ENSIGN GROUP, INC (ENSG) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Ensign Group Q2 Earnings Call. I will now hand the conference over to Mr. Keetch. Please go ahead.

Thank you, operator, and welcome, everyone. We filed our earnings press release on Monday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on August 28, 2026. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, July 29, 2026, and these statements have not been and will not be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its independent subsidiaries do not undertake to publicly update or revise any forward-looking statements if changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries, collectively referred to as the service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other independent subsidiaries through contractual relationships. In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims-made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, Inc., which is a captive real estate investment trust that invests in health care properties and enters into lease agreements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with The Ensign Group. The words Ensign, company, we, our and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our independent subsidiaries, the Service Center, Standard Bearer Healthcare REIT and the insurance captive are operated by separate independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of the words we, us and our and similar terms are not meant to imply nor should it be construed as meaning that The Ensign Group has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in Monday's press release and is available on our Form 10-Q. With that, I'll turn the call over to Barry Port, our CEO. Barry?

Thanks, Chad. Before we get into our record results for the quarter, we want to spend a little time discussing what drives all of this consistency, namely the mission that our organization was founded on and strives to achieve every day. At Ensign, we talk a lot about our mission, which is to dignify post-acute care in the eyes of the world through moments of truth. That mission is much more than a statement on a wall. It is the guiding principle behind nearly every decision that's made across our organization. We believe the best way to transform post-acute care is by consistently delivering exceptional outcomes and experiences that redefine what residents, families and health care partners expect from skilled nursing. Our core values provide the foundation for that work, creating a shared culture that empowers nearly 60,000 partners to lead with compassion, accountability, ownership and a relentless commitment to excellence. If you visit one of our operations, nearly every single employee knows the value acronym, CAPLICO, and what each letter stands for. While CAPLICO may have begun as a set of values, over time it has become an operating discipline that influences hiring decisions, leadership development, employee retention, clinical execution and ultimately the experience of residents and families. Together, our mission and values inspire local teams to strengthen each other and elevate care. We believe culture is not separate from performance. It is the foundation that makes sustainable clinical, operational and financial performance possible. At the center of our clinical strategy is an integrated care model that empowers every health care discipline to participate fully in making our residents' lives better. We call this model ONE CLINICAL. In this model, therapy isn't an ancillary department. It's half of our clinical brain. As opposed to most of the industry that outsources therapy or treats therapy as a separate department to fulfill a singular purpose, our therapists work alongside nursing as equal clinical partners, bringing their expertise into every aspect of resident care. Together with our physician partners and our interdisciplinary teams, there is a continuous evaluation of emerging clinical evidence, sharing of best practices and development of advanced clinical pathways that improve outcomes across our operations. Rather than treating diagnoses in isolation, they coordinate every discipline around a common set of goals: restoring function, improving quality of life, reducing avoidable complications and helping residents achieve the best possible outcome. While it may sound like a program, it's much more than that. It is a clinical operating model that guides how our affiliated operations deliver care every day. And we believe it is one of the most important differentiators of our organization that has been developed over decades. This integrated approach influences everything from fall prevention and wound care to behavior management, functional recovery, hospital utilization, quality measures and even has led to the development of specialized clinical programs. It creates a culture of shared accountability where nursing, therapy, physicians and other clinicians continually learn from one another and refine care based on objective, measurable outcomes. We believe this clinical patient-centric model is a durable competitive advantage that is uniquely perpetuated and refined through peer accountability in our cluster model. And the proof of all this expertise and efficiency is evidenced in the outcomes. According to the most recently published Centers for Medicare & Medicaid Services data for our same-store facilities, we achieved quality measure ratings that were 23% above the average in the states that we operate in. Likewise, these operations achieved CMS Cycle 1 survey inspection results that outperformed the average of facilities in our operating states by 18% and exceeded county-level averages by 26%. In addition, rehospitalization rates and long-stay emergency department visits were better than the national average by 15% and 24%, respectively, supporting successful resident recovery and continuity of care. We also have zero CMS Special Focus facilities, having graduated several acquisitions that we acquired with that designation. We ended the quarter with over 80% of our skilled nursing operations earning a CMS quality measure rating of 4 or 5 stars, exceeding the national averages in every single one of the 15 quality measurement categories, including all five claims-based measurements. This is also especially notable given that many of our acquisitions were 1- and 2-star when we took them over. Importantly, all these measures come from a variety of objective sources, including CMS measures, claims-based metrics, regulatory surveys, occupancy trends and referral behavior. Whether viewed through quality ratings, survey performance, occupancy growth, referral trends, rehospitalization rates, emergency department utilization or managed care relationships, we believe the consistency of these outcomes provides compelling evidence that our operating model is delivering meaningful results for residents and health care partners alike. These results are not the product of any single initiative. They reflect the cumulative impact of our operating model, our ONE CLINICAL approach, the integration of therapy and nursing, investments in technology and clinical tools and the local leadership culture that drives accountability and execution at the bedside every day. The strength of our clinical model ultimately depends on the quality and stability of our people. One of our foundational CAPLICO core values is customer second, the belief that by taking extraordinary care of our employees they, in turn, will provide exceptional care to our residents. We have long believed that outstanding resident outcomes begin with engaged, supported and empowered caregivers who know they are loved and appreciated. We are especially proud of the continued improvement in employee and leadership stability. In particular, our Director of Nursing turnover continues to improve and our overall RN retention rate is also 8% better than the average across our 17-state footprint using CMS reported data. Similarly, administrator turnover is an impressive 46% lower than the CMS measured state average. We believe this level of leadership stability is one of the key differentiators of our organization. It creates continuity for our caregivers and residents, reinforces accountability at the local level and allows the investments we make in our clinical programs, technology and resources to translate into consistently superior quality outcomes, care efficiency, regulatory performance and financial results. As we've said many times, the improvement in our operating metrics like occupancy and skilled mix and the corresponding financial results are a direct reflection of a relentless patient-focused culture. In today's health care environment, patient volumes and acuity levels are directly tied to objective and verifiable positive clinical outcomes. As each operation solidifies its reputation in its respective market, they are not only being chosen to care for more and more patients, but they are also being entrusted to care for increasingly complex cases, including a larger share of Medicare, managed care and other skilled patients. Patients, families, hospital systems, physicians and managed care organizations continue to choose Ensign-affiliated operations at increasing rates because of the outcomes our teams achieve. This cannot and will not happen consistently over a long period of time without consistently achieving these industry-leading high-quality clinical outcomes. In health care, trust is ultimately expressed through patient choice and referral behavior. Hospitals, physicians, managed care organizations, patients and families make decisions every day about where care will be delivered. Occupancy growth is, therefore, more than a financial metric. It's one of the clearest external validations that an operation is consistently delivering the outcomes and experience that stakeholders value. To highlight this point, on the census front, our same-store and transitioning occupancy for the second quarter was 84.1% and 84.7%, respectively. As for our ability to attract high-acuity patients, our combined same facilities and transitioning facilities revenue and days increased by 10.7% and 6.7%, respectively, over the prior year quarter. Also, managed care revenue increased by 6.1% and 16.2%, respectively, for same-store and transitioning operations over the prior year quarter, with skilled mix days up 6.2% and 9.4%, respectively, from the second quarter of 2025. The primary driver of these improvements continues to be the expanding trust from the communities we serve earned through consistent clinical outcomes. In addition, we continue to acquire new operations with significant long-term upside and expect to maintain a healthy pace of growth as we expand our mission-driven approach to transform and dignify post-acute care. Since 2024, we have successfully sourced, underwritten, closed and transitioned 102 new operations across several markets, many of which are already performing at or above expectations, both clinically and financially. We also continue to benefit from powerful demographic tailwinds, which we expect will further support the census momentum we are seeing across our portfolio. While we are pleased with our current same-store occupancy, we are equally excited about the remaining organic growth opportunity as we clinically and culturally transform these operations. At 84% occupancy, we still have meaningful runway with many of our most mature operations consistently achieving occupancy in the mid-90% range. This embedded growth remains one of the most compelling drivers of our long-term performance. Reflecting the strength of our same-store operations, continued operational momentum across our portfolio and the ability of our local teams to deliver strong clinical outcomes that deepen referral relationships and support sustainable growth, along with the contribution from acquisitions, we are increasing our annual 2026 earnings guidance to $7.75 to $7.85 per diluted share, up from our previous guidance of $7.48 to $7.62, which we increased last quarter. We are also increasing our annual revenue guidance to $5.87 billion to $5.92 billion, up from $5.81 billion to $5.86 billion. The midpoint of our earnings guidance represents an 18.7% increase over 2025 and a 41.8% growth rate over 2024. We remain highly confident in 2026 and expect our local teams to continue executing, innovating and integrating new operations while delivering strong results. While we are proud of these results, we also recognize there's always more to learn and more work to do. We remain focused on helping our local leaders find better ways to care for residents, support caregivers and strengthen the operations they serve. Next, I'll ask Spencer to add some operational insights regarding our operations. Spencer?

Thanks, Barry, and hello, everyone. Today, I'm excited to share our facility highlight that illustrates how leadership stability and clinical excellence can fundamentally transform a struggling operation and dignify the health care experience for our patients, their families and the frontline caregivers whose commitment and compassion make our mission possible. The Reserve, a 135-bed skilled nursing operation located in the Charleston, South Carolina metro area, is led by licensed nursing facility administrator Greg Hicks and RN Director of Nursing Amanda Bruno. When we acquired The Reserve in 2023, it was operating under state conservatorship following multiple failed CMS surveys with immediate jeopardy findings. In fact, in the annual survey prior to transition, The Reserve experienced the worst inspection performance of any skilled nursing facility in South Carolina with a Cycle 1 score of 500 points. Now remember, with surveys, fewer points is better. So this 500-point survey was over 900% worse than the South Carolina state average. This and previous failures had led to the facility being designated as a CMS Special Focus facility, which is essentially a last-ditch attempt by federal and state survey agencies to improve a facility's clinical quality before forcing it to shut down. The clinical challenges were exacerbated by leadership turnover and frontline staffing shortages that resulted in heavy reliance on agency staffing and an inability to accept new admissions. Trust was low with local hospitals and managed care providers, which meant that occupancy stayed chronically low, and the facility's clinical and staffing challenges were accompanied by major financial deficits. Where many saw The Reserve as a problem facility, the local South Carolina cluster partners recognized an opportunity to live our organization's mission of dignifying care and transforming the experience of staff and residents alike. So after a lot of internal debate and discussions with state regulators, the decision was made to acquire The Reserve and help it become what the community deserved. The first step in this turnaround was to find and empower the right leaders who not only had a vision for the facility, but could gain the trust and support of state regulators, hospital systems and the local health care workforce. Those leaders included Greg Hicks, a seasoned administrator with a history of successful clinical turnarounds, and Amanda Bruno, a nurse leader with decades of critical care experience, who had been working as a unit manager at a sister facility while being mentored for months in our Director of Nursing training program. With the support of market resources and cluster partners, this duo rallied the facility's interdisciplinary leadership team and quickly established a culture centered on quality, accountability and clinical execution. Over the past few years, the results have been spectacular. Just six months after acquisition, The Reserve graduated from the Federal Special Focus facility program and has now achieved three consecutive deficiency-free health inspections, going from a 1-star CMS inspection rating to a 5-star rating. Today, The Reserve Cycle 1 score ranks it as the number one operation in the entire state for survey performance. The Reserve's success mirrors an exciting trend of survey successes that we're having across Ensign affiliates. As Barry mentioned, our collective Cycle 1 surveys averaged 26% better than the counties in which they operate. And as of today, there is not a single Special Focus facility among the 398 Ensign affiliates. The Reserve's success goes far beyond just survey performance. It currently enjoys a CMS 5-star overall rating as well as five stars for quality measures, including those that are claims-based. Some examples include significantly outperforming both state and national peers for lower use of antipsychotic medications, fewer emergency department visits and lower rehospitalization rates for short-stay patients. These outcomes reflect disciplined clinical approaches, deeply rooted in the ONE CLINICAL processes that Barry described earlier, where therapy and other care disciplines work hand-in-hand with nursing. And speaking of nursing, The Reserve has not only eliminated all contract nursing but has become one of the state's leading facilities for RN retention with an RN turnover rate 28% better than the state average. Stability in the clinical team has allowed The Reserve to expand its ability to care for higher-acuity patients and become a preferred provider for people who had previously had limited placement options in the Charleston area. In fact, earlier this year, The Reserve was awarded a contract with the South Carolina Department of Health and Human Services to care for patients requiring ventilator and tracheostomy services, making them the only facility with this approval in their geographic area. Quality outcomes and improved staff retention have also naturally led to improved operational performance. For example, prior to transition, the facility struggled with occupancy that hovered around 60%. As the facility rebuilt trust with hospitals, physicians and residents, referral relationships have strengthened and admissions accelerated. In fact, during Q2, The Reserve touched 100% occupancy for the first time ever and averaged 92% occupancy for the quarter, up from 83% in Q2 of 2025. During the same period, skilled days increased 39%, while managed care revenues increased by 69%. As expected, financial results have followed. The Reserve's total revenue and EBIT have improved every year since transition. Most recently, in Q2, revenue increased by 18% and EBIT grew by 97% over the prior year quarter. We expect these financial results will continue because they are the natural result of years of investment in creating clinical excellence and building relationships of trust in their health care community. Consistent results like these cannot and will not happen without delivering high-quality clinical care. Success in referral patterns, payer relationships, occupancy growth, skilled mix trends and regulatory performance are all indicators of community trust. And especially in metro markets like Charleston, people have choices. The fact that so many are choosing The Reserve shows the trust and reputation that the team has fought so hard to earn. While there's still more work to be done at The Reserve, we're incredibly proud of the visionary leaders, the field resources, cluster partners and of course the compassionate caregivers who have driven this remarkable transformation. Their success reflects the power of the Ensign model at work: hiring and developing exceptional leaders, retaining and empowering strong clinical talent, leveraging the expertise and best practices available through transparency and earning the trust of residents, families, referral partners and regulators through consistently superior outcomes. While every operation's path is unique, the principles behind this success are replicated throughout our organization and are foundational to the industry-leading clinical, regulatory and operational results that our affiliated operations continue to achieve. With that, I'll turn it over to Chad to discuss more about our ongoing growth and acquisitions.

Thank you, Spencer. During the quarter and since we accelerated our growth by adding 20 new operations, all of which included the real estate assets, bringing the number of operations acquired during 2025 and since to 71. These recent additions include 19 in Texas and one in Iowa. In total, we added 2,392 new skilled nursing beds, 100 senior living beds and 55 independent living beds across two states. This growth brings the number of operations in our recently acquired group of operations to 18% of our entire portfolio. We were thrilled to complete these acquisitions and expand our presence in Texas. These assets are made up of newly constructed, high-quality facilities in populated and growing metro areas, justifying a higher purchase price. However, these operations are almost all lower than our average occupancies for these geographies and all present significant clinical and operational hurdles. While things have started to improve, we expect these, like most of our turnaround deals, will take more time to generate the returns we expect. Over time, however, as our leaders and clinicians focus relentlessly on improving the quality of care and establishing a culture of ownership and accountability, we are confident that these operations will become the facility of choice in the markets they serve. We continue to learn from and improve our transition process and believe that those lessons are showing through in the performance. As we continue to scale, we are able to lean on our talented resources that are spread across many geographies, enhancing our ability to digest larger deals by breaking them into bite-size pieces, transitioning in the traditional Ensign way, but with a local cluster-driven plan that gives each operation the time and attention they deserve. In every single deal decision, the most important factor we consider is our plan for local leadership. Our mantra of first who, then what is at the heart of every single deal decision we make. So far this year, we've been presented with over 350 acquisition opportunities within our geographies. Of those 350 operations, we've executed on 25 of them. There are many factors we consider when deciding whether to pursue a deal or not, but one of the most common reasons we pass on an acquisition is because we aren't satisfied with the question of who the leader will be. When we feel there is a cultural fit, we sometimes elect to leave the current administrator in place and leverage our training and cluster support model to help expose them to our culture, teach them our systems and provide the right expectations for ownership and accountability. In some recent portfolio deals, for example, we selected to keep several impressive administrators. Because of this continuously refined process of onboarding, they have been very successful leaders, many of whom are now CEOs of their respective operations. In the instances where we've made a change, we've either replaced the outgoing administrator with an experienced licensed administrator from another building or a licensed administrator that recently completed their AIT training program. In either case, each operation is surrounded by their local cluster partners and service center resources to help implement the clinical and operational systems required to transform a struggling building into a strong clinical partner to their local health care community. The performance of our newly acquired operations, particularly over the last few years, shows that our local leadership-driven approach to transitions works for single operations, small portfolios and larger portfolios. Our local leaders continue to recruit future CEOs for Ensign-affiliated operations, and we have a deep bench of CEOs in training that are eagerly preparing for the opportunity to lead. The type of leader we recruit is typically a person with significant experience leading people, very often in a different industry. These experienced leaders average 35 years old, and it's not uncommon that applicants that join us are looking to pivot toward a second or even a third career path. We are constantly refilling the AIT ranks. Over the last year, we've had an average of approximately 54 AITs at various stages of the program, actively training and obtaining the hours necessary to obtain their license. This number is particularly impressive when you consider we've added 71 operations in just the last 1.5 years. We see a high demand from qualified applicants and can be very selective. Our local clusters drive the recruiting efforts for AITs and are very selective on who they will admit into the program. This high-quality influx of leadership talent combined with our decentralized transition model allows us to grow without being limited by typical corporate bottlenecks. We also continue to maintain enough cash and available capacity under our line of credit to fund a significant amount of growth, including adding even more real estate assets to our portfolio. Therefore, our unique leadership and acquisition strategy puts us in an excellent position to continue growing in a healthy and sustainable way. Because our model is driven by local leaders who are supported by a cluster of their peers, our model is truly scalable. We are also very comfortable growing the way we have over the last few years with lots of transactions across many states, including small deals and larger portfolios and where it makes sense, even higher-priced strategic assets. As we look at the current pipeline, our local leadership teams and their partners at the service center are working together to source and underwrite and carefully select the right opportunities. We have several new additions lining up for Q3 and Q4 and expect to be very busy for the remainder of the year, including operations within our existing footprint and acquisitions in new states. We continue to see opportunities that include everything from multi-facility portfolios, landlords looking to replace current tenants, nonprofits looking to divest their post-acute assets and a steady flow of traditional one-off deals. In terms of priority, we are first looking to grow in our existing markets as this allows us to be better partners to the health care communities by offering complementary services to hospitals, managed care organizations and to their patients and families. We're also looking to enter into some new states and look forward to closing some opportunities in new states later this year. Lastly, we are pleased with the continued growth with Standard Bearer, which added 23 new assets during the quarter and since, including two senior living communities in Wisconsin and one memory care facility in California, all of which will be operated by a third party under triple-net lease. Standard Bearer is now comprised of 177 owned properties, of which 140 are leased to Ensign-affiliated operators and 38 of which are leased to third-party operators. We are excited to continue to add to the growing list of relationships with unaffiliated operators, which further diversifies our tenant base and helps our organization as a whole continue to advance our mission by working closely with like-minded operators that want to make a difference in this industry. Standard Bearer will continue to work together with our existing operating partners and the new relationships we are developing in order to acquire portfolios comprised of operations that Ensign will operate and facilities with high-quality third parties that are interested in operating under a lease. Collectively, Standard Bearer generated rental revenue of $44.1 million for the quarter, of which $37.8 million was derived from Ensign-affiliated operations. For the quarter, Standard Bearer reported $24.7 million in FFO; and as of the end of the quarter, had an EBITDAR-to-rent coverage ratio of 2.4x. And with that, I'll turn the call over to Suzanne to add more color on our numbers and our guidance. Suzanne?

Thank you, Chad, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed on Monday. Some additional highlights for the quarter compared to the prior year quarter include the following: GAAP diluted earnings per share was $1.68, an increase of 16.7%. Adjusted diluted earnings per share was $1.92, an increase of 20.8%. Consolidated GAAP revenue and adjusted revenues were both $1.4 billion, an increase of 17.3%. GAAP net income was $99.7 million, an increase of 18.2%. And adjusted net income was $114.3 million, an increase of 22.5%. Other key metrics as of June 30, 2026, include cash and cash equivalents of $262.3 million and cash flows from operations of $272.1 million. During the first half of 2026, we spent more than $460 million to execute on our strategic growth plan. We made these investments from a position of strength, as shown by our lease-adjusted net debt-to-EBITDA ratio of 2x after taking these investments into consideration. Our continued ability to maintain low leverage even during periods of significant acquisitions is particularly noteworthy and demonstrates our commitment to disciplined growth as well as our belief that we can continue to achieve sustainable growth in the long run. In addition, we currently have more than $592 million available under our line of credit, which when combined with the cash on our balance sheet gives us more than $850 million in dry powder for future investments. We also own 183 assets, of which 159 are owned completely debt free. They have gained significant value over time, adding even more liquidity to help with future growth. The company paid a cash dividend of $0.065 per common share. We have a long history of paying dividends and have increased the annual dividend for 23 consecutive years. As Barry mentioned, we are increasing our annual 2026 earnings guidance to between $7.75 and $7.85 per diluted share, and our annual revenue guidance between $5.87 billion to $5.92 billion. We have evaluated multiple scenarios and based upon the strength in performance and the positive momentum we've seen in occupancy and skilled mix as well as the continued progress on labor, agency management and other operational initiatives, we have confidence that we can achieve these results. Our 2026 guidance is based on: diluted weighted average common shares outstanding of approximately 59.5 million, a tax rate of 25%, the inclusion of acquisitions closed and expected to be closed during the third quarter of 2026, and the inclusion of management's expectations on reimbursement rates with the primary exclusions coming from stock-based compensation and amortization of system implementation costs. Additionally, other factors that could impact our quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, the short-term impact of our acquisition activities, variations in insurance rules and other factors. With that, I'll turn it back over to Barry.

Thanks, Suzanne. To wrap up, we again want to thank our exceptional team of caregivers, our local operational leaders and our service center partners. Health care is ultimately a people business. While we need to discuss occupancy, reimbursement, margins and growth on these calls, those outcomes are the byproduct of something much more fundamental: nearly 60,000 people who have chosen to care for others and who are united by a common set of values and purpose. Every day, thousands of caregivers, nurses, therapists, housekeepers, dietary staff, administrators and countless others have opportunities to create moments that exceed expectations for coworkers, residents and families during some of the most vulnerable times in their lives. That shared sense of purpose is difficult to quantify on a financial statement, but it is one of the greatest competitive advantages that we have. It strengthens our culture, attracts leaders who share our values, improves clinical outcomes and builds trust with referral partners and ultimately creates long-term value for our shareholders. This quarter's results are another reflection of that enduring connection between purpose and performance. We believe exceptional outcomes ultimately create their own form of accountability because residents, families, referral partners, regulators and payers all have the ability to independently validate whether an operation is truly delivering value. We remain grateful for our local leaders and frontline teams whose commitment to our mission continues to set our affiliated operations apart. And with that, we'll now turn to the Q&A portion of our call. Operator, can you please provide instructions for the Q&A?

Your first question comes from the line of Raj Kumar with Stephens.

I appreciate the focus on the quality metrics that you provided in your investor deck and today's commentary. Maybe looking at some of the changes CMS has made behind the scenes, I believe the July 2026 cycle had some updated thresholds for the QM measure where Ensign particularly excels. Given your internal testing, I would be curious if you see any changes or any initial indications around changes to your QM ratings from the underlying changes in CMS methodology? And as a quick follow-up to that, on the Special Focus Facility designation, have you seen any impacts to favorability in terms of attracting more of the patient base or referral base now that an operation is off that list?

Sure. Great question. CMS announced that there are some meaningful changes to how they're doing their five-star rating. That's not a surprise; they have said over the last two to three years they would periodically update to continue to force a certain distribution of buildings across star categories. The American Health Care Association did some analysis about potential impacts on five-star ratings. We are still doing our preliminary analysis and working on it hard with internal reports. We're seeing that it will affect us and it will affect everyone, but we're actually pretty pleased with the way it's affecting us compared to the association's expectations. We're seeing a lot less impact, and in some cases the changes are being counteracted by improvements in other areas of the five-star calculation. So the overall net effect on our overall five-star ratings is looking like it will not be that large for us.

As far as The Reserve goes, they have been gaining significant momentum over a long period. We've seen a strong growth trajectory for them in terms of occupancy and reputation since the acquisition. I don't know that being off the Special Focus list dramatically changes things because that momentum has been built over the course of three years now, and they've seen tremendous momentum despite technically being on that list. That speaks to what local leaders can do to change a facility's reputation with acute providers and managed care organizations when they can see meaningful results happen.

Great. And then maybe just one more. I think the Board authorized a share repurchase program. The company deploys capital through various means, with M&A and internal investments being priorities, and a healthy dividend. As we think about that potential fourth pillar, do you see share repurchases being an ongoing investment or more near-term driven?

We've had a share repurchase program for a while. It's nothing new. We increased the amount a little because we feel confident about our direction, and we felt the pricing of our stock when the Board approved the plan was undervalued.

I would echo what Barry said. This has always been part of our strategy. As we continue to grow, you should expect that the amount could increase. This represents our overall growth and the liquidity we still have. This is not going to impact the acquisition strategy at all, and we're going to continue to grow like we always have.

The next question comes from the line of Ben Hendrix with RBC Capital Markets.

I appreciate the commentary and the case study on The Reserve in South Carolina. That looked like a pretty rapid turnaround in terms of reduced contract labor and improved turnover. As I think about this large bolus of newly acquired facilities on the platform, how should we realistically think about the timeline through the newly acquired phase into the transitioning phase and then into the same-store bucket? Do you typically target getting contract labor down to target levels and improving retention to a steady state? And by extension, would we expect upside to guidance if we were to see a transition at the speed of The Reserve within that portfolio?

Yes, I'll start and let my partners comment. The recent acquisitions are more representative of typical turnaround transitions we've discussed for years. We've also had some higher-occupancy buildings in prior years that enabled more rapid turnarounds because of their starting positions. These recent Texas acquisitions are mostly low occupancy and low skilled mix, which is exciting because as we rebuild the clinical reputation, occupancy and skilled mix generally follow dramatically. Our investor deck shows how facilities improve over time across different quarters: five quarters, 15 quarters, 45 quarters — you can see that growth trajectory. Regarding guidance, if operations perform ahead of schedule, we will revise guidance accordingly. For now, those Texas acquisitions are not accretive and likely won't be for a while, and they are performing in line with our expectations.

The continued shift from recent acquisitions is baked into our guidance for Q3 and Q4. So to change guidance upward, they would have to perform better than what we have already assumed.

Last one for me on Standard Bearer: you mentioned three acquisitions leased to third-party managers. How are you assessing third-party managers and the mix across the overall Standard Bearer portfolio? How much diversification do you have among managers, and do you have certain groups you prefer to work with?

Great question. In terms of priority, we always prefer to own and operate a property ourselves. That said, Standard Bearer's second priority is to make attractive long-term leases where a third party operates the property. We have many valuable relationships with real estate partners and REITs and continue to work with them. The third scenario, leasing to a third party, is often used in portfolio deals where some buildings are not a fit for Ensign due to geography or other hurdles. In those instances, third-party operators lease the properties from Standard Bearer and operate them. This approach has helped us close deals we might not have otherwise. Our largest third-party tenant is Pennant Group, and we have others on the skilled nursing side as well. We get outreach from smaller operators who want to be part of what we are building and we are excited to expand that base. Strategically, we prefer to own-and-operate first, then look at leases and third-party relationships to enable and expand our portfolio in ways that make sense.

Your next question comes from the line of A.J. Rice with UBS.

Maybe a couple of items on the payer side. What are you seeing in terms of discussions with states? Anything changing there, any updated rate outlooks? And then also in managed care contracting, are you seeing any changes there that we should be aware of?

Yes. Go ahead, Barry.

On the state budget side, it is always dynamic, but we are encouraged by what we are seeing. Medicaid is a big payer for us, and we have active engagement in all of our states with good visibility into the direction for this year and in some cases next year. We feel good about our position in terms of rate stability. We do not expect major increases, but stability and line of sight into state budgets is positive. On the Medicare side, we were encouraged by the recent increase. On managed care, we continue to benefit from strong relationships; these are dynamic arrangements involving rates and networks, but our team collaborates well with local leaders and regional managed care offices to position us positively. We've also seen growth in relationships with the Veterans Administration, which has become a meaningful source of referrals into many of our facilities.

That's helpful. How about on the cost side — any comments on labor dynamics, what you're seeing there? Average wage increases, turnover rates, any update on that trend?

Operationally, we're seeing stability and improvement in several labor metrics. Contract labor usage, particularly nursing registry for RNs and CNAs, has been flat at a low level over the last year and is incrementally decreasing. Turnover across the industry has improved, and while that benefits everyone, we are improving at a quicker pace than the industry average, which gives us separation in outcomes. We track relative acceleration in turnover trends and are encouraged by the pace of improvement. Overtime is also moving in a positive direction, which matters for both cost and quality since well-rested caregivers provide better care. These labor trends are a major operational focus for us.

Your next question comes from the line of Clarke Murphy with Truist Securities.

This is Clarke on for Dave McDonald. First, the Southeast is still a relatively new and underpenetrated area for you. Could you talk about how results have been in that region? When you referenced more mature facilities achieving mid-90% occupancy, those facilities are largely outside of the Southeast. Is there anything structurally different about what levels those facilities could reach over time?

We're excited about the Southeast. It's a large population center, generally favorable labor and regulatory environments, and strong demand for health care services. Our success in Tennessee as a new state has been strong with good growth in quality outcomes and earnings. South Carolina has also been strong, as we've highlighted with The Reserve. Alabama is small but showing promise. There are other adjacent Southeast states we are evaluating, and I would not be surprised if we expand in some of those states this year or next. Ultimately, we believe many of our mature facilities can reach mid-90% occupancy over time as we build trust and reputation in those markets.

Thanks. As a follow-up on M&A: when you acquire a facility and evaluate the leadership team that is in place, how has your approach to retaining or replacing key leaders evolved? I understand it varies, but broadly how are you thinking about keeping local leaders versus putting in your own people?

Great question. There is a lot of strong leadership talent in the market, and many people want to do the right thing. We've improved our ability to include leadership assessment as part of the underwriting process, ensuring access to facility leaders during due diligence so we can identify candidates who could be a strong fit. In many recent deals, the majority of leaders who remain were already operating in those markets and have performed well. Our AIT program remains a major part of our talent pipeline — we usually have around 50 AITs at any given time — and these are mature, experienced candidates who are ready to step into leadership roles. To grow at the pace we plan, we will continue to recruit both internal AIT graduates and external leaders, and we've gotten better at identifying and integrating outside talent.

To add, during due diligence we prioritize getting access to the seller's leadership so we can get to know them. We often jointly announce acquisitions with the seller in a way that signals partnership to the facility team. Early access to facility leaders has been very helpful in assessing fit and enabling a smoother transition. Sometimes sellers are protective of that access, but recently we've had better early access, which has improved outcomes in transitions.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.