What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-01 compared with 2023-02-02 · 205 added, 222 removed, 390 unchanged (52% of the section changed)

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– Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K for the year ended December 31, 2022, that was filed with the Securities and Exchange Commission on February 2, 2023.

We are a provider of health care services across the post-acute care continuum, engaged in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and other ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

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

We are a provider of health care services across the post-acute care continuum.

We engage in the operation, ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare related properties and ancillary businesses located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

Our independent subsidiaries, each of which strive to be the operation of choice in the community they serve, provide a broad spectrum of services.

As of December 31, 2023, we offered skilled nursing, senior living and rehabilitative care services through 297 skilled nursing and senior living facilities.

Of the 271 facilities, we operated 192 facilities under long-term lease arrangements and have options to purchase 11 of those 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.

Our real estate portfolio includes 113 owned real estate properties, which includes 83 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.

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

Our operating subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets.

In addition, certain of our wholly-owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly-owned captive insurance subsidiary that provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

Our subsidiaries are operated by separate, independent entities, each of which has its own management, employees and assets.

In addition, certain of our wholly-owned subsidiaries including Ensign Services, Inc.

and Cornet Limited, Inc., referred to collectively as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other independent subsidiaries through contractual relationships with such subsidiaries.

We also have a wholly-owned captive insurance subsidiary that provides some claims-made coverage to our independent subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities and our captive real estate trust owns and operates our real estate portfolio.

Our captive real estate investment trust, Standard Bearer, owns and manages our real estate business.

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Recent Activities

Operational Update — In 2022, the public health emergency (PHE) was extended several times and was most recently extended through April 11, 2023.

On January 30, 2023, the Biden Administration announced its plan to extend the PHE for a final time to May 11, 2023.

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

We continue to implement measures necessary to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff.

Operational Update — On May 11, 2023, the United States Department of Health and Human Services (HHS) ended the public health emergency (PHE).

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

Even with the end of the PHE, we continue to implement new measures and maintain existing ones to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature of our patients.

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

During the year, our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to 2021.

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

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

During the year ended December 31, 2022 and 2021, we recognized $81.8 million and $75.2 million, respectively, of state relief funding as revenue, including FMAP.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with approximately 50% of the deferred amount paid by December 31, 2021 and the remaining 50% by December 31, 2022.

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

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

Our combined Same Facilities and Transitioning Facilities occupancy is 78.9%, which represents a 3.2% increase compared to the prior year and is closer to our pre-pandemic occupancy levels, which was 80.1% in March 2020.

As we shift to an endemic, we believe that we will continue to see 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.

As we exited the pandemic and enter the endemic, we saw a shift towards pre-pandemic occupancy and skilled mix levels.

This was possible due to the innovative approaches and strategic partnerships developed during the pandemic which supported our occupancy improvements and continue to enable us to gain additional market share.

These key initiatives together with our dedication to our cultural and operational fundamentals resulted in a strong 2023 results.

We receive 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 created a gradual phase down of the temporary increase in FMAP funding in 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 years ended December 31, 2023 and 2022, we recognized $64.8 million and $81.8 million, respectively, of combined state relief funding as revenue.

Standard Bearer Update — In January of 2022, we formed Standard Bearer Healthcare REIT, Inc.

or Standard Bearer, a captive REIT.

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

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

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

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

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

During the year ended December 31, 2022, we acquired the real estate of ten skilled nursing facilities, all of which were leased to certain of our operating subsidiaries through the Standard Bearer Master Leases for a purchase price of $84.7 million.

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

The resulting real estate portfolio in Standard Bearer consists of a select 103 of our 108 owned real estate properties.

Of the 103 owned real estate properties in Standard Bearer, 75 facilities are operated by Ensign operating subsidiaries and 29 facilities are leased to and operated by Pennant.

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

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

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

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

This structure gives us new pathways to growth with transactions we would not have considered in the past.

During the year ended December 31, 2023, Standard Bearer acquired the real estate of three stand-alone skilled nursing facilities and two campus operations for an aggregate purchase price of $65.9 million .

Of these additions, the three skilled nursing facilities and one campus operation acquired are operated by our independent subsidiaries and the other campus operation is leased to a new third-party operator.

Our existing relationship with third-party operators within our industry allowed us to expand our growing REIT structure to operators outside of our organization.

