase in occupancy from our skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2021 increased our consolidated revenue by $41.5 million during the three months ended September 30, 2022, when compared to the same period in 2021.

In addition, we recorded $21.4 million of state relief revenue in the third quarter of 2022 compared to $19.2 million in the same period in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services

The following table presents the skilled services revenue and key performance metrics by category during the three months ended June 30, 2022 and 2021:

Three Months Ended June 30,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended September 30, 2022 and 2021:

Three Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 51.6 % 50.7 % 0.9 %

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 53.7 % 52.3 % 1.4 %

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 47.8 % 44.8 % 3.0 %

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 Change % Change

10 unchanged sentences

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

In the second quarter of 2022, we converted two skilled nursing facilities into campuses.

Since the third quarter of 2021, we converted three skilled nursing facilities into campuses.

(1) Same Facility results represent all facilities purchased prior to January 1, 2019.

1 unchanged sentence

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021.

Skilled services revenue increased $89.6 million, or 14.6%, compared to the three months ended June 30, 2021.

Of the $89.6 million increase, the primary changes were from increases in Medicaid revenue of $47.2 million, or 16.2%, managed care revenue of $15.6 million, or 13.8%, Medicare revenue of $20.5 million, or 12.0% and private revenue of $6.3 million or 16.0%.

The increase in revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the second quarter of 2022.

Our consolidated occupancy increased by 2.5%.

As COVID-19 cases declined from the same period in the previous year, there was a shift in Medicare patients to LTC patients, resulting in a decline in skilled mix revenue.

Skilled services revenue increased $97.2 million, or 15.1%, compared to the three months ended September 30, 2021.

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $38.2 million, or 12.4%, Medicare revenue of $34.4 million, or 19.5%, managed care revenue of $17.7 million, or 15.4% and private revenue of $6.9 million or 16.3%.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the third quarter of 2022, coupled with increases in skilled mix revenue.

Our consolidated occupancy increased by 2.2% and skilled mix revenue increased by 0.9%, driven by higher acuity.

Revenue in our Same Facilities increased $41.7 million, or 8.0% due to increased occupancy and revenue per patient day.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 1.8% to 75.8%.

Managed care and Medicare skilled days increased by 4.1% and 4.0%, respectively, resulting in an increase in Managed Care and Medicare revenue .

Revenue generated by our Transitioning Facilities increased $14.4 million , or 17.9% , primarily due to improved occupancy growth of 6.4% to 74.4% and an increase in total patient days and skilled mix days compared to the three months ended June 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

This resulted in managed care days increasing by 26.0%, and Medicare days increasing by 8.9%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $35.6 million compared to the three months ended June 30, 2021 .

We acquired nine operations between July 1, 2021 and June 30, 2022 across four states.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 2.4%.

Medicare and Managed care skilled days increased by 13.5% and 6.4%, respectively, resulting in an increase in Managed Care and Medicare revenue .

Revenue generated by our Transitioning Facilities increased $10.1 million , or 11.7% , primarily due to improved occupancy growth of 5.3% and an increase in skilled mix days of 2.5% compared to the three months ended September 30, 2021.

Managed care and Medicare days increased by 25.6% and 17.6%, respectively, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $45.4 million compared to the three months ended September 30, 2021 .

We acquired fifteen operations between October 1, 2021 and September 30, 2022 across five states.

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

1 unchanged sentence

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

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

$ 372.99 $ 354.60 $ 331.81 $ 318.88 $ 324.39 $ 326.34 $ 361.74 $ 347.98

(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP) and include sequestration reversal of 1% in 2022 and 2% in 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.1%, respectively, compared to the three months ended June 30, 2021.

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 2% in 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.4% and 0.6%, respectively, compared to the three months ended September 30, 2021.

The increase is attributable to the 1.2% net market basket increase that became effective in October 2021.

This was offset by the sequestration reversal of 1% compared to 2% in 2021.

This was offset by the reinstatement of the 2% sequestration in the third quarter of 2022, effectively creating a 2% reduction in the Medicare rates.

Our average Medicaid rates increased 3.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

3 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

11 unchanged sentences

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

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

1 unchanged sentence

Revenue percentage 78.3 % 77.2 % 1.1 %

Cost of services related to our Skilled services segment increased $72.5 million, or 15.4%, primarily due to additional costs related to new acquisitions, which accounted for $27.7 million of the increase to cost of services with additional increases due to higher staffing expenses, primarily agency.

