# ENSIGN GROUP, INC (ENSG) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ENSIGN GROUP, INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1125376/000112537625000021/ensg-20241231.htm
Accession: 0001125376-25-000021
Filing date: 2025-02-05
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ENSG/
All MD&A years: /company/ENSG/mda/
Previous year: /company/ENSG/mda/fy2023/ (FY 2023)
Next year: /company/ENSG/mda/fy2025/ (FY 2025)

Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K. See Part I. Item 1A. Risk Factors and Cautionary Note Regarding Forward-Looking Statements.

For discussion of 2022 items and year-over-year comparisons between 2023 and 2022 that are not included in this 2024 Form 10-K, refer to “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K for the year ended December 31, 2023, that was filed with the Securities and Exchange Commission on February 1, 2024.

Overview

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 Alabama, Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Tennessee, Texas, Utah, Washington and Wisconsin. Our independent subsidiaries, each of which strive to be the operation of choice in the communities they serve, provide a broad spectrum of services. As of December 31, 2024, we offered skilled nursing, long term acute care, senior living and rehabilitative care services through 327 skilled nursing and senior living facilities. Our real estate portfolio includes 129 owned real estate properties, which includes 96 facilities operated and managed by us, 33 operations leased to and operated by third-party operators and the Service Center location. Of the 33 third-party operations, one senior living operation is located on the same real estate property as a skilled nursing operation that we own and operate.

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The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. 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. 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. References herein to the consolidated “Company” and “its” assets and activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report, are not meant to imply, nor should they be construed as meaning that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by The Ensign Group, Inc.

Recent Activities

We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results serve as a strong indicator that our strategy is working and our transformation is underway. Our dedication to our cultural and operational fundamentals continues to deliver strong results. Refer to Results of Operations for further discussion.

Operational Update — Our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the same period in 2023. Since the first quarter of 2024, Same Facilities skilled nursing occupancy has surpassed pre-pandemic occupancy. Our focus on rebuilding census resulted in Same Facilities occupancy of 81.3% during the year ended December 31, 2024 compared to 79.2% in the same period in 2023. These results were possible due to the innovative approaches and strategic partnerships which supported our multiple year growth in 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 strong 2024 results.

Operational and New State Expansions — During the year ended December 31, 2024, we expanded our operations with the addition of 28 stand-alone skilled nursing operations and three campus operations, which added a total of 3,030 operational skilled nursing beds and 218 operational senior living units to be operated by our independent subsidiaries. Subsequent to December 31, 2024, we added seven stand-alone skilled nursing operations, which added 682 operational skilled nursing beds to be operated by our independent subsidiary. We also invested in new ancillary services that are complementary to our existing businesses.

Twelve of the operations mentioned above are located in Tennessee and Alabama, which are new states for us. The expansion into the two new states are part of our strategic vision to further strengthen our growing national presence in both existing and new attractive markets.

Standard Bearer Update — Standard Bearer Healthcare REIT, Inc. (Standard Bearer), our captive REIT, 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, 2024, Standard Bearer added $131.9 million of real estate associated with 11 stand-alone skilled nursing operations, three stand-alone senior living operations and three campus operations. Of these additions, the stand-alone skilled nursing and campus operations are operated by 14 of our independent subsidiaries and the three stand-alone senior living operations are leased to a third-party operator. Our existing relationships with third-party operators within our industry have allowed us to expand our growing REIT structure to operators outside of our organization.

As of December 31, 2024, the fair value of Standard Bearer's real estate portfolio is approximately $1.3 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.

Subsequent to December 31, 2024, Standard Bearer added $50.9 million of real estate associated with four stand-alone skilled nursing operations and one campus operation. Four of the acquisitions were related to exercising purchase options from CareTrust REIT, Inc. (CareTrust) lease arrangements, which the operations are currently operated and managed by our independent subsidiaries. The remaining real estate acquisition was leased back to our independent subsidiaries.

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Insignia Pathway — In December 2024, we funded $35.0 million to the formation of Insignia Pathway, an independent public charity, with a mission to empower, support and expand the post acute care workforce through recruiting talent, providing resources, education, housing and advocacy to enhance professional growth, job satisfaction and community impact. Insignia Pathway is dedicated to addressing workforce challenges, fostering equity and inspiring the current and next generation to join the essential field of post acute care. Insignia Pathway is currently in the process of applying for recognition of exemption as an organization under Section 501(c)(3) of the Internal Revenue Code.

Common Stock Repurchase Program — On May 16, 2024, 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, 2024. We did not repurchase any shares during the fiscal year 2024.

Key Performance Indicators

We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. Revenue associated with these metrics is generated based on contractually agreed-upon amounts or rate, excluding the estimates of variable consideration under the revenue recognition standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606. These indicators and their definitions include the following:

Skilled Services

•Routine revenue — Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare Part B therapy services, and are not included in the routine revenue definition.

•Skilled revenue — The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled patients who are included in this population represent very high acuity patients who are receiving high levels of nursing and ancillary services which are reimbursed by payors other than Medicare or managed care. Skilled revenue excludes any revenue generated from our senior living services.

•Skilled mix — The amount of our skilled revenue as a percentage of our total skilled nursing routine revenue. Skilled mix (in days) represents the number of days our Medicare, managed care, or other skilled patients are receiving skilled nursing services at the skilled nursing facilities divided by the total number of days patients from all payor sources are receiving skilled nursing services at the skilled nursing facilities for any given period.

•Average daily rates — The routine revenue by payor source for a period at the skilled nursing facilities divided by actual patient days for that revenue source for that given period. These rates exclude additional state relief funding, which includes the American Rescue Plan Act (ARPA), the Family First Coronavirus Response Act (FFCRA) and other state specific 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.

•Number of facilities and operational beds — The total number of skilled nursing facilities that we own or operate and the total number of operational beds associated with these facilities.

Skilled Mix — Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare, managed care and other skilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing and rehabilitative care. Accordingly, Medicare and managed care reimbursement rates are typically higher than from other payors. In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly affect our revenue and profitability.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["Skilled Mix:","","","","","2024","","2023"],["Days","","","","","29.9","%","","30.4","%"],["Revenue","","","","","48.6","%","","50.2","%"]]
[[/GREPCENT_TABLE]]

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Occupancy — We define occupancy derived from our skilled services as the ratio of actual patient days (one patient day equals one patient occupying one bed for one day) during any measurement period to the number of beds in facilities which are available for occupancy during the measurement period. The number of beds in a skilled nursing facility that are actually operational and available for occupancy may be less than the total official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings and/or operational efficiencies in a facility. In some cases, three- and four-bed wards have been reduced to two-bed rooms for resident comfort, and larger wards have been reduced to conform to changes in Medicare requirements. These beds are seldom expected to be placed back into service. We believe that reporting occupancy based on operational beds is consistent with industry practices and provides a more useful measure of actual occupancy performance from period to period.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["Occupancy for skilled services:","","","","","2024","","2023"],["Operational beds at end of period","","","","","33,547","","","30,602"],["Available patient days","","","","","11,710,297","","","10,940,320"],["Actual patient days","","","","","9,431,825","","","8,590,995"],["Occupancy percentage (based on operational beds)","","","","","80.5","%","","78.5","%"]]
[[/GREPCENT_TABLE]]

Segments

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 independent 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. These businesses are neither significant individually, nor in aggregate and therefore do not constitute a reportable segment. Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level.

Revenue Sources

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 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. A number of our independent subsidiaries have 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, 2024, our real estate portfolio within Standard Bearer is comprised of 124 real estate properties. Of these properties, 92 are leased to our independent subsidiaries and 33 are leased to facilities wholly-owned and managed by third-party operators. Of those 33 operations, one senior living operation is located on the same real estate property as a skilled nursing operation that an independent subsidiary operates. During the year ended December 31, 2024, we generated rental revenues of $95.1 million, of which $78.1 million was derived from our independent subsidiaries and therefore eliminated in consolidation.

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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. Payment for these services varies and is based upon the service provided. The payment is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk.

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 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 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.

Depreciation and Amortization — Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary of the depreciable lives of our depreciable assets:

[[GREPCENT_TABLE]]
[["Buildings and improvements","Minimum of three years to a maximum of 59 years, generally 45 years"],["Leasehold improvements","Shorter of the lease term or estimated useful life, generally 5 to 15 years"],["Furniture and equipment","3 to 10 years"]]
[[/GREPCENT_TABLE]]

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements.

Variable consideration within revenue recognition — Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration. We use the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If actual amounts of consideration ultimately received differ from our estimates, we adjust these estimates, which would affect net service revenue in the period such variances become known.

Self-insurance for general and professional liability — The self-insured retention and deductible limits for general and professional liability for all states, except Kansas, 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, 2024 and 2023 was $160.1 million and $117.7 million, respectively.

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Our policy is to accrue amounts equal to the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported. We develop information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis and evaluate the estimates for claim loss exposure on a quarterly basis. We use actuarial valuations to estimate the liability based on historical experience and industry information.

RESULTS OF OPERATIONS

We believe we exist to dignify and transform post-acute care. We set out a strategy to achieve our goal of ensuring our patients are receiving the best possible care through our ability to acquire, integrate and improve our operations. Our results serve as a strong indicator that our strategy is working and our transformation is underway. Over the last five years, our total revenue increased by $2.2 billion, or 109.2%, representing a 15.9% compound annual growth rate (CAGR) while our diluted GAAP earning per share (EPS) from continuing operations grew by $3.48 from 2019 to 2024, representing a 25.6% CAGR.

Our total revenue for the year ended December 31, 2024 increased $531.1 million, or 14.2%, compared to the year ended December 31, 2023. Throughout 2024, we continued to make progress on targeted initiatives related to increasing occupancy and the level of acuity and complexity of the patients we serve in our facilities, attracting and developing our people and acquiring underperforming skilled nursing operations and integrating them with our proven cultural and operational principles. During the year ended December 31, 2024, we added 31 new operations. We consistently experience healthy growth in both revenue and overall results as we continue to work diligently with existing and recently acquired operations so that each can reach its full clinical and financial potential.

Our combined Same Facilities and Transitioning Facilities occupancy increased by 2.9% compared to the same period in 2023. Since the first quarter of 2024, Same Facilities skilled nursing occupancy has surpassed pre-pandemic occupancy. Our focus on rebuilding census resulted in Same Facilities occupancy of 81.3% during the year ended December 31, 2024 compared to 79.2% in the same period in 2023, demonstrating our ability to gain additional market share even at our more mature operations. Further, our Transitioning Facilities occupancy increased by 4.1% to 76.0% compared to the same period in 2023, highlighting our organic growth ability that results from transforming underperforming operations that we have acquired.

Throughout most of our history, our business is affected by seasonal fluctuations in occupancy and acuity, which are most prominent when comparing the summer and winter months of the calendar year. For skilled nursing occupancy and skilled mix, our historic seasonal trend tends to show stronger occupancy and acuity during the first and fourth quarters and softening in the second and third quarters. Additionally, we historically have acquired operations with lower occupancy and skilled mix. As these operations become "operations of choice" in each of their respective healthcare markets, we typically see both occupancy and skilled mix increase.

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 across our operations. During 2024, we added over 4,000 full-time equivalent team members, or 11%, to our independent subsidiaries and the Service Center.

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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:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2024","","2023"],["REVENUE:"],["Service revenue","","","","","99.5","%","","99.4","%"],["Rental revenue","","","","","0.5","","","0.6"],["TOTAL REVENUE","","","","","100.0","%","","100.0","%"],["Expenses:"],["Cost of services","","","","","79.3","","","78.9"],["Rent\u2014cost of services","","","","","5.1","","","5.3"],["General and administrative expense","","","","","5.3","","","7.1"],["Depreciation and amortization","","","","","1.9","","","1.9"],["TOTAL EXPENSES","","","","","91.6","%","","93.2","%"],["Income from operations","","","","","8.4","","","6.8"],["Other income (expense):"],["Interest expense","","","","","(0.2)","","","(0.2)"],["Interest income","","","","","0.7","","","0.5"],["Other income (expense)","","","","","0.2","","","0.2"],["OTHER INCOME (EXPENSE), NET","","","","","0.7","%","","0.5","%"],["Income before provision for income taxes","","","","","9.1","","","7.3"],["Provision for income taxes","","","","","2.1","","","1.7"],["NET INCOME","","","","","7.0","%","","5.6","%"],["Less: net income attributable to noncontrolling interests","","","","","\u2014","","","\u2014"],["Net income attributable to The Ensign Group, Inc.","","","","","7.0","%","","5.6","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2024","","2023"],["SEGMENT INCOME(1)","","","","(In thousands)"],["Skilled services","","","","","$","518,463","","","$","464,925"],["Standard Bearer(2)","","","","","29,335","","","29,065"],["NON-GAAP FINANCIAL MEASURES:"],["PERFORMANCE METRICS"],["Adjusted EBT","","","","","$","427,976","","","$","365,310"],["EBITDA(3)","","","","","449,284","","","333,569"],["Adjusted EBITDA","","","","","490,392","","","425,762"],["FFO for Standard Bearer","","","","","58,632","","","54,270"],["VALUATION METRICS"],["Adjusted EBITDAR","","","","","$","706,408"]]
[[/GREPCENT_TABLE]]

(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 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.

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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. These Non-GAAP Financial Measures are used in addition to and in conjunction with results presented in accordance with GAAP. These Non-GAAP Financial Measures should not be relied upon to the exclusion of GAAP financial measures. These Non-GAAP Financial Measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

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

•they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest income, interest expense 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; and

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

We use the Non-GAAP Financial Measures:

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

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

•to assess the value of a potential acquisition;

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

•to evaluate the effectiveness of our operational strategies; and

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

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

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of certain Non-GAAP Financial Measures.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, the Non-GAAP Financial Measures have no standardized meaning defined by GAAP. Therefore, certain of our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. Some of these limitations are:

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

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

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

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

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

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

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

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We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business. Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure. Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures with other companies’ Non-GAAP financial measures having the same or similar names. These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table below, along with our 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

Adjusted EBT

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;

•loss (gain) on long-lived assets and gain on business interruption recoveries;

•acquisition related costs;

•costs incurred related to system implementations;

•write off of deferred financing fees; and

•amortization of patient base intangible assets.

EBITDA

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

We calculate EBITDA as net income, adjusted for net losses attributable to noncontrolling interest, before (a) interest income, (b) provision for income taxes, (c) depreciation and amortization, and (d) interest expense. EBITDA in the prior period has been recast to conform to the current period presentation.

Adjusted EBITDA

We adjust EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, in the case of Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA, when combined with EBITDA and GAAP net income attributable to The Ensign Group, Inc., is beneficial to an investor’s complete understanding of our operating performance.  

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

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Funds from Operations (FFO)

We consider FFO to be a useful supplemental measure of the operating performance of Standard Bearer. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental measure of operating performance for REITs, which excludes historical cost depreciation from net income. We define (in accordance with the definition used by NAREIT) FFO to consist of Standard Bearer segment income, excluding depreciation and amortization related to real estate, gains or losses from the sale of real estate, insurance recoveries related to real estate and impairment of long-lived assets.

VALUATION MEASURE

Adjusted EBITDAR

 We use Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a commonly used measure by our management, research analysts and investors, to compare the enterprise value of different companies in the healthcare industry, without regard to differences in capital structures and leasing arrangements. Adjusted EBITDAR is a financial valuation measure that is not specified in GAAP. This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense, and is therefore presented only for the current period.

The adjustments made and previously described in the computation of Adjusted EBITDA are also made when computing Adjusted EBITDAR. We calculate Adjusted EBITDAR by excluding rent-cost of services from Adjusted EBITDA.

We believe the use of Adjusted EBITDAR allows the investor to compare operational results of companies who have operating and capital leases. A significant portion of capital lease expenditures are recorded in interest, whereas operating lease expenditures are recorded in rent expense.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2024","","2023"],["Consolidated statements of income data:","","","","","(In thousands)"],["Income before provision for income taxes","","","","","$","386,094","","","$","272,762"],["Stock-based compensation expense","","","","","36,226","","","30,767"],["Litigation(1)","","","","","(1,425)","","","60,781"],["Loss (gain) on long-lived assets and gain on business interruption recoveries","","","","","2,335","","","(1,132)"],["Acquisition related costs(2)","","","","","1,019","","","814"],["Costs incurred related to system implementations","","","","","2,953","","","963"],["Depreciation and amortization - patient base(3)","","","","","574","","","355"],["Interest expense - write off deferred financing fees(4)","","","","","200","","","\u2014"],["ADJUSTED EBT","","","","","$","427,976","","","$","365,310"]]
[[/GREPCENT_TABLE]]

(1) Represents specific proceedings and adjustments arising outside of the ordinary course of business.

(2) Represents costs incurred to acquire operations that are not capitalizable.

(3) Represents amortization expenses related to patient base intangible assets at newly acquired skilled nursing and senior living facilities.

(4) Represents the write off of deferred financing fees associated with mortgage loans.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2024","","2023"],["Consolidated statements of income data:","","","","","(In thousands)"],["Net income","","","","","$","298,458","","","$","209,850"],["Less: Net income attributable to noncontrolling interests","","","","","485","","","451"],["Interest income","","","","","28,749","","","19,216"],["Add: Provision for income taxes","","","","","87,636","","","62,912"],["Depreciation and amortization","","","","","84,138","","","72,387"],["Interest expense","","","","","8,286","","","8,087"],["EBITDA","","","","","$","449,284","","","$","333,569"],["Adjustments to EBITDA:"],["Stock-based compensation expense","","","","","36,226","","","30,767"],["Litigation(1)","","","","","(1,425)","","","60,781"],["Loss (gain) on long-lived assets and gain on business interruption recoveries","","","","","2,335","","","(1,132)"],["Acquisition related costs(2)","","","","","1,019","","","814"],["Costs incurred related to system implementations","","","","","2,953","","","963"],["ADJUSTED EBITDA","","","","","$","490,392","","","$","425,762"],["Rent\u2014cost of services","","","","","216,016","","","197,358"],["ADJUSTED EBITDAR","","","","","$","706,408"]]
[[/GREPCENT_TABLE]]

(1) Litigation relates to specific proceedings and adjustments arising outside of the ordinary course of business.

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

Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2024"],["","","Skilled Services","","Standard Bearer","","All Other","","Eliminations","","Consolidated"],["Total revenue","","$","4,076,825","","","$","95,086","","","$","192,881","","","$","(104,307)","","","$","4,260,485"],["Total expenses, including other income, net","","3,558,362","","","65,751","","","352,250","","","(104,307)","","","3,872,056"],["Segment income (loss)","","518,463","","","29,335","","","(159,369)","","","\u2014","","","388,429"],["Loss on long-lived assets","","","","","","","","","","(2,335)"],["Income before provision for income taxes","","","","","","","","","","$","386,094"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023"],["","","Skilled Services","","Standard Bearer","","All Other","","Eliminations","","Consolidated"],["Total revenue","","$","3,578,855","","","$","82,486","","","$","155,804","","","$","(87,790)","","","$","3,729,355"],["Total expenses, including other income, net","","3,113,930","","","53,421","","","377,055","","","(87,790)","","","3,456,616"],["Segment income (loss)","","464,925","","","29,065","","","(221,251)","","","\u2014","","","272,739"],["Gain on sale of assets and insurance recoveries from real estate, net","","","","","","","","","","23"],["Income before provision for income taxes","","","","","","","","","","$","272,762"]]
[[/GREPCENT_TABLE]]

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Our total revenue increased by $531.1 million, or 14.2%, compared to the year ended December 31, 2023. The increase in revenue was primarily driven by an increase in occupancy of 2.7% and 4.1% from our skilled services in Same Facilities and Transitioning Facilities, respectively, coupled with increasing daily revenue rates and the impact of acquisitions. Additionally, our skilled services in Recently Acquired Facilities increased total revenue by $271.7 million, when compared to the same period in 2023.

Skilled Services Segment

Revenue

The following tables present the skilled services revenue and key performance metrics by category during the years ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change","","% Change"],["TOTAL FACILITY RESULTS:","(Dollars in thousands)"],["Skilled services revenue","$","4,076,825","","","3,578,855","","","$","497,970","","","13.9","%"],["Number of facilities at period end","286","","","259","","","27","","","10.4","%"],["Number of campuses at period end(1)","30","","","27","","","3","","","11.1","%"],["Actual patient days","9,431,825","","","8,590,995","","","840,830","","","9.8","%"],["Occupancy percentage \u2014 Operational beds","80.5","%","","78.5","%","","2.0","%","","2.5","%"],["Skilled mix by nursing days","29.9","%","","30.4","%","","(0.5)","%","","(1.6)","%"],["Skilled mix by nursing revenue","48.6","%","","50.2","%","","(1.6)","%","","(3.2)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change","","% Change"],["SAME FACILITY RESULTS:(2)","(Dollars in thousands)"],["Skilled services revenue","$","3,018,601","","","$","2,823,314","","","$","195,287","","","6.9","%"],["Number of facilities at period end","193","","","193","","","\u2014","","","\u2014","%"],["Number of campuses at period end(1)","25","","","25","","","\u2014","","","\u2014","%"],["Actual patient days","6,902,006","","","6,704,689","","","197,317","","","2.9","%"],["Occupancy percentage \u2014 Operational beds","81.3","%","","79.2","%","","2.1","%","","2.7","%"],["Skilled mix by nursing days","31.7","%","","31.8","%","","(0.1)","%","","(0.3)","%"],["Skilled mix by nursing revenue","50.2","%","","51.2","%","","(1.0)","%","","(2.0)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change","","% Change"],["TRANSITIONING FACILITY RESULTS:(3)","(Dollars in thousands)"],["Skilled services revenue","$","507,143","","","$","472,808","","","$","34,335","","","7.3","%"],["Number of facilities at period end","40","","","40","","","\u2014","","","\u2014","%"],["Number of campuses at period end(1)","1","","","1","","","\u2014","","","\u2014","%"],["Actual patient days","1,336,074","","","1,302,680","","","33,394","","","2.6","%"],["Occupancy percentage \u2014 Operational beds","76.0","%","","73.0","%","","3.0","%","","4.1","%"],["Skilled mix by nursing days","21.8","%","","20.7","%","","1.1","%","","5.3","%"],["Skilled mix by nursing revenue","38.4","%","","38.4","%","","\u2014","%","","\u2014","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change","","% Change"],["RECENTLY ACQUIRED FACILITY RESULTS:(4)","(Dollars in thousands)"],["Skilled services revenue","$","550,507","","","$","278,791","","","$","271,716","","","NM"],["Number of facilities at period end","53","","","25","","","28","","","NM"],["Number of campuses at period end(1)","4","","","1","","","3","","","NM"],["Actual patient days","1,191,663","","","566,398","","","625,265","","","NM"],["Occupancy percentage \u2014 Operational beds","81.6","%","","84.4","%","","NM","","NM"],["Skilled mix by nursing days","28.9","%","","37.4","%","","NM","","NM"],["Skilled mix by nursing revenue","48.9","%","","59.7","%","","NM","","NM"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","Change","","% Change"],["FACILITY CLOSED RESULTS:(5)","(Dollars in thousands)"],["Skilled services revenue","$","574","","","$","3,942","","","$","(3,368)","","","NM"],["Actual patient days","2,082","","","17,228","","","(15,146)","","","NM"],["Occupancy percentage \u2014 Operational beds","52.6","%","","90.8","%","","NM","","NM"]]
[[/GREPCENT_TABLE]]

(1)Campus represents a facility that offers both skilled nursing and senior living services. Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.

(2)Same Facility results represent all facilities purchased prior to January 1, 2021.

(3)Transitioning Facility results represent all facilities purchased from January 1, 2021 to December 31, 2022.

(4)Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2023.

(5)Facility Closed results represent a closed operation during the year ended December 31, 2024 due to the transitioning of an intermediate care facility program to a group home setting, which is included in the All Other category. The skilled services revenue was excluded from Same Facility results for the years ended December 31, 2024 and 2023 for comparison purposes.

Skilled services revenue increased $498.0 million, or 13.9%, compared to the year ended December 31, 2023. The increases in skilled services revenue were across all payer types including increases in Medicaid revenue of $238.0 million, or 14.2%, Medicare revenue of $69.4 million, or 7.0%, managed care revenue of $123.6 million, or 18.6% and private revenue of $67.0 million, or 26.6%.

The increase in skilled services revenue was primarily driven by strong occupancy performance across our skilled services operations. Our consolidated occupancy increased by 2.5% to 80.5% during the year ended December 31, 2024 compared to the same period in 2023, as a result of an increase in long-term care Medicaid patients and an increase in managed care skilled days.

Revenue in our Same Facilities increased $195.3 million, or 6.9%, compared to the same period in 2023, due to increased occupancy from long-term care patients, strong skilled days and revenue per patient day. Our diligent efforts to strengthen our partnerships with various managed care organizations, hospitals and local communities, increased our managed care revenue by 12.1%, mainly due to increases in managed care days of 6.5% and revenue per patient day of 3.6%. We continued to see a shift in our patient population from Medicare to managed care as Medicare Advantage enrollment continues to account for a larger portion of the overall Medicare eligible population. In addition, Medicaid revenue increased by $89.8 million or 6.8%, mainly from the increases in Medicaid days and revenue per patient day. Our skilled mix days and revenue percentage decline was due to our non-skilled days and revenue growing at a faster pace than our skilled days and revenue. Both skilled and non-skilled days and revenue increased from the prior year.

Revenue generated by our Transitioning Facilities increased $34.3 million, or 7.3%, primarily due to improved occupancy growth, increases in skilled mix days and revenue per patient day. The increases in revenue were derived from managed care revenue of 25.5%, Medicare revenue of 2.1%, Medicaid revenue of 3.9% and private revenue of 16.5%. These increases demonstrate our ability to focus on increasing occupancy across payer types. Included in the year ended December 31, 2023 is the revenue related to a facility that was not operating at full capacity starting in the first quarter of 2024 due to flooding.

Skilled services revenue generated by Recently Acquired Facilities increased by approximately $271.7 million compared to the year ended December 31, 2023. The increases were primarily due to 31 operational expansions between January 1, 2024 and December 31, 2024 across ten states.

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Historically, we have generally experienced lower occupancy rates and lower skilled mix at Recently Acquired Facilities and therefore, we anticipate lower overall occupancy during years of growth. Included in our metrics for Recently Acquired Facilities are 17 facilities we acquired in California in 2023 that were more mature and accordingly, had higher occupancy rates, higher skilled mix days and higher skilled mix revenue than our typical acquisitions. In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the type of the facilities and operations that we acquire.

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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","Same Facility","","Transitioning","","Acquisitions","","Total"],["","2024","","2023","","2024","","2023","","2024","","2023","","2024","","2023"],["SKILLED NURSING AVERAGE DAILY REVENUE RATES"],["Medicare","$","757.99","","","$","721.04","","","$","705.71","","","$","677.71","","","$","846.60","","","$","865.81","","","$","767.72","","","$","733.47"],["Managed care","555.11","","","535.95","","","526.01","","","528.10","","","590.50","","","613.57","","","555.37","","","539.25"],["Other skilled","628.01","","","595.57","","","537.30","","","494.43","","","627.85","","","424.56","","","620.42","","","575.34"],["Total skilled revenue","638.61","","","615.59","","","605.32","","","593.46","","","738.31","","","743.60","","","647.28","","","623.70"],["Medicaid","296.64","","","275.47","","","274.24","","","251.18","","","309.90","","","292.73","","","294.78","","","272.14"],["Private and other payors","278.20","","","262.93","","","246.18","","","237.11","","","334.92","","","347.70","","","280.24","","","262.93"],["Total skilled nursing revenue","$","403.02","","","$","382.15","","","$","342.94","","","$","320.41","","","$","436.43","","","$","466.18","","","$","398.66","","","$","378.02"]]
[[/GREPCENT_TABLE]]

(1) The rates are based on contractually agreed-upon amounts or rates, excluding the estimates of variable consideration under the revenue recognition standard, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 and state relief funding during the year ended December 31, 2023.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 5.1% and 4.1%, respectively, compared to the year ended December 31, 2023. The increase is attributable to the 4.0% and 4.2% net market basket increase that became effective in October 2023 and October 2024, respectively, and a shift toward higher acuity patients.

Our average Medicaid rates increased 8.3% due to state reimbursement increases, our participation in supplemental Medicaid payment programs and quality improvement programs in various states and changes in Medicaid mix. For example, we continue to have an increase in Medicaid days in states with higher rates, such as California. In addition, during the COVID periods from 2020 through 2023, we received state relief funding through Medicaid programs from various states such as California. These funds have been excluded from our average daily rates from 2020-2023. Starting in 2024, several of the states we operate in have incorporated the state relief funding as part of the state per diem rates or enhanced their supplemental programs. As results, these revenue are included in the 2024 average daily revenue rate. As such, the increase in Medicaid rates from 2023 to 2024 is not a lateral comparison.

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:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","Same Facility","","Transitioning","","Acquisitions","","Total"],["","2024","","2023","","2024","","2023","","2024","","2023","","2024","","2023"],["PERCENTAGE OF SKILLED NURSING REVENUE"],["Medicare","20.5","%","","22.4","%","","19.4","%","","20.8","%","","31.4","%","","42.2","%","","21.9","%","","23.8","%"],["Managed care","20.4","","","20.1","","","14.3","","","12.3","","","12.7","","","13.3","","","18.6","","","18.5"],["Other skilled","9.3","","","8.7","","","4.7","","","5.3","","","4.8","","","4.2","","","8.1","","","7.9"],["Skilled mix","50.2","%","","51.2","%","","38.4","%","","38.4","%","","48.9","%","","59.7","%","","48.6","%","","50.2","%"],["Private and other payors","7.2","","","7.6","","","8.6","","","8.9","","","8.2","","","6.4","","","7.5","","","7.6"],["Medicaid","42.6","","","41.2","","","53.0","","","52.7","","","42.9","","","33.9","","","43.9","","","42.2"],["TOTAL SKILLED NURSING","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","Same Facility","","Transitioning","","Acquisitions","","Total"],["","2024","","2023","","2024","","2023","","2024","","2023","","2024","","2023"],["PERCENTAGE OF SKILLED NURSING DAYS"],["Medicare","10.9","%","","11.9","%","","9.4","%","","9.8","%","","16.2","%","","22.7","%","","11.4","%","","12.3","%"],["Managed care","14.8","","","14.3","","","9.3","","","7.5","","","9.4","","","10.1","","","13.4","","","13.0"],["Other skilled","6.0","","","5.6","","","3.1","","","3.4","","","3.3","","","4.6","","","5.1","","","5.1"],["Skilled mix","31.7","%","","31.8","%","","21.8","%","","20.7","%","","28.9","%","","37.4","%","","29.9","%","","30.4","%"],["Private and other payors","10.4","","","11.0","","","12.0","","","12.1","","","10.7","","","8.6","","","10.7","","","11.0"],["Medicaid","57.9","","","57.2","","","66.2","","","67.2","","","60.4","","","54.0","","","59.4","","","58.6"],["TOTAL SKILLED NURSING","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

Cost of Services

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Change"],["","","2024","","2023","","$","","%"],["Cost of service","","$","3,242,737","","","","","$","2,832,012","","","","","$","410,725","","","14.5","%"],["Revenue percentage","","79.5","%","","","","79.1","%","","","","","","0.4","%"]]
[[/GREPCENT_TABLE]]

Cost of services related to our skilled services segment increased by $410.7 million, or 14.5%, from the same period in 2023. Cost of services as a percentage of revenue increased to 79.5% from 79.1%, due to increased labor costs as a result of new acquisitions in the turnaround stage, increased insurance expenses and increased expense related to the deferred compensation investment program. Our cost of services as a percentage of revenue varies depending on the volume of acquisitions during the period, which typically have higher costs during the transition period.

Standard Bearer

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Change"],["","","2024","","2023","","$","","%"],["","","(Dollars in thousands)"],["Rental revenue generated from third-party tenants","","$","16,976","","","","","$","15,774","","","","","$","1,202","","","7.6","%"],["Rental revenue generated from Ensign's independent subsidiaries","","78,110","","","","","66,712","","","","","11,398","","","17.1"],["TOTAL RENTAL REVENUE","","$","95,086","","","","","$","82,486","","","","","$","12,600","","","15.3","%"],["Segment income","","29,335","","","","","29,065","","","","","270","","","0.9"],["Depreciation and amortization","","29,297","","","","","25,205","","","","","4,092","","","16.2"],["FFO","","$","58,632","","","","","$","54,270","","","","","$","4,362","","","8.0","%"]]
[[/GREPCENT_TABLE]]

Rental revenue — Our rental revenue, including revenue generated from our independent subsidiaries, increased by $12.6 million, or 15.3%, to $95.1 million, compared to the year ended December 31, 2023. The increase in revenue is primarily attributable to 17 real estate purchases as well as annual rent increases since the year ended December 31, 2023.

FFO — Our FFO increased by $4.4 million, or 8.0%, to $58.6 million, compared to the year ended December 31, 2023. The increase in rental revenue of $12.6 million is offset by increases in interest expense of $7.4 million associated with the intercompany debt arrangements as Standard Bearer continues to grow its real estate portfolio.

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All Other Revenue

Our other revenue increased by $37.1 million, or 23.8%, to $192.9 million, compared to the year ended December 31, 2023. Other revenue for the year ended December 31, 2024 includes senior living revenue of $90.0 million, revenue from other ancillary services of $91.1 million and rental income of $11.8 million. The increase in other revenue is primarily attributable to our senior living and other ancillary services.

Consolidated Financial Expenses

Rent-cost of services — Our rent-cost of services as a percentage of revenue decreased by 0.2% to 5.1%, as our operational expansions included a higher mix of real estate purchases.

General and administrative expense — General and administrative expense decreased by $37.9 million or 14.4%, to $225.1 million. General and administrative expense as a percentage of revenue decreased by 1.8% to 5.3%. This reduction is attributable to a settlement that was outside the ordinary course of business and finalized in 2023. Excluding the impact of the proceeding in 2023, general and administrative expense as a percentage of revenue would be at 5.4%.

Depreciation and amortization — Depreciation and amortization expense increased by $11.8 million, or 16.2%, to $84.1 million. This increase was primarily related to the additional depreciation and amortization incurred as a result of our newly acquired operations and capital expenditures. Depreciation and amortization expense as a percentage of revenue remained consistent at 1.9%.

Other income (expense), net — Other income (expense), net as a percentage of revenue increased by 0.2%. Other income primarily includes interest income from our investments, interest expense related to our debt and deferred compensation gains and losses. Other income (expense), net increased by $10.4 million due to increases in interest income from our investments and gains in our deferred compensation plan which incurs gains or losses depending on market performance. During the years ended December 31, 2024 and 2023, the deferred compensation plan had gains of $5.2 million and $4.6 million, respectively. We also recorded an offsetting expense allocated between cost of services and general and administrative expenses.

Provision for income taxes — Our effective tax rate was 22.7% for the year ended December 31, 2024, compared to 23.1% for the same period in 2023. The effective tax rate for both periods was driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses, including non-deductible compensation. See Note 13, 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 Credit Facility (defined below). Our liquidity as of December 31, 2024 is impacted by cash generated from strong operational performance offset by investments made for our operational expansions and ancillary businesses as well as capital expenditures to improve the quality of care at our existing operations.

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 $156.5 million for the year ended December 31, 2024 compared to cash paid of $69.0 million for the year ended December 31, 2023. Total capital expenditures for property and equipment were $158.2 million and $106.2 million for the years ended December 31, 2024 and 2023, respectively. We currently have approximately $150.0 million budgeted for renovation projects in 2025. 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.

Our cash and cash equivalents as of December 31, 2024 consisted of bank term deposits, money market funds and U.S. Treasury bill related investments. In addition, as of December 31, 2024, we held investments of approximately $203.5 million. We believe our investments that were in an unrealized loss position as of December 31, 2024 do not require an allowance for expected credit losses, nor has any event occurred subsequent to that date that would indicate so.

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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, 2024, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

On May 16, 2024, 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, 2024. On August 29, 2023, the Board of Directors previously 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 September 1, 2023, which the program terminated by its terms on August 31, 2024 and is no longer in effect. We did not purchase any shares pursuant to the stock repurchase programs during the year ended December 31, 2024.

Under these repurchase programs, we are authorized to repurchase our issued and outstanding common shares from time to time in open-market and privately negotiated transactions, tender offers, pursuant to contractual provisions, and block trades, or otherwise in accordance with federal securities laws. The stock repurchase programs do not obligate us to acquire any specific number of shares. Any such repurchases will depend on our business strategy, prevailing market conditions, our liquidity requirements, contractual restrictions or covenants, compliance with securities laws, and other factors. The amounts involved in any such transaction may be material.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["NET CASH PROVIDED BY/(USED IN):","(In thousands)"],["Operating activities","$","347,186","","","$","376,666"],["Investing activities","(390,052)","","","(182,698)"],["Financing activities","(2,162)","","","(612)"],["Net (decrease) increase in cash and cash equivalents","$","(45,028)","","","$","193,356"],["Cash and cash equivalents beginning of period","509,626","","","316,270"],["Cash and cash equivalents at end of period","$","464,598","","","$","509,626"]]
[[/GREPCENT_TABLE]]

Operating Activities

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

The $29.5 million decrease in cash provided by operating activities for the year ended December 31, 2024 compared to the same period in 2023 was due to payment of the $48.0 million related to the litigation matter discussed in Item 3., Legal Proceedings and we funded $35.0 million to Insignia Pathway, which is discussed in Recent Activities. This cash outflow was partially offset by an increase in operational performance.

Investing Activities

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

The $207.4 million increase in cash used in investing activities for the year ended December 31, 2024 compared to the same period in 2023 was primarily used for operational expansions and capital expenditures as well as increased investment activity as part of our capital strategy.

Financing Activities

Financing cash flows consist primarily of cash provided by the issuance of common stock upon exercise of stock options, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, payment for share repurchases and the noncontrolling interest activity.

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The $1.6 million increase in cash provided by financing activities for the year ended December 31, 2024 compared to the same period in 2023, was primarily due to stock option exercises offset by the purchase of non-controlling interest in one of our ancillary businesses.

A discussion of our cash flows for the year ended December 31, 2022 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, 2023 filed with the Securities and Exchange Commission on February 1, 2024.

Material cash requirements from known contractual and other obligations

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

[[GREPCENT_TABLE]]
[["","December 31,"],["","2024","","2023","","2022","","2021","","2020"],["","(In thousands)"],["Mortgage loans and promissory note","148,438","","","152,388","","","156,271","","","159,967","","","117,806"],["TOTAL","$","148,438","","","$","152,388","","","$","156,271","","","$","159,967","","","$","117,806"]]
[[/GREPCENT_TABLE]]

Significant contractual obligations as of December 31, 2024 were as follows, including the future periods in which payments are expected:

[[GREPCENT_TABLE]]
[["","","2025","","2026","","2027","","2028","","2029","","Thereafter","","Total"],["","","(In thousands)"],["Operating lease obligations","","$","204,909","","","$","204,696","","","$","204,002","","","$","202,994","","","$","199,144","","","$","1,776,571","","","$","2,792,316"],["Long-term debt obligations","","4,086","","","4,227","","","3,897","","","3,779","","","3,896","","","128,553","","","148,438"],["Interest payments on long-term debt","","4,487","","","4,346","","","4,207","","","4,091","","","3,974","","","50,463","","","71,568"],["TOTAL","","$","213,482","","","$","213,269","","","$","212,106","","","$","210,864","","","$","207,014","","","$","1,955,587","","","$","3,012,322"]]
[[/GREPCENT_TABLE]]

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. The settlement funds were fully paid during the year ended December 31, 2024.

Credit Facility with a Lending Consortium Arranged by Truist

We maintain a revolving credit facility with Truist Securities (Truist) (the Credit Facility) with availability of up to $600.0 million in aggregate principal. The maturity date of the Credit Facility is April 8, 2027. Borrowings are supported by a lending consortium arranged by Truist. 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 ranging 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, 2024, 23 of our subsidiaries had mortgage loans insured with HUD for an aggregate amount of $146.9 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, 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 terms for all the mortgage loans are 25 to 35 years.

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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

As of December 31, 2024, 231 of our facilities are under long-term lease arrangements, of which 99 of the operations are under nine triple-net Master Leases and one stand-alone lease with CareTrust. The Master Leases consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography. Under each master lease, our individual subsidiaries that operate those properties are the tenants and CareTrust's individual subsidiaries that own the properties subject to the Master Leases are the landlords. The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%. At our option, we can extend the Master Leases for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If we elect to renew the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease. Additionally, four of the 100 facilities leased from CareTrust include an option to purchase that we can exercise starting on December 1, 2024. Subsequent to December 31, 2024, we, through Standard Bearer, exercised the option to purchase the real estate of the four facilities from CareTrust for $44.6 million.

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 are 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.

Ninety of our independent subsidiaries, excluding the subsidiaries that are operated under the Master Leases from CareTrust, are operated under 14 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. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. 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.

Inflation

We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services.

Labor, supply expenses and capital expenditures make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

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