As of December 31, 2023, the fair value of Standard Bearer's real estate portfolio is approximately $1.1 billion.

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

As part of the formation of Standard Bearer, certain of our operating subsidiaries and the Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases).

Total annual rental income under the Standard Bearer Master Lease is approximately $62.5 million.

Standard Bearer has no employees.

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

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

The base management fee for each applicable period is equal to 5.0% of the total revenue of Standard Bearer.

The incentive management fee is equal to 5.0% of funds from operations (FFO) and is capped at 1.0% of total revenue.

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

During the year ended December 31, 2022, the Service Center management fee was $4.4 million, which represents 6% of total Standard Bearer rental revenue.

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

The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs.

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

During the year ended December 31, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $0.1 million.

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

In addition, as part of the formation of Standard Bearer in January of 2022, we established the Standard Bearer Healthcare REIT, Inc.

2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

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

We did not grant any stock options nor restricted shares during the year ended December 31, 2022.

During the year ended December 31, 2022, Standard Bearer met the requirement to distribute to its shareholders at least 90% of its annual taxable income through a declaration and payment of cash dividends totaling $30.4 million.

Of that amount, $30.1 million was paid in the form of a distribution to the Company and $0.3 million was paid in the form of a distribution to noncontrolling interests.

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

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

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

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

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

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

As part of the amendment, deferred financing costs of $0.6 million were written off and additional deferred financing costs of $3.2 million were capitalized during the year ended December 31, 2022.

Common Stock Repurchase Program — 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 did not purchase any shares pursuant to this stock repurchase program in the year ended December 31, 2022.

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

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

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

Expansion into a New State — Subsequent to December 31, 2023, we expanded our operations into the state of Tennessee with the addition of one stand-alone skilled nursing operation.

This expansion is part of our strategic vision to further strengthen our growing national presence in both existing and new attractive markets.

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 pursuant to this program during the fiscal year 2023.

Litigation — In regard to the proceeding discussed in Item 3.

Legal Proceedings , the parties agreed to settle the litigation for $48.0 million, subject to the review and approval of all parties, including the DOJ.

The settlement does not include admissions on the part of the Company and the Company maintains that it has at all times complied and continues to comply with all applicable State and Federal statutes (including but not limited to the FCA and the AKS).

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 Family First Coronavirus Response Act.

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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We have two reportable segments:

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) Standard Bearer, which is comprised of select properties owned by us through our captive REIT and leased to skilled nursing and senior living operations, including our own operating subsidiaries and third party operators.

We also reported an “all other” category that includes operating results from our senior living operations, mobile diagnostics, transportation, other real estate and other ancillary operations.

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Revenue Sources

Skilled Services

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

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

We believe that our skilled mix, which we define as the number of days Medicare, managed care and other skilled patients are receiving services at our skilled nursing operations divided by the total number of days patients are receiving services at our skilled nursing operations, from all payor sources (less days from senior living services) for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare, managed care and other skilled payors, for whom we receive higher reimbursement rates.

We are participating in supplemental payment programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts.

Numerous operating subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts.

Each affected operating subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.

Standard Bearer

We generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions.

We participate in supplemental payment programs and quality improvement programs in various states that provide supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government-owned entities such as city and county hospital districts.

Numerous independent subsidiaries entered into transactions with various hospital districts providing for the transfer of the licenses for those skilled nursing facilities to the hospital districts.

Each affected independent subsidiary agreement between the hospital district and our subsidiary is terminable by either party to fully restore the prior license status.

Standard Bearer — We generate rental revenue primarily by leasing post-acute care properties that we acquired to healthcare operators under triple-net lease arrangements, whereby the tenants are solely responsible for the costs related to the property, including property taxes, insurance and maintenance and repair costs, subject to certain exceptions.

As of December 31, 2023, our real estate portfolio within Standard Bearer is comprised of 108 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.

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

During the year ended December 31, 2022, we generated rental revenues of $72.9 million, of which $58.0 million 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.

Of these properties, 79 are leased to our independent subsidiaries and 30 are leased to facilities wholly-owned and managed by third-party operators.

During the year ended December 31, 2023, we generated rental revenues of $82.5 million, of which $66.7 million, was derived from our independent subsidiaries' operators and therefore eliminated in consolidation.

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

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

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Primary Components of Expense

Cost of Services (exclusive of rent and depreciation and amortization shown separately) — Our cost of services represents the costs of operating our operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients.

Cost of Services (exclusive of rent and depreciation and amortization shown separately) — Our cost of services represents the costs of operating our independent subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients.

Cost of services also includes the cost of general and professional liability insurance, rent expenses related to leasing our operational facilities that are not included in facility rent - cost of services, and other general cost of services with respect to our operations.

Facility Rent - Cost of Services — Rent - cost of services consists solely of base minimum rent amounts payable under lease agreements to third-party real estate owners.

Our operating subsidiaries lease and operate but do not own the underlying real estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

Our independent subsidiaries lease and operate but do not own the underlying real estate and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

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

General and Administrative Expense — General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support.

General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to our information systems and stock-based compensation related to our Service Center employees.

General and administrative expense also includes professional fees (including accounting and legal fees), litigation expense related to specific proceedings that are outside the ordinary course of business, costs relating to our information systems and stock-based compensation related to our Service Center employees.

Depreciation and Amortization — Property and equipment are recorded at their original historical cost.

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

Our general and professional liability as of the years ended December 31, 2022 and 2021 was $87.0 million and $69.7 million, respectively.

Our general and professional liability as of the year ended December 31, 2023 and 2022 was $117.7 million and $87.0 million, respectively.

Our policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported.

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

Since 2018, our total revenue increased $1.3 billion, or 72.4%, representing a 14.6% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.86 from 2018 to $3.95, representing a 38.0% CAGR.

Our total revenue for the year ended December 31, 2022 increased $398.0 million, or 15.1%, while our diluted GAAP earning per share grew by 15.5%, from $3.42 to $3.95, compared to the year ended December 31, 2021.

Over the past year, we have continued to make progress on targeted initiatives related to increasing occupancy and hiring and developing our people.

Over the last five years, our total revenue increased by $2.0 billion, or 112.5%, representing a 16.3% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continued operations grew by $2.56 from 2018 to $3.65 in 2023, representing a 27.4% CAGR.

Our total revenue for the year ended December 31, 2023 increased $703.9 million, or 23.3%, compared to the year ended December 31, 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.

We continue to experience healthy growth in both revenue and operational earnings.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 3.2% compared to 2022.

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

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

We also added over 4,000 team members, or 16%, to our operating subsidiaries and the Service Center.

Our net revenue for the year ended December 31, 2022 continued to be impacted by COVID-19, with the continual evolution of COVID-19 variants and subvariants in 2022.

Accordingly, we continued to receive state relief funding in selected states, which have been designed to provide additional funding to cover COVID-19 related expenses.

For the year ended December 31, 2022, we recorded state relief revenue of $81.8 million, which directly offsets against COVID-19 related expenses we incurred in those states.

See Recent Activities for further information.

Additionally, we continue to seek out opportunities to expand our operations and real estate, adding 29 new operations and ten real estate properties, three of which we previously operated, during the year ended December 31, 2022.

We remain confident that our operating model will continue to allow 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.

We are excited to be adding new operations in several geographies.

These transitions will take time, particularly given the continued labor pressures, but with each new operation we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reach its enormous clinical and financial potential.

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 year ended December 31, 2023, we added 26 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 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.

During 2023, we added over 5,000 team members, or 18%, to our independent subsidiaries and the Service Center.

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:

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Other income 0.7 —

Other expense, net (0.3) (0.1)

Other income (expense), net 0.5 (0.3)

Income before provision for income taxes 7.3 9.5

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PERFORMANCE METRICS

EBITDA 359,209 313,377

Adjusted EBT 365,310 314,609

327,303 359,209

Adjusted EBITDA 419,496 383,570

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

Included in segment income for Standard Bearer for the year ended December 31, 2022 are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

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

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

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

Included in segment income for Standard Bearer are expenses for intercompany management fees between Standard Bearer and the Service Center and intercompany interest expense.

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

(2) Standard Bearer segment income includes rental revenue and expenses from our independent subsidiaries.

(3) EBITDA includes litigation related to specific proceedings arising outside of the ordinary course of business as discussed in Item 3.

Legal Proceedings.

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

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

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

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

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

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

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

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

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

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

PERFORMANCE MEASURES

We adjust income before provision for income taxes (Adjusted EBT) when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance.