Cost of services related to our Skilled services segment increased $83.7 million, or 16.9%, due to costs related to new acquisitions, which accounted for $36.4 million of the increase, with additional increases due to higher staffing expenses.

As the result of COVID-19 variants, our operations experienced staffing constraints due to isolation requirements and COVID-19 exposure, which resulted in additional overtime, benefits and bonuses to our staff and higher use of contracted labor.

The increase in labor costs is offset by cost management in non-clinical expenses.

Cost of services as a percentage of revenue increased to 78.3% from 77.2%.

Standard Bearer

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

8 unchanged sentences

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $3.4 million, or 23.8%, to $17.6 million, compared to the three months ended June 30, 2021.

The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the three months ended June 30, 2021.

Our FFO decreased $0.1 million, or 0.8% to $12.1 million, compared to the three months ended June 30, 2021.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.3 million, or 29.8%, to $18.7 million, compared to the three months ended September 30, 2021.

The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the three months ended September 30, 2021.

Our FFO increased $0.2 million, or 1.4% to $12.5 million, compared to the three months ended September 30, 2021.

The increase in rental revenue of $4.3 million is offset by interest expense of $2.3 million as well as management fee expense of $1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center that started in January of 2022.

As noted in Item 2., under Recent Activities , Ensign Group, Inc., the real estate properties and Standard Bearer entered into intercompany debt arrangements, including mortgage loans and the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022.

The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, property taxes and other expenses related to the formation of Standard Bearer.

All Other Revenue

Our other revenue increase by $5.4 million, or 21.3%, to $30.6 million, compared to the three months ended June 30, 2021.

Our other revenue increased by $5.8 million, or 22.2%, to $31.8 million, compared to the three months ended September 30, 2021.

Other revenue for 2022 includes senior living revenue of $18.1 million and revenue from other ancillary services of $11.9 million and rental income of $1.8 million.

The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from the COVID-19 decreases.

The increase in other revenue is attributable to our senior living operations as our senior living occupancy rate rebounds from COVID-19.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.3% to 5.1%, primarily due the growth in revenue outpacing the increase in rent expense.

Our rent — cost of services as a percentage of total revenue decreased by 0.2% to 5.1%, primarily due to growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties.

General and administrative expense — General and administrative expense increased $0.7 million or 1.8%, to $39.2 million.

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

General and administrative expense as a percentage of revenue decreased by 0.5% to 5.3%.

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

General and administrative expense as a percentage of revenue decreased by 0.7% to 5.1%, which demonstrates our refocused efforts on non-clinical spend management.

Depreciation and amortization — Depreciation and amortization expense increased $2.0 million, or 14.4%, to $15.9 million.

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

Depreciation and amortization decreased 0.2%, to 2.0%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue increased by 0.6% to 0.7%.

Depreciation and amortization remained consistent at 2.1%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue remained consistent at 0.2%.

Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investment program.

During the three months ended June 30, 2022, we recorded a loss on those investments of $3.3 million compared to a gain of $0.8 million during the three months ended June 30, 2021.

There is an offsetting reduction in expense split between cost of services and general and administrative expenses for both periods.

Provision for income taxes — Our effective tax rate was 20.8% for the three months ended June 30, 2022, compared to 21.4% for the same period in 2021.

During the three months ended September 30, 2022, we recorded a loss on those investments of $1.1 million.

There is an offsetting reduction in expense allocated between cost of services and general and administrative expenses.

Provision for income taxes — Our effective tax rate was 22.4% for the three months ended September 30, 2022, compared to 25.5% for the same period in 2021.

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 including non-deductible compensation.

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

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated:

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

4 unchanged sentences

Income before provision for income taxes $ 211,638

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Skilled services Standard Bearer All Other Eliminations Consolidated

4 unchanged sentences

Income before provision for income taxes $ 191,984

Our total revenue increased $180.1 million, or 14.2%, compared to the six months ended June 30, 2021.

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

Total revenue from operations acquired on or subsequent to January 1, 2021 increased our consolidated revenue by $82.8 million during the six months ended June 30, 2022, when compared to the same period in 2021.

In addition, we recorded $42.1 million of state relief revenue during the six months ended in 2022 compared to $33.2 million in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

Our total revenue increased $281.6 million, or 14.6%, compared to the nine months ended September 30, 2021.

The increase in revenue was primarily driven by an increase in occupancy from our skilled services operations along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2021 increased our consolidated revenue by $77.1 million during the nine months ended September 30, 2022, when compared to the same period in 2021.

In addition, we recorded $63.5 million of state relief revenue during the nine months ended in 2022 compared to $52.4 million in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

The following table presents the skilled services revenue and key performance metrics by category during the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 52.3 % 52.5 % (0.2) %

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 54.0 % 53.8 % 0.2 %

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 47.7 % 46.3 % 1.4 %

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 Change % Change

10 unchanged sentences

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

In the first half of 2022, we converted three skilled nursing facilities into campuses.

In 2022, we converted three skilled nursing facilities into campuses.

(1) Same Facility results represent all facilities purchased prior to January 1, 2019.

1 unchanged sentence

(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2021.

S killed services revenue increased $175.3 million, or 14.4%, compared to the six months ended June 30, 2021.

Of the $175.3 million increase, the primary changes were from increases in M edicaid custodial revenue of $74.0 million, or 15.6%, managed care revenue of $35.0 million, or 15.8% and Medicare revenue of $38.6 million, or 10.7%.

The increase in revenue was primarily driven by our consolidated occupancy increasing by 2.8%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

As COVID-19 cases declined from the same period in the previous year, there was a shift in Medicare patients to LTC patients.

However, strong skilled mix days were maintained due to increase in managed care and other skilled days.

S killed services revenue increased $272.6 million, or 14.7%, compared to the nine months ended September 30, 2021.

Of the $272.6 million increase, the primary changes were from increases in M edicaid custodial revenue of $106.9 million, or 14.5%, Medicare revenue of $73.0 million, or 13.6%, managed care revenue of $52.8 million, or 15.7%, private revenue of $21.6 million, or 18.5% and Medicaid skilled revenue of $18.3 million, or 14.3%.

The increase in revenue was primarily driven by our consolidated occupancy and skilled mix days increasing by 2.5% and 0.3%, respectively, compared to the same period in the prior year.

Revenue in our Same Facilities increased $115.8 million, or 7.5% due to increased occupancy and increase in skilled mix days.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals, and the local communities we operate in, increased our occupancy by 2.3% to 75.4%.

Managed care skilled days increased by 6.8%, resulting in an increase in managed care revenue.

Revenue generated by our Transitioning Facilities increased $25.8 million, or 16.0%, primarily due to improved occupancy growth of 6.3% to 73.5% and an increase in our total patient days and skilled mix days compared to the six months ended June 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

M anaged care and Medicare days increased by 22.0% and 7.0%, respectively, resulting in an increase in managed care and Medicare revenue.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $75.4 million compared to the six months ended June 30, 2021.

We acquired nine operations between July 1, 2021 and June 30, 2022 across four states.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals, and the local communities we operate in, as well as higher acuity, increased our occupancy by 2.4% to 75.9%.

Managed care and Medicare skilled days increased by 6.7% and 5.6%, respectively, resulting in an increase in skilled mix revenue.

Revenue generated by our Transitioning Facilities increased $35.9 million, or 14.5%, primarily due to improved occupancy growth of 5.9% and an increase in skilled mix days of 1.5%, compared to the nine months ended September 30, 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled mix revenue increased by 1.4%, mainly from the increases in M anaged care and Medicare days of 23.2% and 10.4%, respectively.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $120.8 million compared to the nine months ended September 30, 2021.

We acquired fifteen operations between October 1, 2021 and September 30, 2022 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.

1 unchanged sentence

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

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

9 unchanged sentences

$ 373.44 $ 360.42 $ 335.08 $ 322.23 $ 330.74 $ 338.85 $ 364.06 $ 354.19

(1) These rates exclude additional Federal Medical Assistance Percentage (FMAP) and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the six months ended June 30, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.6% and 1.1%, respectively, compared to the six months ended June 30, 2021.

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the nine months ended September 30, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 0.5% and 0.9%, respectively, compared to the nine months ended September 30, 2021.

The increase is attributable to the 1.2% net market basket increase that became effective in October 2021.

Medicare daily rates in 2022 includes three months of sequestration reversal of 1% and three months of sequestration of reversal of 2% compared to six months of sequestration reversal of 2% in 2021.

Medicare daily rates in 2022 includes three months of sequestration suspension of 1% and three months of sequestration of suspension of 2% compared to nine months of sequestration suspension of 2% in 2021.

Our average Medicaid rates increased 3.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

3 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

8 unchanged sentences

TOTAL SKILLED NURSING 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

10 unchanged sentences

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

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

1 unchanged sentence

Revenue percentage 77.9 % 77.1 % 0.8 %

Cost of services related to our skilled services segment increased by $143.7 million, or 15.4%, due primarily to additional costs at new acquisitions, which accounted for $59.6 million of the increase to cost of services with additional increases mainly due to higher staffing expenses.

Cost of services related to our skilled services segment increased by $227.4 million, or 15.9%, due to additional costs at new acquisitions, which accounted for $96.1 million of the increase to cost of services, with additional increases mainly due to higher staffing expenses.

The increase in labor costs is offset by cost management in non-clinical expenses.

The increase is offset by cost management in non-clinical expenses.

Cost of services as a percentage of revenue increased to 77.9% from 77.1%.

Standard Bearer

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

7 unchanged sentences

Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $6.5 million, or 23.0% to $34.8 million, compared to the six months ended June 30, 2021.

The increase in revenue is primarily attributable to seven real estate purchases as well as annual rent increases since the six months ended June 30, 2021.

Our FFO remained consistent at $24.0 million, for both the six months ended June 30, 2022 and 2021.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $10.8 million, or 25.3% to $53.5 million, compared to the nine months ended September 30, 2021.

The increase in revenue is primarily attributable to 13 real estate purchases as well as annual rent increases since the nine months ended September 30, 2021.

Our FFO increased by 0.3% to $36.5 million, for the nine months ended September 30, 2022 compared to the same period in 2021.

The increase in rental revenue of $10.8 million is offset by interest expense of $6.1 million as well as management fee expense of $3.2 million associated with the intercompany agreements between Standard Bearer and the Service Center starting in January of 2022.

As noted in Item 2., Recent Activities , the Company, the real estate properties and Standard Bearer entered into intercompany debt arrangements, including mortgage loans and the Revolving Credit Facility, and an intercompany management agreement with the formation of Standard Bearer in January of 2022.

The additional offsets to rental revenue include increases in interest expense related to new mortgage loans held by HUD, and other expenses related to the formation of Standard Bearer.

All Other Revenue

Our other revenue increased by $7.0 million, or 13.7% to $57.9 million, compared to the six months ended June 30, 2021.

Our other revenue increased by $12.8 million, or 16.6% to $89.8 million, compared to the nine months ended September 30, 2021.

Other revenue for 2022 includes senior living revenue of $48.9 million and revenue from other ancillary services of $35.4 million and rental income of $5.5 million.

The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from COVID-19 decreases.

The increase in other revenue is attributable to our senior living acquisitions as our senior living occupancy rate rebounds from COVID-19.

Consolidated Financial Expenses

Rent — cost of services.

Our rent — cost of services as a percentage of total revenue decreased by 0.4% to 5.0%, primarily due to the growth in revenue outpacing the increase in rent expense.

Our rent — cost of services as a percentage of total revenue decreased by 0.4% to 5.0%, primarily due to the growth in revenue outpacing the increase in rent expense and as our operation expansions include the acquisition of the related real estate properties.

General and administrative expense.

1 unchanged sentence

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

General and administrative expense as a percentage of revenue decreased by 0.1% to 5.4%.

General and administrative expense as a percentage of revenue decreased by 0.5% to 5.2%, which demonstrates our refocused efforts on non-clinical spend management.

Depreciation and amortization .

1 unchanged sentence

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 2.0%, as a percentage of revenue.

Depreciation and amortization remained consistent at 2.1%, as a percentage of revenue.

Other expense, net.

1 unchanged sentence

Other expense primarily includes interest expense related to our debt and gain or loss on the deferred compensation investments.

During the six months ended June 30, 2022, we recorded a loss on those investments of $4.5 million compared to a gain of $1.1 million during the six months ended June 30, 2021.

During the nine months ended September 30, 2022, we recorded a loss on those investments of $5.7 million compared to a gain of $0.9 million during the nine months ended September 30, 2021.

There is an offsetting reduction in expense split between cost of services and general and administrative expenses for both periods.

Provision for income taxes.

Our effective tax rate was 22.5% for the six months ended June 30, 2022, compared to 21.0% for the same period in 2021.

Our effective tax rate was 22.4% for the nine months ended September 30, 2022, compared to 22.5% for the same period in 2021.

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

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

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

1 unchanged sentence

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

Our liquidity as of June 30, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Our liquidity as of September 30, 2022 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Historically, we have primarily financed the majority of our acquisitions through mortgages on our properties, our Revolving Credit Facility and cash generated from operations.

Total capital expenditures for property and equipment were $37.1 million and $33.8 million for the six months ended June 30, 2022 and 2021, respectively.

Total capital expenditures for property and equipment were $59.7 million and $50.1 million for the nine months ended September 30, 2022 and 2021, respectively.

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

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

Our cash and cash equivalents as of June 30, 2022 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of September 30, 2022 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of June 30, 2022, we held debt security investments of approximately $49.1 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of June 30, 2022 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

In addition, as of September 30, 2022, we held debt security investments of approximately $53.9 million, which were primarily split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of September 30, 2022 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 June 30, 2022, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

We currently anticipate that existing cash and total investments as of September 30, 2022, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

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 from October 29, 2021.

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

Under this program, we are authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

The Company did not purchase any shares pursuant to this stock repurchase program.

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

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

Six Months Ended June 30,

Nine Months Ended September 30,

NET CASH PROVIDED BY/(USED IN):

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Financing activities (31,903) (78,562)

Net increase/(decrease) in cash and cash equivalents 23,379 (38,151)

Net increase in cash and cash equivalents 46,663 68,058

Cash and cash equivalents beginning of period 262,201 236,562

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

The $21.4 million increase in cash provided by operating activities for the six months ended June 30, 2022 compared to the same period in 2021, w as primarily due to higher net income and changes in working capital.

Changes in working capital were driven by timing of collections of accounts receivable and payments of accounts payable and other accrued liabilities.

The $17.8 million increase in cash provided by operating activities for the nine months ended September 30, 2022 compared to the same period in 2021, w as primarily due to higher net income and changes in working capital.

Changes in working capital were driven by other accrued liabilities offset by timing of collections of accounts receivable and payments of income taxes.

Investing Activities

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

The $35.7 million increase in cash used in investing activities for the six months ended June 30, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $41.6 million offset by cash proceeds from the sale of assets of $6.8 million.

The $85.9 million increase in cash used in investing activities for the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $88.9 million offset by sale of assets.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of subsidiary shares.

The $75.8 million decrease in cash used in financing activities for the six months ended June 30, 2022 compared to the same period in 2021, was primarily due to the $102.0 million of net proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds in 2021, offset by $29.9 million of share repurchases as part of our stock repurchase program in 2022.

Additionally, we received proceeds of $6.7 million from the sale of preferred shares and common stock of Standard Bearer offset by payment of deferred financing fees of $3.2 million associated with the entry into the Amended Credit Agreement in April 2022.

The $46.7 million decrease in cash used in financing activities for the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to $102.0 million of net proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds in 2021 and $6.7 million receipt of proceeds from the sale of preferred shares and common stock of Standard Bearer in 2022.

This is offset by $29.9 million of share repurchases as part of our stock repurchase program in 2022 and $31.4 million proceeds from HUD borrowings in the same period in 2021, that did not recur in 2022.

Credit Facility with a Lending Consortium Arranged by Truist

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Mortgage Loans and Promissory Notes

As of June 30, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $155.1 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of September 30, 2022, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $154.3 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates at a range of 3.1% to 4.2%, including fixed interest rates at a range of 2.4% to 3.3% per annum.

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Operating Leases

As of June 30, 2022, 180 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

As of September 30, 2022, 182 of our facilities are under long-term lease arrangements, of which 96 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust REIT, Inc.

The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.

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

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

Forty-eight 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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ASC 832 requires business entities to disclose information about certain government assistance they receive.

We adopted this standard on January 1, 2022 and determined there was no material impact on the our condensed consolidated financial statements.

We adopted this standard on January 1, 2022 and determined there was no material impact on our condensed consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company — In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis