What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-25 compared with 2023-07-27 · 317 added, 227 removed, 984 unchanged (36% of the section changed)

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These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.

Additionally, our business and operations for 2023 continue to be impacted by changes in the status of the COVID-19 pandemic.

Because of the unprecedented nature of the pandemic, we are unable to predict the full extent and duration of the financial impact of these changes on our business, financial condition and results of operations.

Our actual results could differ materially from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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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, 2023, we offered skilled nursing, senior living and rehabilitative care services through 290 skilled nursing and senior living facilities.

Our real estate portfolio includes 108 owned real estate properties, which included 79 facilities operated and managed by us, 29 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the Service Center location.

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, 2023:

As of September 30, 2023, we offered skilled nursing, senior living and rehabilitative care services through 295 skilled nursing and senior living facilities.

Our real estate portfolio includes 112 owned real estate properties, which includes 82 facilities operated and managed by us, 30 operations leased to and operated by third party operators, and the Service Center location.

Of the 30 real estate operations leased to third party operators, one senior living facility 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 September 30, 2023:

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

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Our combined Same Facilities and Transitioning Facilities occupancy is 79.2%, which represents a 2.9% increase compared to the prior year quarter and is closer to our pre-pandemic occupancy levels, which was 80.1% in March 2020.

As the pandemic comes to an end, we anticipate the return of our seasonal occupancy and skilled mix.

As we shift to an endemic, we anticipate the return of our seasonal occupancy and skilled mix.

Throughout most of our history, our seasonality trends for skilled nursing occupancy and skilled mix typically included the greatest growth during the first and fourth quarters and softening in the second and third quarters.

The seasonal impact coupled with certain Emergency Waivers expiring have contributed to shift our acuity towards pre-pandemic levels.

Nevertheless, the innovative approaches and strategic partnerships developed during the pandemic have supported our occupancy improvements and continue to enable us to gain additional market share.

These key initiatives together with our dedication to operational fundamentals resulted in a strong first half of 2023.

These key initiatives together with our dedication to our cultural and operational fundamentals resulted in a strong third quarter.

We receive state relief funding from various states, including healthcare relief funding under the American Rescue Plan Act (ARPA), increases in the Federal Medical Assistance Percentage (FMAP) under the Families First Coronavirus Response Act (FFCRA) and other state specific relief programs.

We use this funding, which reimburses the recipient, for healthcare and labor related patient care services and expenses that are attributable to the COVID-19 pandemic.

The end of the PHE resulted in the gradual phase down of the temporary increase in FMAP funding until it is phased out completely at the end of 2023.

State specific approaches have been developed including various states having increased their rates to account for the increase in expenses as a result of the pandemic.

During the three and six months ended June 30, 2023, we recognized $18.5 million and $44.8 million, respectively, of combined state relief funding as revenue.

During the three and six months ended June 30, 2022, we recognized $24.5 million and $42.1 million, respectively, of combined state relief funding as revenue.

The end of the PHE created a gradual phase down of the temporary increase in FMAP funding until it is completely phased out at the end of 2023.

State specific approaches have been developed including various states having increased their base rates to account for increases in expenses in the post-pandemic environment.

During the three and nine months ended September 30, 2023, we recognized $10.3 million and $55.1 million, respectively, of combined state relief funding as revenue.

During the three and nine months ended September 30, 2022, we recognized $21.4 million and $63.5 million, respectively, of combined state relief funding as revenue.

Common Stock Repurchase Program — On August 29, 2023, 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 September 1, 2023.

We did not repurchase any shares during the third quarter of 2023.

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, 2023:

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, 2023:

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

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Real estate properties leased to third party (2)

Senior living properties 6 2 1 — — — — — — — — 1 19 29

Skilled nursing and senior living properties 6 2 1 — — 1 — — — — — 1 19 30

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

(2) Excludes three subleases to third parties in California.

During the six months ended June 30, 2023, we expanded our operations through long-term leases, with the addition of 19 stand-alone skilled nursing operations.

During the nine months ended September 30, 2023, we expanded our operations through long-term leases, with the addition of 24 stand-alone skilled nursing operations.

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

These new operations added a total of 2,340 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

The Company also invested in new ancillary services that are complementary to its existing businesses.

For further discussion of our expansions, see Note 8, Operation Expansions in the Notes to the Interim Financial Statements .

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

Additionally, Standard Bearer acquired the real estate of one campus operation, which is leased to a third party operator.

Subsequent to September 30, 2023, we expanded our operations through a long-term lease, with the addition of one stand-alone skilled nursing operation.

This new operation added 45 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our real estate properties and expansions, see Note 6 and 7, Standard Bearer and Operation Expansions in the Notes to the Interim Financial Statements .

Key Performance Indicators

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

These rates exclude additional state relief funding, which includes payments we recognized as part of the ARPA, FFCRA and other state relief programs.

These rates exclude additional state relief funding, which includes ARPA, FFCRA and other state relief programs.

• Occupancy percentage (operational beds) — The total number of patients occupying a bed in a skilled nursing facility as a percentage of the beds in a facility which are available for occupancy during the measurement period.

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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,

2023 2022 2023 2022

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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 our "All Other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

Three Months Ended September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

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TOTAL SERVICE REVENUE $ 902,967 $ 739,318 $ 32,357 $ 26,565 $ 935,324 $ 765,883

Three Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

Three Months Ended September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

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

Six Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

(3) All Other incorporates intercompany eliminations.

Nine Months Ended September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

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TOTAL SERVICE REVENUE $ 2,638,090 $ 2,128,567 $ 95,253 $ 74,819 $ 2,733,343 $ 2,203,386

Six Months Ended June 30,

Skilled Services Other Service Revenue Total Service Revenue

Nine Months Ended September 30,

Skilled Services All Other (3)

Total Service Revenue

2023 2022 2023 2022 2023 2022

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

(3) All Other incorporates intercompany eliminations.

Skilled Services

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We generate rental revenue primarily by leasing post-acute care properties that 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, 2023, our real estate portfolio within Standard Bearer is comprised of 103 real estate properties.

Of these properties, 75 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.

During the three and six months ended June 30, 2023, we generated rental revenues of $19.9 million and $39.6 million, respectively, of which $16.1 million and $32.1 million, respectively, was derived from affiliated wholly owned healthcare operators and therefore eliminated in consolidation.

As of September 30, 2023, our real estate portfolio within Standard Bearer is comprised of 107 real estate properties.

Of these properties, 78 are leased to affiliated skilled nursing facilities wholly owned and managed by us and 30 are leased to facilities wholly owned and managed by third party operators.

During the three and nine months ended September 30, 2023, we generated rental revenues of $21.0 million and $60.6 million, respectively, of which $17.0 million and $49.0 million, respectively, was derived from affiliated wholly owned healthcare operators and therefore eliminated in consolidation.

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

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In addition, these same subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors, business relationships with physicians and workplace protection for healthcare staff.

Such laws include the Anti-Kickback Statute (AKS), the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect the skilled nursing facilities (SNFs), senior living facilities and outpatient rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and standards.

The operations must pass these inspections to remain licensed under state laws and to comply with Medicare and Medicaid provider agreements.

Such laws include (but are not limited to) the Anti-Kickback Statute (AKS), the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect the skilled nursing facilities (SNFs), senior living facilities and the outpatient rehabilitation agencies of our independent operating subsidiaries to verify continued compliance with applicable regulations and standards.

The operations must pass these inspections to remain licensed under state laws and to comply with Medicare and Medicaid provider agreements and applicable Conditions of Participation.

The operations can only participate in these third-party payment programs if inspections by regulatory authorities reveal that the operations are in substantial compliance with applicable state and federal requirements.

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Expansion of enforcement activity could adversely affect our business, financial condition or the results of operations.

Proposed and Anticipated Rulemaking and Administrative Actions

The federal government, through CMS rulemaking, Presidential executive actions or Congressional legislation, and state and local governments have recently released the following proposed rulemaking or administrative actions that may have an impact on our independent operating SNFs or senior living facilities:

Biden-Harris Administration's Nursing Home Care Priorities — The Biden-Harris Administration is seeking reform changes around reimbursement, staffing levels, standards of care, increased transparency and public disclosure of ownership, and enhanced civil remedies and other authority to exercise upon facilities that do not satisfy CMS’s standards.

Proposed, Anticipated and Recently Issued Rulemaking and Administrative Actions

Biden-Harris Administration's Nursing Home Care Priorities — The Biden-Harris Administration is seeking reform around reimbursement, staffing levels, standards of care, increased transparency and public disclosure of ownership, and enhanced civil remedies as a means of enforcement against those facilities that do not satisfy CMS’s standards.

Proposed rules based on these directives have already been published in 2023, including those highlighted below and observers expect additional rules to be issued this year and in the future.

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This proposed rule is different from, and farther-reaching than, the disclosure of Medicare-collected nursing facility ownership that has been published on the Nursing Home Compare website since April of 2022.

Proposed Federal Legislation — On March 9, 2023, the home and community-based services (HCBS) Access Act was introduced to expand access to and resources available for HCBS.

Certain states have adopted laws reflecting their concerns regarding ownership transparency.

For example, in July 2023, Iowa adopted laws requiring disclosure of ownership information not previously required for licensure to promote transparency.

Additionally, in July of 2023, the California Department of Health Care Access and Information of the California Health and Human Services Agency issued a notice of proposed rulemaking containing regulations that would implement financial and ownership transparency requirements for California-licensed SNFs that are required by California law passed in 2021.

Federal Legislation — On March 9, 2023, the home and community-based services (HCBS) Access Act was introduced to expand access to and resources available for HCBS.

This bill provides Medicaid funding to individuals who provide direct home- and community-based care to adults over the age of 60 or people who have disabilities.

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As of the date of filing, no further action has been taken on the HCBS Access Act since its introduction and referral to the aforementioned committees.

Proposed State Legislation — Many states in which our independent operating subsidiaries operate have introduced legislation that would create or change laws and regulations related to our business and industry.

For example, California has two proposals that may affect our business and SNFs operating within that state.

Specifically, one of the proposals would increase the minimum wage for workers.

This proposal was introduced to the California Senate and the Assembly and referred to its Committee on Labor and Employment and no action has been taken since then.

Another proposal would require healthcare facilities certified by CMS, including SNFs, to report all annual revenues to the State of California by June 30 of each year and certify that 85% of all non-Medicare revenues were used for direct patient-related services, including staffing and operational costs.

This proposal was introduced to the California Assembly and the Senate and referred to its Committee on Health.

No action has been taken since then.

A variation of the bill was introduced in the last legislative session, but was vetoed by California’s governor at that time.

Proposed Fiscal Year 2024 Skilled Nursing Facility Prospective Payment System (SNF PPS) — On April 4, 2023, CMS issued its proposed rule for the fiscal year 2024 SNF PPS, which included proposed changes for Medicare payment rates, the SNF Quality Reporting Program (QRP) and the SNF Value-Based Purchasing (VBP) Program.

The proposed changes to the Medicare payment rates increase the aggregate net market basket by 3.7%.

The increase includes a 6.1% update to the market basket, which is based on a 2.7% current year market basket increase plus a 3.6% market basket error adjustment, less a 0.2% productivity adjustment and a negative 2.3% adjustment as a result of the second phase of the recalibrated parity adjustment.

This proposed rule also suggests numerous changes to the SNF QRP that would take effect in 2025 and 2026 if finalized, requiring the reporting of more data that would be used by HHS and CMS to evaluate SNF performance.

Additionally, the proposed rule for the 2024 SNF PPS suggested changes to the SNF VBP Program, specifically, adopting four new quality measures concerning nursing staff turnover, the success of discharged patients, patients experiencing falls during their stay and readmissions of discharged patients.

State Legislation — Many states in which our independent operating subsidiaries operate have introduced or passed legislation that would create or change laws and regulations related to our business and industry.

In the past, California had proposed a law on direct care spending requirements that may have affected our business and SNFs operating within that state.

These proposals had included requirements for healthcare facilities certified by CMS, including SNFs, to report all annual revenues to the State of California by June 30 of each year and certify that a stated percentage of all non-Medicare revenues should be used for direct patient-related services, including staffing and operational costs.

On October 13, 2023, the California Governor signed into law a bill which impacts the minimum wages of healthcare workers.

Effective June 1, 2024, the law raises the minimum wage for California healthcare employees and sets a new salary threshold for those who are considered exempt healthcare employees.

The bill only becomes effective for SNFs if a patient care minimum spending requirement bill is also passed.

We anticipate that a minimum spending bill will be proposed in the near future.

Final Rule Fiscal Year 2024 Skilled Nursing Facility Prospective Payment System (SNF PPS) — On July 31, 2023, CMS published its final rule updating the Medicare payment rates within the SNF PPS for FY 2024 (SNF PPS FY 2024 Final Rule).

The SNF PPS FY 2024 Final Rule modifies the SNF Quality Reporting Program (QRP) and the SNF Value-Based Purchasing (VBP) Program.

The SNF PPS FY 2024 Final Rule finalized the rates to be paid in the 2024 fiscal year.

The SNF PPS FY 2024 Final Rule increases the Medicare payment rate aggregate net market basket by 4.0%.

The increase includes a 6.4% net market basket update to the payment rates of 3.0%, plus a 3.6% market basket forecast error adjustment, less a 0.2% productivity adjustment, as well as a negative 2.3% in the FY 2024 SNF PPS rates due to the second phase of the Patient Driven Payment Model (PDPM) parity adjustment recalibration.

The net effect of these changes is expected to be an overall 4.0% increase in payments to SNFs in FY 2024.

This final rule also updates the SNF QRP for FY 2024 and future years, including the adoption of two new quality reporting measures, modification of one measure and removal of three measures resulting in public reporting of four QRP measures.

Additionally, the SNF PPS FY 2024 Final Rule makes changes to the SNF VBP Program.

Specifically, this final rule adopts four new measures:

the nursing staff turnover measure, the discharge function score measure, the long stay hospitalization measure per 1,000 resident days and the percent of residents experiencing one or more falls with a major injury (long stay);

the existing SNF 30-day all-cause readmission measure (SNFRM) is replaced with the SNF within stay potentially preventable readmissions (SNF WS PPR) measure beginning in FY 2028.

SNF PPS FY 2024 Final Rule adopted the Nursing Staff Turnover (NST) measure for the SNF VBP program beginning with the FY 2026 program year.

This is a structural measure that has been collected and publicly reported on Care Compare, and the measure assesses the stability of the staffing within a SNF using nursing staff turnover.

The NST measure uses facility-reported, electronic data from CMS’ Payroll-Based Journal (PBJ) system to calculate annual turnover rates for nursing staff, including RNs, LPNs, and nurse assistants.

Facilities would begin reporting this measure in FY 2024, with payment effects beginning in FY 2026.

The NST measure looks at six consecutive quarters of data.

It starts with a baseline quarter and the first two quarters of the performance period to identify eligible employees.

Then, it uses the next four quarters to find the number of employment spells that ended in turnover.

Finally, it checks data from the sixth quarter to identify gaps in days worked that began in the last 60 days of the fifth quarter used for the measure.

The measure score is then calculated by comparing the total number of eligible employees with 60-day gaps in working during the specified periods.

Biden-Harris Administration Executive Order — In April of 2023, President Biden signed an executive order seeking to increase access to affordable, high-quality long-term care for adults who are older or disabled.

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This executive order directed HHS and CMS to take steps to use existing funding and resources to connect home- and community-based workers with education and training opportunities and to create greater opportunities for workers in those fields to obtain health insurance and retirement benefits.

Proposed CMS Minimum Staffing Mandate — In April of 2022, CMS published a request for information that solicited public comments regarding SNF staffing requirements.

CMS received more than 3,000 comments in response to this request for information, which CMS evaluated along with other data in a mixed methods study it conducted in August of 2022.

The information CMS has gathered and studied during 2022 will serve as the basis for proposed minimum staffing requirements in SNFs.

CMS’s final rule, which is expected before the end of 2023, may vary significantly from the substance of the proposed rule.

Proposed CMS Minimum Staffing Mandate — On September 1, 2023, CMS issued its proposed rule that would establish minimum staffing standards for long-term care facilities.

As a proposed rule, the comment period for this regulation is open for 60 days from the date of this proposed rule’s publication.

This proposed rule contains three primary staffing proposals:

1) minimum staffing standards of 0.55 hours per resident per day (HPRD) for registered nurses (RNs) and 2.45 HPRD for nurse aids (NAs);

2) a requirement to have a RN on-site 24 hours per day, seven days per week;

and 3) requirements for enhanced facility assessments.

The proposed rule features a staggered implementation of these requirements, including a possible hardship exemption for select facilities.

As this is a proposed rule, CMS has requested and received stakeholder feedback on all components of this regulation so that these comments may be considered prior to CMS's publication of a final rule.

Additionally, the proposed rule would increase the reporting and transparency of Medicaid payments made to a facility for its direct care, including state-level reporting requirements and provisions for states and CMS to make public information about payments made to long-term care facilities.

Facility self-assessments would also be enhanced under this proposed rule.

CMS proposes that the facility self-assessment be updated on the issue of staffing to contain or clarify:

1) that facilities must use evidence-based methods when planning for resident care, including accommodation of behavioral health needs;

2) requiring facilities to use the self-assessment to assess the specific needs of each resident, with adjustments made for changes in the resident population;

3) requiring that facilities include the input of staff, including leadership, management, nurse staff and other direct care providers who render other services to residents;

4) requiring that the staffing plan maximize recruitment and retention of staff in a manner consistent with the President’s April 2023 Executive Order on increasing access to high-quality care and supporting caregivers.

A hardship exemption for CMS’s proposed minimum staffing standards is also set forth in the proposed rule.

Long-term care facilities could qualify for a temporary hardship exemption from new minimum staffing ratios upon meeting specific criteria that demonstrate:

1) workforce unavailability based on an absence of providers relative to individuals in the age group of recipients within a specific geographic location;

2) a facility’s good faith efforts to hire and retain staff through a recruitment and retention plan;

and 3) a financial commitment to staffing by documenting the total annual amount spent on direct care staff.

A survey would be required to assess the residents’ health and safety before CMS would consider granting such a hardship exemption.

Any facility that received a hardship exemption from the minimum staffing requirement would have this exemption noted on the Care Compare website rating skilled nursing facilities.

Further, facilities would not be eligible to receive an exemption if they:

1) failed to submit their data to the payroll-based journal system;

2) have been identified as a special focus facility;

or 3) have been identified at any time within the preceding 12 months as having insufficient staffing that was either at a widespread or pattern level with resulting actual harm to residents, or receiving an immediate jeopardy citation regarding insufficient staffing.

Even after receiving an exemption, a facility would still be required to maintain sufficient staff around-the-clock to provide care and monitor resident health.

If finalized, this proposed rule would have a staggered and phased implementation over a period of three years, with the phases differentiated between rural and non-rural facilities.

For facilities in urban areas, the final rule’s facility assessment requirements would become effective within 60 days of the final rule’s publication, with the proposed rule’s round-the-clock on-site RN requirement becoming effective two years after the final rule’s publication;

and the above-referenced minimum staffing of 0.55 HPRD for RNs and 2.45 HPRD for NAs would take effect three years after the final rule’s publication.

For rural facilities, the final rule’s facility assessment requirements would still become effective within 60 days of the final rule’s publication but the proposed rule’s round-the-clock on-site RN requirement would become effective three years after the final rule’s publication, and the above-referenced minimum staffing of 0.55 HPRD for RNs and 2.45 HPRD for NAs would take effect five years after the final rule’s publication.

This minimum staffing proposed rule also seeks further information from stakeholders regarding alternative policies for establishing minimum nurse staffing standards.

In particular, CMS seeks comment on an alternative total nurse staffing standard of 3.48 HPRD (among other alternatives), which would include minimum individual standards of 0.55 HPRD for RNs and 2.45 HPRD for NAs, in addition to other nurse staffing as needed to attain a total of 3.48 HPRD across all nurse types.

CMS also seeks stakeholder comments regarding the benefits and trade-offs of using different standards, evidence, or methodologies used by states that have adopted minimum nursing standards to inform its own standard-setting.

In March of 2020, in an effort to promote efficient care delivery and to decrease the spread of COVID-19, federal, state and local regulators implemented new regulations and waived, (in some cases temporarily), certain existing regulations, including those discussed below.

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Certain rules, such as requirements for COVID-19 reporting, testing, and vaccination remained in place through the end of the PHE.

Resuming visitation and resident rights — CMS issued guidance to facilities regarding patients’ rights to visitation, initially severely restricting patient visitation and then gradually broadening the scope of permitted visitation throughout the pandemic to reflect the availability of vaccinations and changes in standards concerning the use of facemasks for staff and visitors.

While the PHE ended on May 11, 2023, CMS still intends for the guidance issued throughout the PHE to be influential on facilities and state regulators when managing general infection control measures.

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 SNFs and senior living facilities based on guidance from the Centers for Disease Control and Prevention (CDC).

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 SNFs and assisted living facilities based on guidance from the Centers for Disease Control and Prevention (CDC).

During the PHE, CMS issued revised parameters for testing, requiring routine testing of only unvaccinated staff and then further revised its guidance in September of 2022 to specify only symptomatic individuals and their close contacts, (including staff and residents), should be tested for COVID-19.

On June 5, 2023, CMS published a final rule containing changes to COVID-19 vaccination, reporting, testing, and other requirements (Omnibus Final Rule), which takes effect 60 days after publication and ended the COVID-19 testing and reporting requirements for SNFs and senior living facilities imposed during the PHE.

All of the federal, state and local government vaccines mandates have been rescinded since the end of the PHE.

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The Consolidated Appropriations Act of 2023 (CAA 2023) amended these Medicaid enrollment protections and increased FMAP funding provided in the FFCRA.

In the first quarter of 2023, the FMAP increase CMS provides to the states remained elevated by 6.2%, but this amount will taper to 0% by the end of 2023.

In the first quarter of 2023, the FMAP increase CMS provides to the states remained elevated by 6.2%, but this amount decreased to 5% for April through June 2023, 2.5% for July through September 2023, and 1.5% for October through December 2023 before tapering to 0% by the end of 2023.

The ultimate amount of Medicaid funding provided from each state will vary substantially based on each state's policies.

Under the CAA 2023, states are allowed to begin disenrolling Medicaid beneficiaries and resuming Medicaid eligibility determinations beginning on April 1, 2023 upon satisfying conditions that include reviewing Medicaid beneficiaries eligibility.

Under the CAA 2023, states were allowed to begin disenrolling Medicaid beneficiaries and resuming Medicaid eligibility determinations beginning on April 1, 2023 upon satisfying conditions that include reviewing Medicaid beneficiaries' eligibility and have begun doing so.

On August 30, 2023, CMS advised all 50 states in a letter to their respective Medicaid administrators to observe federal Medicaid regulations in making these redeterminations, including requirements to make eligibility determinations on an individual basis rather than a per-household basis.

CMS has worked with 12 states regarding their respective redetermination and disenrollment processes, and previously paused policy in six states.

As a result of this activity, the redetermination and disenrollment period that began on April 1, 2023 has not proceeded as rapidly as some may have expected.

Medicare presently accounts for approximately 27.8% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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The SNF PPS Rule included a new case mix model that focuses on the patient’s condition (clinically relevant factors) and resulting care needs, rather than on the volume of care provided, to determine Medicare reimbursement.

The case mix-model is called the Patient-Driven Payment Model (PDPM), which utilizes clinically relevant factors for determining Medicare payment by using diagnosis codes and other patient characteristics as the basis for patient classification.

The case mix-model is called the PDPM, which utilizes clinically relevant factors for determining Medicare payment by using diagnosis codes and other patient characteristics as the basis for patient classification.

PDPM utilizes five case-mix adjusted payment components:

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CMS's rulemaking often identifies new data elements to be reported.

For example, in July of 2022, CMS announced revisions to calculating its five-star ratings for the Nursing Home Compare website.

In July of 2022, CMS announced revisions to calculating its five-star ratings for the Nursing Home Compare website.

Under this new calculation, points are assigned to a SNF based on its performance across six measures:

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SNFs began submitting this data on October 1, 2022.

On January 25, 2023, CMS announced that the most recently reported QRP data was incorporated in the January 2023 refresh of the information available through the SNF Care Compare website.

On February 14, 2023, CMS released a draft of the latest minimum data set (MDS) specifications for information to be collected and reported to CMS by SNFs under the QRP.

CMS anticipates releasing the final MDS specifications in May of 2023, with these specifications and reporting requirements implemented on October 1, 2023.

On July 31, 2023, CMS published the SNF PPS FY 2024 Final Rule, which included changes to the SNF QRP, including adopting, removing and modifying specific measures.

The final rule also includes policy changes and the public reporting of four measures.

The final rule adopts the Discharge Function Score (DC Function) measure, which determines the functional condition of residents by examining the proportion of SNF residents who achieve or surpass a projected discharge functionality score.

The assessment includes consideration of mobility and self-care, utilizing data from the Minimum Data Set (MDS).

The DC Function will replace the current process and is scheduled to go into effect for the FY 2025 SNF QRP.

CMS will adopt two measures for the SNF QRP starting in FY 2026.

First, CMS will raise the Data Completion Thresholds for the MDS.

SNFs must report required quality measure data and standardized resident assessment data gathered using the MDS for at least 90% of the assessments they submit to CMS.

SNFs who fail to meet this requirement will be subject to a 2% reduction on their applicable fiscal year payment starting in FY 2026.

Second, CMS will adopt the Patient/Resident COVID-19 Vaccine metric.

This metric highlights the number of patient stays in which SNF patients received the COVID-19 vaccine.

The SNF PPS FY 2024 Final Rule also modifies the SNF QRP’s Healthcare Professional (HCP) Covid Vaccine Measure.

The measure will track the proportion of healthcare staff vaccinated for COVID-19 and have kept their vaccination status current per the CDC recommendations.

Previously, SNFs were only obligated to disclose whether their healthcare workers had completed the initial vaccination series for COVID-19.

Now, there is an added requirement to report the total count of healthcare employees who have maintained their COVID-19 vaccination status in line with CDC recommendations.

The SNF PPS FY 2024 Final Rule also removed the Application of Functional Assessment/Care Plan measures from the SNF QRP.

CMS stated the decision stemmed from two primary reasons:

first, the consistently high-performance levels among SNFs make it challenging for CMS to identify significant advancements;

and second, the DC Function measure aligns more closely with the preferred functional outcomes for residents.

Medicare Annual Payment Rule

CMS is required to calculate an annual Medicare market-basket update to the payment rates.

On July 31, 2023, CMS issued the SNF PPS FY 2024 Final Rule, which will result in a net increase of 4.0% in Medicare payments to SNFs in fiscal year 2024.

This increase results from the 6.4% net market basket update to the payment rates, which is based on a 3.0% SNF market basket increase plus a 3.6% market basket forecast error adjustment, less a 0.2% productivity adjustment and a negative 2.3% adjustment as a result of the recalibrated parity adjustment.

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

The increase results 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 on both the SNF PPS FY 2024 and FY 2023 Final Rules.

Sequestration of Medicare Rates

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The deadlines for baseline period quality measure quarterly reporting and performance periods and standards began in the 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 Biden Administration published a fact sheet identifying the SNF-VBP Program as an area for change, specifically regarding staffing levels, retention and resident experience.

In March of 2023, CMS updated its FAQ for the SNF-VBP program to incorporate information and details from the fiscal year 2023 SNF PPS final rule and the impact that rule changes may have on individual facility scoring.

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 assess the rate of successful discharges to the community from a SNF setting.

The SNF PPS FY 2024 Final Rule elected to replace the SNFRM measure with the SNF WS PPR measure beginning in the FY 2028 program year.

The potentially preventable readmission (PPR) measure assesses the risk-standardized rate of unplanned and potentially avoidable readmissions during SNF stays for Medicare fee-for-service beneficiaries.

The new SNF WS PPR measure refines the original Skilled Nursing Facility 30-Day Potentially Preventable Readmission (SNFPPR) measure, which followed the requirements of the Protecting Access to Medicare Act (PAMA) of 2014.

The refinement in the SNF WS PPR measure shifts the observation window from a fixed 30-day post-hospital discharge to the duration of the SNF stay.

Moreover, the time gap allowed between the prior inpatient discharge and the SNF admission has been extended from one day to 30 days.

These changes, based on feedback from expert panels and a 2015 partnership, better align the measure with the IMPACT Act's provisions and enhance the reliability of tracking preventable readmissions.

Additionally, the SNF WS PPR measure's calculations use two years of Medicare claims data to generate a provider-specific risk-standardized readmission rate.

Part B Rehabilitation Requirements

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The comments and data CMS receives from this request for information may affect the rate of reimbursement for PT and OT services in the future and may affect the desirability and utilization of physical therapy assistants and occupational therapy assistants for certain patient services.

Additionally, the proposed CY 2024 PFS would add certain health maintenance and well-being coaching services to the services for which Medicare will reimburse telehealth services through December 31, 2024.

Additionally, the proposed CY 2024 PFS would add certain health maintenance and well-being coaching to the services for which Medicare will reimburse telehealth services through December 31, 2024.

This proposed rule also proposes adding risk assessments for social determinants of health to the list of telehealth services Medicare will reimburse on a permanent basis.

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CMS "grandfathered" certain facilities and will allow SNFs that were participating in Medicare before July 5, 2016 and that previously used the Fire Safety Evaluation System (FSES) to continue using the 2001 FSES mandatory values when determining compliance with applicable standards.

CMS also updated the Requirements of Participation to revise existing qualification requirements for directors of food and nutrition services in SNFs, while "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 satisfying further educational requirements.

CMS also updated the Requirements of Participation to revise existing qualification requirements for directors of food and nutrition services in SNFs, while "grandfathering" in directors with two or more years of experience and certain minimum training in food safety so they may continue in that role without satisfying further educational requirements.

On February 17, 2023, CMS revised the survey resources that CMS and state surveyors use in evaluating SNFs’ compliance with federal Requirements for Participation.

This revision incorporated the recent changes to CMS’s focused infection control survey item, which CMS had removed in favor of standard infection control survey measures.

This revision incorporated the recent changes to CMS’ focused infection control survey item, which CMS had removed in favor of standard infection control survey measures.

These changes were made to the most recent revision of long-term care facility survey documents that CMS had last revised in October of 2022.

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CMS can recover overpayments from health care providers up to six years following the year in which payment was made.

In 2021, the OIG released the result of an audit finding that Medicare overpaid millions of dollars of chronic care management (CCM) services.

In 2021, the OIG released the result of an audit finding that Medicare overpaid millions of dollars for chronic care management (CCM) services.

The OIG's 2021 report found that in calendar years 2017 and 2018, Medicare overpaid millions of dollars in CCM claims.

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These investigatory actions by OIG demonstrate its increased scrutiny into post-hospital SNF care provided to beneficiaries and may encourage additional oversight or stricter compliance standards.

In 2023, representatives of the DOJ speaking at certain industry events, including the American Health Law Association’s Fraud and Compliance Forum, have indicated that its healthcare enforcement trends would emphasize opioid prescribing, Medicare Advantage and managed care plan fraud, and COVID-19 related fraud, including under various relief programs available during and in conjunction with the pandemic.

Our business model, like those of some other for-profit operators, is based in part on seeking out higher-acuity patients whom we believe are generally more profitable.

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Additionally, in April of 2022, the Nursing Home Compare website began publishing the ownership information for Medicare-enrolled nursing facilities based on disclosures made to CMS from 2016 through 2022 due to mergers, acquisitions, or other changes in ownership, to allow for the identification of common ownership of nursing facilities.

In 2020, in response to the COVID-19 pandemic, CMS temporarily froze SNF QRP data, including data in the staffing and health inspection domains, on the Nursing Home Compare website to account for the then-suspended reporting and inspection obligations.

In January of 2021, the freeze on reporting and data updates ended and the Five-Star Quality ratings resumed as normal on the Nursing Home Compare website which included new and other data CMS has collected and required SNFs to report as discussed within this Government Regulation heading.

In January of 2022, the Nursing Home Compare website began reporting SNF weekend staffing as well as staff tenure and other collected staffing data, which would also be incorporated into its Five-Star Quality ratings.

This data was included in the October 2022 refresh of the Nursing Home Compare website.

In addition, the Five Star Quality Ratings incorporated staffing data such as staff tenure and SNF weekend staffing beginning with the October 2022 refresh of the Nursing Home Compare website.

In January of 2023, CMS updated the Nursing Home Five-Star Quality Rating System’s Technical Users’ Guide.

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Only 10% of nursing facilities can receive a five-star rating in the state where it operates.

In September 2023, CMS announced that it will update the staffing level case-mix adjustment methodology and freeze four of the quality measures used in the Nursing Home Five-Star Quality Rating System beginning with the April 2024 refresh of the Nursing Home Compare website’s data.

This freeze is implemented to accommodate changes to the MDS so that information that will be added to the MDS can be gathered.

For three months, until the July 2024 refresh of the Nursing Home Compare website rankings, CMS will freeze the staffing level measures for all SNFs.

Beginning with the July 2024 refresh, CMS will change the staffing case-mix adjustment methodology to a model based on PDPM, which is discussed above.

The Nursing Home Compare website will then begin posting staffing level measures that use this PDPM methodology.

To incentivize SNFs to submit accurate staffing data, CMS will revise the staffing methodology to penalize SNFs that fail to submit staffing data, or submit erroneous data, by awarding them the lowest possible score for those measures beginning in April of 2024.

State Legislation Concerning Nursing Home Supervision — California passed into law a bill 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).

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

Expected to take effect on July 1, 2023, this law increases the oversight authority of the California Department of Public Health, and changes several provisions regarding SNF licensing in the State of California.

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

This includes eliminating previous regulatory provisions that permitted SNFs to operate in advance of receiving their formal license from the State.

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Talevski, which pertained to claims of mistreatment in a nursing home.

The nursing home was publicly owned by the government county where it operated, rather than privately owned such as our facilities are through independent operating subsidiaries.

The question before the Supreme Court was whether the Nursing Home Reform Act (NHRA), passed as part of the Omnibus Budget Reconciliation Act of 1987 (OBRA), gave Talevski the right to sue HHC for a violation of his civil rights under 42 U.S.C.

The nursing home was publicly owned by the government county where it operated, rather than privately owned.

The question before the Supreme Court was whether the Nursing Home Reform Act, passed as part of the Omnibus Budget Reconciliation Act of 1987, gave Talevski the right to sue HHC for a violation of his civil rights under 42 U.S.C.

§ 1983, a specific statute that allows for claims against persons who act for and on behalf of any government entity.

The Supreme Court held that Talevski’s civil rights claim against HHC could proceed.

While the facts of this case are of limited precedential value to our independent operating subsidiaries, which are not owned by and do not act on behalf of any government entity, this decision may draw wider public interest into claims against SNFs and senior living facilities generally.

Monitoring Compliance in Our Facilities

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However, if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the original notice, leaving operators with the task of deciding whether to continue accepting patients after the potential denial of payment date--risking the retroactive denial of revenue.

Some of our independent operating subsidiaries have been or will be in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of revenue associated with Medicare and Medicaid patients admitted after the denial of payment date.

Some of our independent operating subsidiaries have been or will be in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of revenue associated with patients admitted after the denial of payment date.

Additional sanctions could ensue and, if imposed, could include various remedies up to and including decertification.

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Enforcement of the antitrust laws against healthcare providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician relations, joint venture, merger, affiliation and acquisition activities.

On February 3, 2023, the DOJ’s Antitrust Division withdrew its support for three policies that had been jointly created by the DOJ and the Federal Trade Commission in 1993, 1996, and 2011, announcing instead, without providing further alternative guidance, that the DOJ would take a case-by-case enforcement approach to evaluate conduct in the healthcare industry, citing that the previous policies were outdated and overly permissive.

Similarly, on July 14, 2023, the Federal Trade Commission (“FTC”) withdrew two antitrust policy statements related to enforcement in healthcare markets.

On February 3, 2023, the DOJ’s Antitrust Division withdrew its support for three policies that had been jointly created by the DOJ and the Federal Trade Commission (FTC) in 1993, 1996, and 2011, announcing instead, without providing further alternative guidance, that the DOJ would take a case-by-case enforcement approach to evaluate conduct in the healthcare industry, citing that the previous policies were outdated and overly permissive.

Similarly, on July 14, 2023, the FTC withdrew two antitrust policy statements related to enforcement in healthcare markets.

Moving forward, the FTC will evaluate mergers and conduct in healthcare markets on a case-by-case basis using principles of antitrust enforcement and competition policy.

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Real Estate Investment Trust (REIT) Qualification

We are electing for Standard Bearer to be taxed as a REIT for U.S.

We elected for Standard Bearer to be taxed as a REIT for U.S.

federal income tax purposes beginning with its taxable year ended December 31, 2022.

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

Our total revenue for the three months ended June 30, 2023 increased $188.9 million, or 25.8%, while our diluted GAAP earnings per share grew by 10.9%, from $1.01 to $1.12, compared to the three months ended June 30, 2022.

Throughout 2023, we have continued to make progress on targeted initiatives related to increasing occupancy in our facilities and attracting and developing our people.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 3.1% compared to the three months ended June 30, 2022.

As our census returns to pre-pandemic levels, we anticipate a return to our historical seasonality trends, which typically result in higher occupancy and skilled mix during the first and fourth quarters and softening in the second and third quarters.

Our total revenue for the three months ended September 30, 2023 increased $170.8 million, or 22.2%, while our diluted GAAP earnings per share grew by 12.1%, from $0.99 to $1.11, compared to the three months ended September 30, 2022.

Throughout 2023, we have continued to make progress on targeted initiatives related to increasing occupancy in our facilities, attracting and developing our people and acquiring new skilled nursing operations and integrating them with our proven cultural and operational principals.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the three months ended September 30, 2022.

As our census continues to return to pre-pandemic levels, we anticipate a return to our historical seasonality trends, which typically result in higher occupancy and skilled mix during the first and fourth quarters and softening in the second and third quarters.

See Recent Activities for our operational update.

During the six months ended June 30, 2023, we added 19 new operations, which included 17 operations in California.

These California facilities include an amazing group of highly skilled team members who will further our mission of dignifying long term care.

During the nine months ended September 30, 2023, we added 24 new operations, which included 17 operations in California.

These California facilities include a group of highly skilled team members who will further our mission of dignifying long term care.

We continue to work diligently with existing and recently acquired operations so that each can reach its full clinical and financial potential.

Our strength remains in our operating model, which empowers each operator to form their own market-specific strategy and to adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff.

Our strength remains in our operating model, which empowers each operator to form their own market-specific strategy and adjust to the needs of their local medical communities, including methods for attracting new healthcare professionals into our workforce and retaining and developing existing staff.

Despite continued labor pressures, there are positive trends on both turnover and agency usage in some of our markets.

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,

2023 2022 2023 2022

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6.8 % 7.3 % 6.8 % 7.4 %

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

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

2023 2022 2023 2022

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• stock-based compensation expense;

• legal adjustments;

• legal costs and adjustments;

• gain on business interruption of recoveries and sale of assets;

• write off deferred financing fees;

• write-off of deferred financing fees;

• acquisition related costs;

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

Adjusted EBITDA is EBITDA adjusted for the same non-core business items as listed in Adjusted EBT, except for depreciation and amortization of patient base intangible assets.

Adjusted EBITDA is EBITDA adjusted for the same non-core business items as listed in Adjusted EBT, except for depreciation and amortization of patient base intangible assets and write-off of deferred financing fees.

Funds from Operations (FFO)

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The table below reconciles income before provision for income taxes to Adjusted EBT for the periods presented:

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

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

2023 2022 2023 2022

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7,237 5,898 22,691 16,681

Legal adjustments (a)

Legal costs and adjustments (a)

2,783 859 1,965 4,485

Gain on business interruption recoveries and sale of assets (259) (900) (1,009) (3,467)

Write off deferred financing fees (b)

Write-off of deferred financing fees (b)

Acquisition related costs (c)

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Costs incurred related to new systems implementation

— 321 875 390

Depreciation and amortization - patient base (d)

135 86 182 213

(a) Legal adjustments relate to findings attributable to our ancillary services subsidiary, which includes the portion attributable to non-controlling interests.

$ 92,091 $ 78,964 $ 266,906 $ 230,922

(a) Legal costs incurred in connection with the medical directors related matter.

Legal adjustments relate to findings attributable to our ancillary services subsidiary, which includes the portion attributable to non-controlling interests.

(b) Represents the write-off of deferred financing fees associated with the amendment of the credit facility.

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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,

2023 2022 2023 2022

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7,237 5,898 22,691 16,681

Legal adjustments (a)

Legal costs and adjustments (a)

2,783 859 1,965 4,212

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Costs incurred related to new systems implementation

— 321 875 390

ADJUSTED EBITDA

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$ 158,401 $ 457,374

(a) Legal adjustments relate to findings attributable to our ancillary services subsidiary, which excludes the portion attributable to non-controlling interests.

(a) Legal costs incurred in connection with the medical directors related matter.

Legal adjustments relate to findings attributable to our ancillary services subsidiary, which excludes the portion attributable to non-controlling interests.

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

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

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, 2023

Three Months Ended September 30, 2023

Skilled services Standard Bearer All Other Eliminations Consolidated

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Segment income (loss) 117,816 7,165 (42,936) — 82,045

Loss on real estate insurance recoveries

— — — — — (100)

Income before provision for income taxes $ 82,045

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Skilled services Standard Bearer All Other Eliminations Consolidated

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Segment income (loss) 101,750 6,941 (37,036) — 71,655

Gain from sale of real estate

— — — — 2,467

Gain on sale of assets, net

Income before provision for income taxes $ 72,455

Our total revenue increased by $188.9 million, or 25.8%, compared to the three months ended June 30, 2022.

The increase in revenue was driven by an increase in occupancy and patient days from our skilled services operations, growth in skilled average daily census and the impact of acquisitions.

Total revenue from operations acquired on or subsequent to July 1, 2022 increased our consolidated service revenue by $130.2 million during the three months ended June 30, 2023, when compared to the same period in 2022.

We recorded $18.5 million of state relief revenue in the second quarter of 2023 compared to $24.5 million in the same period in 2022.

Our total revenue increased by $170.8 million, or 22.2%, compared to the three months ended September 30, 2022.

The increase in revenue was driven by an increase in occupancy from Medicaid non-skilled services as well as the impact of acquisitions.

Total revenue from operations acquired on or subsequent to October 1, 2022 increased our consolidated service revenue by $117.3 million during the three months ended September 30, 2023, when compared to the same period in 2022.

These increases were offset by a decline in state relief funds.

We recorded $10.3 million of state relief revenue in the third quarter of 2023 compared to $21.4 million in the same period in 2022.

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, 2023 and 2022:

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, 2023 and 2022:

Three Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 48.4 % 51.6 % (3.2) %

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 49.8 % 53.1 % (3.3) %

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 36.1 % 40.5 % (4.4) %

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 Change % Change

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2022.

Skilled services revenue increased by $181.7 million, or 25.9%, compared to the three months ended June 30, 2022.

Skilled services revenue increased by $163.6 million, or 22.1%, compared to the three months ended September 30, 2022.

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $83.0 million, or 23.9%, Medicare revenue of $26.4 million, or 12.5%, managed care revenue of $38.1 million, or 28.7% and private revenue of $16.1 million, or 33.0%.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our occupancy continued to recover in the second quarter of 2023 and growth in skilled census.

Our consolidated occupancy increased by 2.8% during the three months ended June 30, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased by $49.6 million, or 7.8% due to increased occupancy and a shift to higher acuity patients.

The increase in skilled services revenue was primarily driven by strong performance across our skilled services operations as our occupancy continued to recover in the third quarter of 2023, as well as the favorable impact of skilled census from our recent acquisitions.

Our consolidated occupancy increased by 3.2% during the three months ended September 30, 2023 compared to the same period in 2022.

See Recent Activities for our operational update.

Revenue in our Same Facilities increased by $42.6 million, or 6.6% due to increased occupancy and a shift to higher Medicaid and private census.

Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and the local communities we operate in increased our managed care days by 6.9% and managed care revenue per patient day by 6.6%, resulting in an increase in managed care revenue of 15.9%.

In addition, Medicaid revenue increased by $30.7 million or 10.3%, mainly from the increase in days and Medicaid revenue per patient day.

With the ending of the PHE, we experienced a decrease in acuity due to the return of seasonal trends.

Revenue generated by our Transitioning Facilities increased by $3.2 million, or 5.4%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our Medicaid days, private days and Medicare skilled days increased by 5.5%, 5.2% and 3.4%, respectively, demonstrating our ability to focus on increasing occupancy across various payer types.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2022 (Recently Acquired Facilities) increased by $126.7 million compared to the three months ended June 30, 2022 .

We acquired 39 operations between July 1, 2022 and June 30, 2023 across six states.

Our Medicaid days and private days increased by 9.0% and 5.6%, respectively, demonstrating our ability to focus on increasing occupancy across various payer types.

We experienced a decrease in Medicare revenue and skilled days as our normal seasonality returns in the post-pandemic environment.

Skilled services revenue generated by Recently Acquired Facilities increased by $117.9 million compared to the three months ended September 30, 2022 .

We acquired 36 operations between October 1, 2022 and September 30, 2023 across six states.

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

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

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature and have higher occupancy rates, higher skilled mix days and skilled mix revenue.

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

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature and have higher occupancy rates, higher skilled mix days and higher skilled mix revenue than our typical acquisitions.

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

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$ 379.79 $ 368.27 $ 339.42 $ 335.24 $ 368.46 $ 293.23 $ 374.85 $ 361.74

(1) These rates exclude state relief funding and for the three months ended June 30, 2022 include sequestration reversal of 1%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.4% and 2.9%, respectively, compared to the three months ended June 30, 2022.

The increase is attributable to the 2.7% net market basket increase that became effective in October 2022, offset by the reinstatement of the sequestration.

Medicare daily rate in the second quarter of 2022 included three months of sequestration suspension of 1%.

(1) These rates exclude state relief funding .

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 5.4% and 4.5%, respectively, compared to the three months ended September 30, 2022.

The increase is attributable to the 2.7% net market basket increase that became effective in October 2022.

In addition, we have seen a shift to higher acuity patients.

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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

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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

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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

2023 2022 $ %

2 unchanged sentences

Cost of services related to our skilled services segment increased by $134.1 million, or 23.2%.

Cost of services as a percentage of revenue increased to 78.8% from 77.5% due to costs related to higher staffing expenses as a result of the labor shortage environment.

The increase in wages and benefits and additional overtime is offset by the decrease in contract labor usage as we made progress toward our staff hiring.

Cost of services as a percentage of revenue increased to 79.0% from 78.3% due to costs related to new acquisitions, increase in professional liabilities reserves and higher staffing expenses as a result of the challenging labor environment.

The increase in wages and benefits is offset by the decrease in contract labor usage as we made progress on retention and hiring.

Standard Bearer

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

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$ 13,594 $ 12,502 $ 1,092 8.7 %

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.3 million, or 13.2%, to $19.9 million, compared to the three months ended June 30, 2022.

The increase in revenue is primarily attributable to eight real estate purchases, as well as annual rent increases since the three months ended June 30, 2022.

FFO — Our FFO increased by $1.2 million, or 10.1%, to $13.3 million, compared to the three months ended June 30, 2022.

The increase in rental revenue of $2.3 million is offset by increases in interest expense of $0.9 million as well as management fee expense of $0.1 million associated with the intercompany agreements between Standard Bearer and the Service Center.

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.2 million, or 12.0%, to $21.0 million, compared to the three months ended September 30, 2022.

The increase in revenue is primarily attributable to six real estate purchases, as well as annual rent increases since the three months ended September 30, 2022.

FFO — Our FFO increased by $1.1 million, or 8.7%, to $13.6 million, compared to the three months ended September 30, 2022.

The increase in rental revenue of $2.2 million is offset by increases in interest expense of $1.1 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

Our other revenue increased by $7.7 million, or 25.3%, to $38.4 million, compared to the three months ended June 30, 2022.

Other revenue for 2023 includes senior living revenue of $19.0 million, revenue from other ancillary services of $16.6 million and sub-rental income of $2.8 million.

The increase in other revenue is primarily attributable to our senior living operations' occupancy rates rebounding from COVID-19.

Our other revenue increased by $7.3 million, or 22.9%, to $39.1 million, compared to the three months ended September 30, 2022.

Other revenue for 2023 includes senior living revenue of $18.9 million, revenue from other ancillary services of $17.3 million and rental income of $2.9 million.

The increase in other revenue is primarily attributable to our other ancillary services.

Consolidated Financial Expenses

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.3% to 5.4%, primarily due to lease obligations acquired as part of our operational expansions.

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.3% to 5.4%, primarily due to lease obligations acquired as part of our 31 operational expansions with long-term leases since the three months ended September 30, 2022.

General and administrative expense — General and administrative expense increased $11.9 million or 30.3%, to $51.1 million.

General and administrative expense as a percentage of revenue increased by 0.3% to 5.4%.

This increase was primarily due to increased headcounts due to acquisition activities and bonuses due to enhanced performance.

This increase was primarily due to increased legal costs and headcount due to acquisition activities.

Excluding the legal costs, general and administrative expense as a percentage of revenue remained consistent at 5.1%.

Depreciation and amortization — Depreciation and amortization expense increased $2.5 million, or 15.7%, to $18.4 million.

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Other income primarily includes interest income from our investments offset by interest expense related to our debt.

Additionally our deferred investment program may have gains or losses depending on market performance.

During the three months ended June 30, 2023, the deferred compensation investment program had a gain of $1.3 million.

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

During the three months ended June 30, 2022, the deferred compensation investment program had a loss of $3.3 million.

Additionally our deferred investment program incurs gains or losses depending on market performance.

During the three months ended September 30, 2023 and 2022, the deferred compensation investment program had a loss of $1.4 million and $1.1 million, respectively.

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 20.9% for the three months ended June 30, 2023, compared to 20.8% for the same period in 2022.

Provision for income taxes — Our effective tax rate was 22.0% for the three months ended September 30, 2023, compared to 22.4% for the same period in 2022.

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 14, Income Taxes , in the Notes to the Interim Financial Statements for further discussion.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

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, 2023

Nine Months Ended September 30, 2023

Skilled Services Standard Bearer All Other Eliminations Consolidated

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Income before provision for income taxes $ 241,480

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Skilled Services Standard Bearer All Other Eliminations Consolidated

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Income before provision for income taxes $ 211,638

Our total revenue increased $362.3 million, or 25.1%, compared to the six months ended June 30, 2022.

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

Total revenue from operations acquired on or subsequent to July 1, 2022 increased our consolidated service revenue by $230.1 million during the six months ended June 30, 2023, when compared to the same period in 2022.

In addition, we recorded $44.8 million of state relief revenue during the six months ended June 30, 2023 compared to $42.1 million in 2022, which directly correlated to the additional COVID-19 related labor expenses incurred.

Our total revenue increased $533.0 million, or 24.1%, compared to the nine months ended September 30, 2022.

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

Total revenue from operations acquired on or subsequent to October 1, 2022 increased our consolidated service revenue by $300.1 million during the nine months ended September 30, 2023, when compared to the same period in 2022.

In addition, we recorded $55.1 million of state relief revenue during the nine months ended September 30, 2023 compared to $63.5 million in 2022, which directly correlated to the additional COVID-19 related labor 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, 2023 and 2022:

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, 2023 and 2022:

Nine Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 50.6 % 52.3 % (1.7) %

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 51.8 % 53.4 % (1.6) %

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 Change % Change

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Skilled mix by nursing revenue 38.9 % 41.8 % (2.9) %

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 Change % Change

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2022.

Skilled services revenue increased $345.9 million, or 24.9%, compared to the six months ended June 30, 2022.

Skilled services revenue increased $509.5 million, or 23.9%, compared to the nine months ended September 30, 2022.

The increases in skilled services revenue were across all payer types including increases in M edicaid revenue of $243.6 million, or 24.6%, Medicare revenue of $123.3 million, or 20.2%, managed care revenue of $99.5 million, or 25.6% and private revenue of $43.1 million, or 31.3%.

The increase in skilled services revenue was primarily driven by strong performance across our existing skilled services operations as our census continued to recover in the first half of 2023, growth in skilled census, state specific relief programs and the impact of acquisitions.

Our consolidated occupancy increased by 3.3% during the six months ended June 30, 2023 compared to the same period in 2022.

The increase in skilled services revenue was primarily driven by strong performance across our existing skilled services operations as our census continued to recover during the first nine months of 2023, continued growth in skilled census and the impact of acquisitions.

Our consolidated occupancy increased by 3.3% during the nine months ended September 30, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased $148.9 million, or 7.8%, compared to the same period in 2022, due to increases in 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 managed care skilled revenue by $26.9 million, or 12.2%, mainly from the increase in managed care days 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 managed care revenue by $49.5 million, or 13.6%, mainly due to increases in managed care days of 8.2% and revenue per patient day of 4.2%.

In addition, Medicaid revenue increased by $87.3 million or 10.0%, mainly from the increases in Medicaid days and revenue per patient day.

Revenue generated by our Transitioning Facilities increased $15.5 million, or 9.1%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our private days, managed care skilled days and Medicaid days increased by 14.8%, 5.9% and 6.5%, respectively, demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2022 (Recently Acquired Facilities) increased by approximately $227.2 million compared to the six months ended June 30, 2022.

The increases were primarily due to the expansion of 39 operations between July 1, 2022 and June 30, 2023 across six states.

Our private days, Medicaid days and managed care skilled days increased by 11.4%, 7.3% and 4.2%, respectively, demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by Recently Acquired Facilities increased by approximately $345.1 million compared to the nine months ended September 30, 2022.

The increases were primarily due to the expansion of 36 operations between October 1, 2022 and September 30, 2023 across six states.

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

Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired that are mature and have higher occupancy rates, higher skilled mix days and skilled mix revenue.

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

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(1) These rates exclude state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022.

Our Medicare daily rates at Same Facilities and Transitioning Facilities both increased by 2.9%, compared to the six months ended June 30, 2022.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.7% and 3.4%, respectively, compared to the nine months ended September 30, 2022.

The increase is attributable to the 2.7% net market basket increase that became effective in October 2022, offset by the phased reinstatement of the sequestration.

In the first half of 2022, Medicare daily rates included three months of sequestration suspension of 1% and three months of sequestration suspension of 2%.

During the nine months ended September 30, 2022, Medicare daily rates included three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and three months of no sequestration suspension.

In addition, we have seen a shift to higher acuity patients.

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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

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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

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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

2023 2022 $ %

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Cost of services related to our skilled services segment increased by $423.0 million, or 25.5%.

Cost of services as a percentage of revenue increased to 78.8% from 77.7%, due to costs related to new acquisitions and higher wage expenses as a result of the labor shortage environment, resulting in additional overtime, benefits and bonuses to our staff.

Cost of services as a percentage of revenue increased to 78.9% from 77.9%, due to costs related to new acquisitions, increase in professional liabilities reserves and higher wage expenses as a result of the labor shortage environment, resulting in additional overtime, benefits and bonuses to our staff.

Standard Bearer

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

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FFO $ 40,045 $ 36,477 $ 3,568 9.8 %

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $4.8 million, or 13.9%, to $39.6 million, compared to the six months ended June 30, 2022.

The increase in revenue is primarily attributable to eight real estate purchases as well as annual rent increases since the six months ended June 30, 2022.

FFO — Our FFO increased by $2.5 million, or 10.3%, to $26.5 million, compared to the six months ended June 30, 2022.

The increase in rental revenue of $4.8 million is offset by increases in interest expense of $1.9 million as well as management fee expense of $0.3 million associated with the intercompany agreements between Standard Bearer and the Service Center.

Rental revenue — Our rental revenue, including revenue generated from our affiliated facilities, increased by $7.1 million, or 13.2%, to $60.6 million, compared to the nine months ended September 30, 2022.

The increase in revenue is primarily attributable to six real estate purchases as well as annual rent increases since the nine months ended September 30, 2022.

FFO — Our FFO increased by $3.6 million, or 9.8%, to $40.0 million, compared to the nine months ended September 30, 2022.

The increase in rental revenue of $7.1 million is offset by increases in interest expense of $3.0 million associated with the intercompany agreements between Standard Bearer and the Service Center.

All Other Revenue

Our other revenue increased by $17.5 million, or 30.2%, to $75.5 million, compared to the six months ended June 30, 2022.

Other revenue for 2023 includes senior living revenue of $37.5 million, revenue from other ancillary services of $32.6 million and sub-rental income of $5.4 million.

The increase in other revenue is primarily attributable to our senior living operations' occupancy rates rebounding from COVID-19.

Our other revenue increased by $24.8 million, or 27.6%, to $114.6 million, compared to the nine months ended September 30, 2022.

Other revenue for 2023 includes senior living revenue of $56.4 million, revenue from other ancillary services of $49.9 million and rental income of $8.3 million.

The increase in other revenue is primarily attributable to our other ancillary services as well as senior living operations' starting to rebound from COVID-19.

Consolidated Financial Expenses

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.3% to 5.3%, primarily due to lease obligations acquired as part of our operational expansions.

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.3% to 5.3%, primarily due to lease obligations acquired as part of our 31 operational expansions with long-term leases since the nine months ended September 30, 2022.

General and administrative expense — General and administrative expense increased $40.4 million or 34.8%, to $156.4 million.

General and administrative expense as a percentage of revenue increased by 0.5% to 5.7%.

This increase was primarily due to increases in system implementation costs, bonuses due to enhanced performance and headcount due to acquisition activity.

This increase was primarily due to increases in legal costs, system implementation costs, bonuses due to enhanced performance and headcount due to acquisition activity.

Excluding the legal costs, general and administrative expense as a percentage of revenue decreased 0.1%.

Depreciation and amortization — Depreciation and amortization expense increased $7.7 million, or 16.9%, to $53.2 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 remained consistent at 2.0%, as a percentage of revenue.

Depreciation and amortization decreased 0.2%, to 1.9%, as a percentage of revenue.

Other income (expense), net — Other income (expense), net as a percentage of revenue increased by 0.8%.

Other income primarily includes interest income from our investments offset by interest expense related to our debt.

Additionally, our deferred investment program may have gains or losses depending on market performance.

During the six months ended June 30, 2023, the deferred compensation investment program had a gain of $2.5 million.

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

During the six months ended June 30, 2022, the deferred compensation investment program had a loss of $4.5 million.

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

Provision for income taxes — Our effective tax rate was 22.2% for the six months ended June 30, 2023, compared to 22.5% for the same period in 2022.

Additionally, our deferred investment program may incur gains or losses depending on market performance.

During the nine months ended September 30, 2023, the deferred compensation investment program had a gain of $1.1 million.

During the nine months ended September 30, 2022, the deferred compensation investment program had a loss of $5.7 million.

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

Provision for income taxes — Our effective tax rate was 22.1% for the nine months ended September 30, 2023, compared to 22.4% for the same period in 2022.

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.

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

Our liquidity as of June 30, 2023 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Our liquidity as of September 30, 2023 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

Internal Revenue Service and California have provided disaster-area tax relief for the deferral of federal and California estimated tax payments until the fourth quarter of 2023.

As of the second quarter of 2023, the Company has deferred approximately $50 million of 2023 federal and California estimated tax payments.

As of the third quarter of 2023, the Company has deferred approximately $50.0 million of 2023 federal and California estimated tax payments.

The Company subsequently made an estimated tax payment of $69.4 million in October of 2023 for federal and California taxes that had been incurred through the third quarter of 2023.

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

Cash paid to fund acquisitions was $1.6 million and $49.5 million for the six months ended June 30, 2023 and 2022, respectively.

Total capital expenditures for property and equipment were $51.6 million and $37.1 million for the six months ended June 30, 2023 and 2022, respectively.

Cash paid to fund acquisitions was $54.0 million and $90.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Total capital expenditures for property and equipment were $77.4 million and $59.7 million for the nine months ended September 30, 2023 and 2022, respectively.

We currently have approximately $100.0 million budgeted for renovation projects in 2023.

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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, 2023 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of September 30, 2023 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of June 30, 2023, we held investments of approximately $105.8 million.

We believe our investments that were in an unrealized loss position as of June 30, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

In addition, as of September 30, 2023, we held investments of approximately $103.3 million.

We believe our investments that were in an unrealized loss position as of September 30, 2023 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

As mentioned above, our primary source 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, 2023, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

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 from August 2, 2022.

We currently anticipate that existing cash and total investments as of September 30, 2023, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

On August 29, 2023, 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 September 1, 2023.

Under this program, we are authorized to repurchase our 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 share repurchase program does not obligate us to acquire any specific number of shares.

We did not purchase any shares pursuant to this stock repurchase program during the six months ended June 30, 2023.

We did not purchase any shares pursuant to this stock repurchase program during the three months ended September 30, 2023.

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

The $38.3 million increase in cash provided by operating activities for the six months ended June 30, 2023 compared to the same period in 2022 w as primarily due to higher net income offset by changes in working capital.

Changes in working capital were driven by timing of income tax payments offset by timing of accounts receivable collections.

The $69.1 million increase in cash provided by operating activities for the nine months ended September 30, 2023 compared to the same period in 2022 w as primarily due to higher net income offset by changes in working capital.

Changes in working capital were driven by deferral of income tax payments of $55.5 million and accrued wages offset by timing of accounts receivable collections.

Investing Activities

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

The $14.2 million decrease in cash used in investing activities for the six months ended June 30, 2023 compared to the same period in 2022, was primarily due to a decrease in cash used for operational expansions of $47.9 million offset by an increase in cash used for investments of $11.8 million and an increase in cash used for the capital expenditures of $14.5 million.

The $6.0 million decrease in cash used in investing activities for the nine months ended September 30, 2023 compared to the same period in 2022, was primarily due to a decrease in cash used for operational expansions of $36.4 million offset by an increase in cash used for capital expenditures of $17.6 million and investments of $4.8 million.

In addition, in the prior year, we had cash proceeds from the sale of fixed assets and insurance proceeds of $8.6 million that did not recur in current year.

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 and sale of subsidiary shares.

The $27.9 million decrease in cash used in financing activities for the six months ended June 30, 2023 compared to the same period in 2022, was primarily due to $29.9 million of share repurchases as part of our stock repurchase program in 2022.

The $29.9 million decrease in cash used in financing activities for the nine months ended September 30, 2023 compared to the same period in 2022, was primarily due to $29.9 million of share repurchases as part of our stock repurchase program in 2022.

Credit Facility with a Lending Consortium Arranged by Truist

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Mortgage Loans and Promissory Note

As of June 30, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $151.9 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

As of September 30, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $151.1 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, 2023, 211 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, 2023, 213 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.

Seventy-eight of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under 12 separate master lease arrangements.

Eighty of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated under 13 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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On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.

Department of Justice stating that it was investigating to determine whether there had been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of our skilled nursing facilities and persons who serve or have served as medical directors, advisory board participants or other referral sources.

Additionally, we are aware of a claim filed by an individual related to this matter.

As a general matter, our operating entities have established and maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements.

We have fully cooperated with the U.S.

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

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

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

Department of Justice (DOJ) stating that it was investigating whether there had been a violation of the FCA and/or the AKS with respect to the relationships between certain of our independently operated skilled nursing facilities and persons who serve or have served as medical directors.

We have fully cooperated with the DOJ and promptly responded to its requests for information.

In April 2020, we were advised that the DOJ declined to intervene in any subsequent action filed in connection with the subject matter of this investigation.

Despite the decision of the DOJ to decline to participate in litigation based on the subject matter of its previously issued CID, the involved qui tam relator has moved forward with the lawsuit.

We are vigorously defending this lawsuit, but expects the costs of defense to be significant given the nature of the allegations and the date range contemplated by the complaint.

As a general matter, our independent operating entities have established and maintain policies and procedures to promote compliance with the FCA, the AKS, and other applicable regulatory requirements.

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

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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