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

We use this performance measure as an indicator of business performance, as well as for operational planning, decision-making purposes and to determine compensation in our executive compensation plan.

Adjusted EBT is income before provision for income taxes adjusted for non-core business items, which for the reported periods includes, to the extent applicable:

• stock-based compensation expense;

• litigation;

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

• write-off of deferred financing fees;

• acquisition related costs;

• costs incurred related to new systems implementation;

• depreciation and amortization of patient base intangible assets.

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

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

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

Adjusted EBITDA

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

• stock-based compensation expense;

• real estate transactions and other related costs;

• legal finding;

• acquisition related costs;

• costs incurred related to new systems implementation;

• results related to operations not at full capacity;

• gain on sale of assets and business interruptions recoveries.

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

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

Year Ended December 31,

Consolidated statements of income data:

(In thousands)

Income before provision for income taxes $ 272,762 $ 289,089

Stock-based compensation expense

30,767 22,720

Litigation (a)

Gain on sale of assets and business interruption recoveries (1,132) (4,380)

Write-off of deferred financing fees (b)

Acquisition related costs (c)

Costs incurred related to new systems implementation

Depreciation and amortization - patient base (d)

$ 365,310 $ 314,609

(a) Litigation relates to specific proceedings arising outside of the ordinary course of business, 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.

(d) Included in depreciation and amortization are amortization expenses related to patient base intangible assets at newly acquired skilled nursing and senior living facilities.

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

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Net income $ 209,850 $ 224,652

net (loss) income attributable to noncontrolling interests

Other expense, net 7,736 2,461

net income (loss) attributable to noncontrolling interests

Other (income) expense, net

(17,395) 7,736

Provision for income taxes

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EBITDA $ 327,303 $ 359,209

Stock-based compensation 22,720 18,678

Real estate transactions and other related costs(a)

Legal finding(b)

Gain on sale of assets and business interruptions recoveries

Stock-based compensation expense

30,767 22,720

Results related to operations not at full capacity — 585

Acquisition related costs(c)

Litigation (a)

Gain on sale of assets and business interruption recoveries

(1,132) (4,380)

Acquisition related costs (b)

Costs incurred related to new systems implementation

Rent related to items above — 38

ADJUSTED EBITDA

$ 419,496 $ 383,570

Rent—cost of services 197,358 153,049

rent related to items above — (38)

Adjusted rent 153,049 139,333

ADJUSTED EBITDAR

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

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

(a) Litigation relates to specific proceedings arising outside of the ordinary course of business, which excludes the portion attributable to non-controlling interests.

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

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

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Total revenue $ 3,578,855 $ 82,486 $ 155,804 $ (87,790) $ 3,729,355

Total expenses, including other expense, net 2,497,483 45,066 273,391 (76,294) 2,739,646

Total expenses, including other income (expense), net

3,113,930 53,421 377,055 (87,790) 3,456,616

Segment income (loss) 464,925 29,065 (221,251) — 272,739

Gain from sale of real estate 3,267

Gain on sale of assets and insurance recoveries from real estate, net

Income before provision for income taxes $ 272,762

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Total revenue $ 2,906,215 $ 72,937 $ 122,610 $ (76,294) $ 3,025,468

Total expenses, including other expense, net 2,149,631 26,251 250,600 (56,585) 2,369,897

Total expenses, including other income (expense), net

2,497,483 45,066 273,391 (76,294) 2,739,646

Segment income (loss) 408,732 27,871 (150,781) — 285,822

Gain from sale of real estate

Gain on sale of assets and insurance recoveries from real estate, net

Income before provision for income taxes $ 289,089

Our total revenue increased $703.9 million, or 23.3%, compared to the year ended December 31, 2022.

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

Total revenue from operations acquired on or subsequent to January 1, 2022 increased our consolidated revenue by $123.9 million during the year ended December 31, 2022, when compared to the same period in 2021.

In addition, we recorded $81.8 million of state relief revenue during the year ended in 2022 compared to $75.2 million in 2021, which directly correlated to the additional COVID-19 related expenses incurred.

The increase in revenue was primarily driven by an increase in occupancy of 3.2% from our skilled services Same Facilities and Transitioning Facilities coupled with increasing daily revenue rates and the impact of acquisitions.

Specifically, our skilled services Recently Acquired Facilities increased total revenue by $450.0 million, when compared to the same period in 2022, with 52.0% of these operations being acquired in 2023.

We believe this demonstrates our ability to increase our market share through strategic acquisitions of operations that have higher skilled mix and higher occupancy than our typical acquisitions.

These increases are offset by a decrease in state relief revenue of $17.1 million as the end of the PHE created a gradual phase down of the temporary increase in FMAP funding.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the years ended December 31, 2022 and 2021:

The following table presents the skilled services revenue and key performance metrics by category during the year ended December 31, 2023 and 2022:

Year Ended December 31,

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Number of campuses at period end (1)

27 26 1 3.8 %

Actual patient days 8,590,995 7,243,781 1,347,214 18.6 %

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Number of facilities at period end 48 23 25 NM

Number of campuses at period end* 1 — 1 NM

Number of campuses at period end (1)

Actual patient days 1,371,664 319,365 1,052,299 NM

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

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

(2) Same Facility results represent all facilities purchased prior to January 1, 2020.

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Skilled services revenue increased $672.6 million, or 23.1%, compared to the year ended December 31, 2022.

Of the $383.0 million increase, the primary changes were from increases in M edicaid custodial revenue of $151.2 million, or 15.0%, Medicare revenue of $105.1 million, or 14.4%, managed care revenue of $69.0 million, or 15.1%, private revenue of $29.6 million, or 18.5% and Medicaid skilled revenue of $28.1 million, or 16.3%.

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 fiscal year 2022 and the impact of operation expansions in 2022.

Our consolidated occupancy increased by 2.5% and our skilled nursing days increased by 0.1% compared to 2021.

Revenue in our Same Facilities increased $152.6 million, or 7.3%, compared to 2021, due to increases in occupancy and skilled mix.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 2.5% to 76.4%.

Managed care and Medicare skilled days increased by 6.4% and 5.5%, respectively, coupled with an increase in our skilled revenue daily rate of 2.3%, resulting in an increase in skilled mix revenue.

Revenue generated by our Transitioning Facilities increased $44.7 million, or 13.3%, primarily due to improved occupancy growth of 5.5% and an increase in skilled mix days of 1.4%, compared to 2021, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled mix revenue increased by 1.1%, mainly from the increases in m anaged care and Medicare days of 22.3% and 8.6%, respectively, coupled with an increase in our skilled revenue daily rate of 1.7%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2021 (Recently Acquired Facilities) increased by approximately $185.8 million compared to the year ended December 31, 2021.

The increases are primarily due to the expansion of 24 operations between January 1, 2022 and December 31, 2022 across six states.

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

The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $315.9 million, or 23.2%, Medicare revenue of $153.6 million, or 18.5%, managed care revenue of $140.4 million, or 26.7% and private revenue of $62.7 million, or 33.1%.

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

Our consolidated occupancy increased by 3.2% during the year ended December 31, 2023 compared to the same period in 2022.

Revenue in our Same Facilities increased $201.8 million, or 7.9%, compared to the same period in 2022, due to increases in occupancy from both skilled and long-term care patients and revenue per patient day.

Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and the local communities we operate in, increased our managed care revenue by 14.8%, mainly due to increases in managed care days of 7.2% and revenue per patient day of 5.3%.

We continued to see a shift in our patient population from Medicare to managed care as Medicare Advantage enrollment accounts for a larger portion of the overall population.

In addition, Medicaid revenue increased by $116.7 million or 9.9%, mainly from the increases in Medicaid days and revenue per patient day.

Revenue generated by our Transitioning Facilities increased $20.8 million, or 9.0%, primarily due to improved occupancy growth and an increase in revenue per patient day.

Our Medicaid revenue increased by 10.9%, Managed Care revenue increased by 12.3% and private revenue increased by 18.1%, demonstrating our ability to focus on increasing occupancy across payer types.

Skilled services revenue generated by Recently Acquired Facilities increased by approximately $450.0 million compared to the year ended December 31, 2022.

The increases were primarily due to 26 operational expansions in 2023 as well as the full year impact of the 24 operational expansions in 2022.

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

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

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) :

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$ 383.56 $ 370.57 $ 342.57 $ 332.09 $ 368.46 $ 296.15 $ 378.02 $ 363.97

(1) These rates exclude additional FMAP and other state relief funding and include sequestration reversal of 1% for the second quarter in 2022 and 2% for the first quarter of 2022 and the year ended December 31, 2021.

(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 increased by 4.1% and 4.2%, respectively, compared to the year ended December 31, 2022.

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

In 2022, Medicare daily rates includes three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and six months of no sequestration suspension compared to the sequestration suspension of 2% that was in place for the entire year of 2021.

The increase is attributable to the 2.7% and 4.0% net market basket increase that became effective in October 2022 and October 2023, respectively, offset by the phased reinstatement of the sequestration.

During the year ended December 31, 2022, Medicare daily rates included three months of sequestration suspension of 1%, three months of sequestration suspension of 2% and six months of no sequestration suspension.

Our average Medicaid rates increased 5.6% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

Medicaid rates exclude the amount of state relief revenue we recorded.

Payor Sources as a Percentage of Skilled Nursing Services — We use our skilled mix as a measure of the quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods.

Payor Sources as a Percentage of Skilled Nursing Services — We use our skilled mix as a measure of the quality of reimbursements we receive at our independent skilled nursing facilities over various periods.

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

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Revenue percentage 79.1 % 78.0 % 1.1 %

Cost of services related to our skilled services segment increased by $323.2 million, or 16.6%, due to additional costs at new operation expansions, which accounted for $147.7 million of the increase to cost of services.

The remaining increases are mainly due to higher staffing expenses.

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

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

Cost of services as a percentage of revenue increased to 78.0% from 77.1%.

Cost of services related to our skilled services segment increased by $564.3 million, or 24.9% from prior year.

Cost of services as a percentage of revenue increased to 79.1% from 78.0%, due to increased costs related to general and professional liabilities reserves and wage expenses as a result of the labor environment.

In addition, included in cost of services during the year ended December 31, 2023 is the expense related to the deferred compensation investment program of $2.4 million compared to a gain of $2.6 million during the year ended December 31, 2022.

Standard Bearer

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Rental revenue generated from third-party tenants $ 15,774 $ 14,970 $ 804 5.4 %

Rental revenue generated from Ensign affiliated operations 57,967 44,165 13,802 31.3

Rental revenue generated from Ensign's independent subsidiaries

66,712 57,967 8,745 15.1

TOTAL RENTAL REVENUE $ 82,486 $ 72,937 $ 9,549 13.1 %

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FFO $ 54,270 $ 49,484 $ 4,786 9.7 %

Rental revenue — Standard Bearer's rental revenue, including revenue generated from our affiliated facilities, increased by $14.8 million, or 25.5% to $72.9 million, compared to the year ended December 31, 2021.

The increase in revenue is primarily attributable to ten real estate purchases as well as annual rent increases since the year ended December 31, 2021.

Segment income — Standard Bearer's segment income decreased by 12.6% to $27.9 million, compared to the year ended December 31, 2021.

The decrease is primarily attributable to increases in interest expense as a result of intercompany debt arrangements used to fund real estate acquisitions, management fee expense associated with the intercompany agreements between Standard Bearer and the Service Center and depreciation and amortization offset by increases in rental revenue as a result of the real estate acquisitions.

FFO — Standard Bearer's FFO increased by 0.1% to $49.5 million, compared to the year ended December 31, 2021.

The increase is similar to the change in segment income with the exclusion of depreciation and amortization.

Excluding the expenses entered into in 2022, FFO increased by 26.4%.

Rental revenue — Our rental revenue, including revenue generated from our independent subsidiaries, increased by $9.5 million, or 13.1%, to $82.5 million, compared to the year ended December 31, 2022.

The increase in revenue is primarily attributable to five real estate purchases as well as annual rent increases since the year ended December 31, 2022.

FFO — Our FFO increased by $4.8 million, or 9.7%, to $54.3 million, compared to the year ended December 31, 2022.

The increase in rental revenue of $9.5 million is offset by increases in interest expense of $4.3 million associated with the intercompany debt arrangements between Standard Bearer and us, as we continue to grow our real estate portfolio.

All Other Revenue

Our other revenue increased by $33.2 million, or 27.1%, to $155.8 million, compared to the year ended December 31, 2022.

Other revenue for 2022 includes senior living revenue of $67.4 million and revenue from other ancillary services of $47.8 million and rental income of $7.4 million.

The increase in other revenue is attributable to our senior living operation expansions in 2022.

Other revenue for 2023 includes senior living revenue of $76.4 million, revenue from other ancillary services of $68.3 million and rental income of $11.1 million.

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

Consolidated Financial Expenses

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

Rent-cost of services — Our rent-cost of services as a percentage of total revenue increased by 0.2% to 5.3%, primarily due to lease obligations acquired as part of our 22 operational expansions with long-term leases since the year ended December 31, 2022.

General and administrative expense — General and administrative expense increased $104.2 million or 65.6%, to $263.0 million.

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

General and administrative expense as a percentage of revenue decreased by 0.6% to 5.2%, which demonstrates our refocused efforts on non-clinical spend management.

General and administrative expense as a percentage of revenue increased by 1.9% to 7.1%.

This increase was primarily due to increases in litigation expense related to specific proceedings that are outside the ordinary course of business, system implementation costs, bonuses due to enhanced performance and headcount due to acquisition activity.

Excluding the litigation expense, general and administrative expense as a percentage of revenue increased by 0.2% to 5.4%.

Depreciation and amortization — Depreciation and amortization expense increased $10.0 million, or 16.1%, to $72.4 million.

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

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

Other expense, net — Other expense, net as a percentage of revenue increased by 0.2%, to 0.3%.

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

During the year ended December 31, 2022, we recorded a loss on those investments of $4.2 million compared to a gain of $1.6 million during the year ended December 31, 2021.

There is an offsetting income and offsetting expense split between cost of services and general and administrative expenses in 2022 and 2021, respectively.

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

Depreciation and amortization decreased 0.2%, to 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 incur gains or losses depending on market performance.

During the year ended December 31, 2023, the deferred compensation investment program had a gain of $4.6 million.

During the year ended December 31, 2022, the deferred compensation investment program had a loss of $4.2 million.

The offsetting expenses or reduction in expenses are allocated between cost of services and general and administrative expenses.

Provision for income taxes — Our effective tax rate was 23.1% for the year ended December 31, 2023, compared to 22.3% 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.

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

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

See Note 14, Income Taxes , in the Financial Statements for further discussion.

Liquidity and Capital Resources

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

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

Our liquidity as of December 31, 2023 is impacted by cash generated from strong operational performance and increased acquisition and share repurchase activities.

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

Cash paid to fund acquisitions was $101.1 million and $104.1 million for the years ended December 2022 and 2021, respectively.

Total capital expenditures for property and equipment were $87.5 million and $69.6 million for the years ended December 31, 2022 and 2021, respectively.

We currently have approximately $80.0 million budgeted for renovation projects for 2023.

We believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Revolving Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

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 $69.0 million and $101.1 million for the year ended December 31, 2023 and 2022, respectively.

Total capital expenditures for property and equipment were $106.2 million and $87.5 million for the year ended December 31, 2023 and 2022, respectively.

We currently have approximately $110.0 million budgeted for renovation projects in 2024.

We believe our current cash balances, our cash flow from operations and the amounts available for borrowing under our Credit Facility will be sufficient to cover our operating needs for at least the next 12 months.

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

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We believe our investments that were in an unrealized loss position as of December 31, 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 sources of cash is from our ongoing operations.

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 December 31, 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.

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 Company did not purchase any shares pursuant to this stock repurchase program in the year ended December 31, 2022.

The share repurchase program does not obligate us to acquire any specific number of shares.

Under this program, we were 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.

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

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

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

We did not purchase any shares pursuant to this stock repurchase program during the year ended December 31, 2023.

During the first quarter of 2022, we repurchased approximately 0.1 million shares of our common stock for $9.9 million.

During the fourth quarter of 2021, we repurchased 0.1 million shares of our common stock for $10.1 million.

This repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

The share repurchase program did not obligate us to acquire any specific number of shares.

The stock repurchase program expired on August 2, 2023 and is no longer in effect.

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

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

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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 $3.2 million decrease in cash provided by operating activities for the year ended December 31, 2022 compared to the same period in 2021 w as primarily due to changes in working capital offset by higher net income.

Changes in working capital were driven by timing of collections of accounts receivable and accrued wages and related liabilities.

The $104.2 million increase in cash provided by operating activities for the year ended December 31, 2023 compared to the same period in 2022 w as due to cash generated from improved results at our local operations as well as $24.2 million that was paid for deferred social security taxes in 2022, which did not occur in 2023.

Investing Activities

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

The $12.3 million increase in cash used in investing activities for the year ended December 31, 2022 compared to the same period in 2021, was primarily due to an increase in cash used for expansions and capital expenditures of $15.0 million partially offset by sale of assets.

The $3.5 million decrease in cash used in investing activities for the year ended December 31, 2023 compared to the same period in 2022 was primarily due to a decrease in cash used for operational expansions of $32.1 million, offset by an increase in cash used for capital expenditures of $18.6 million, an increase in investments of $3.1 million and a decrease of cash proceeds from the sale of fixed assets and insurance proceeds of $7.7 million.

Financing Activities

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

The $43.9 million decrease in cash used in financing activities for the year ended December 31, 2022 compared to the same period in 2021, was primarily due to $102.0 million of net repayments of the Medicare Accelerated and Advance Payment Program funds in 2021 and $6.7 million receipt of proceeds from the sale of preferred shares and common stock of Standard Bearer in 2022.

This is offset by $19.8 million of share repurchases as part of our stock repurchase program in 2022 and $45.2 million in proceeds from HUD borrowings in the same period in 2021, that did not recur in 2022.

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 $31.7 million decrease in cash used in financing activities for the year ended December 31, 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.

A discussion of our cash flows for the year ended December 31, 2021 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 2, 2023.

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Credit facilities and term loans $ — $ — $ — $ — $ 210,000

Mortgage loan and promissory notes 156,271 159,967 117,806 120,350 122,955

Mortgage loans and promissory note

152,388 156,271 159,967 117,806 120,350

TOTAL $ 152,388 $ 156,271 $ 159,967 $ 117,806 $ 330,350

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Not included in the table above are our actuarially determined self-insured general and professional malpractice liability, workers' compensation and medical (including prescription drugs) and dental healthcare obligations, which are broken out between current and long-term liabilities in our financial statements included in this Annual Report on Form 10-K.

As part of the proceeding discussed in Item 3.

Legal Proceedings , the parties agreed to settle the litigation for $48.0 million, subject to the review and approval of all parties, including the DOJ and other relevant government entities.

Credit Facility with a Lending Consortium Arranged by Truist

On April 8, 2022, we entered into the Amended Credit Agreement, which increased the amount of the revolving line of credit thereunder to $600.0 million in aggregate principal amount.

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

We maintain a revolving credit facility with Truist Securities (Truist) (the Credit Facility) with availability up to $600.0 million in aggregate principal amount.

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

Borrowings are supported by a lending consortium arranged by Truist.

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

Mortgage Loans and Promissory Notes

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

In addition, there is a commitment fee on the unused portion of the commitments that ranges from 0.20% to 0.40% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Mortgage Loans and Promissory Note

As of December 31, 2023, 23 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $150.2 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.

In addition to the interest rate, we incur other fees for HUD placement, including but not limited to audit fees.

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

For the majority of the loans, the prepayment fee is 10% during the first three years and is reduced by 3% in the fourth year of the loan, and is reduced by 1% per year for years five through ten of the loan.

For the majority of the loans, during the first three years, the prepayment fee is 10.0%, and is reduced by 3.0% in the fourth year of the loan, and reduced by 1.0% per year for years five through ten of the loan.

There is no prepayment penalty after year ten.

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

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

The notes bear fixed interest rates of 6.3% and 5.3% per annum and the term of the notes are 10 months and 12 years, respectively.

The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

The terms for all the mortgage loans are 25 to 35 years.

In addition to the HUD mortgage loans, one of our subsidiaries has a promissory note that bears a fixed interest rate of 5.3% per annum and has a term of 12 years.

The note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

Operating Leases

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Additionally, four of the 97 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024.

We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

We also lease certain facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

In addition, we lease certain of our equipment under non-cancelable operating leases with initial terms ranging from three to five years.

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

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

Eighty of our independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases from CareTrust, are operated under 13 separate master lease arrangements.

Under these master leases, a default at a single facility could subject one or more of the other independent subsidiaries covered by the same master lease to the same default risk.

Failure to comply with Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt financing instruments.

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With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

Department of Justice Civil Investigative Demand

On May 31, 2018, we received a Civil Investigative Demand (CID) from the U.S.

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

The CID covered the period from October 3, 2013 through 2018, and was limited in scope to ten of our Southern California skilled nursing facilities.

In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 through 2018, relating to the same topic.

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

We have fully cooperated with the U.S.

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

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

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis