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The Ensign Group, inc (ENSG) Q2 2021 Earnings Call Transcript

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The Ensign Group, inc (NASDAQ: ENSG)
Q2 2021 Earnings Call
Jul 29, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to The Ensign Group's Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host, Chief Investment Officer, Chad Keetch. Mr. Keetch, please go ahead.

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Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Thank you. Good morning, everyone, and thank you for joining us today. We filed our earnings press release yesterday 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 PM Pacific on Friday, September 3, 2021. We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, July 29, 2021, and these statements have not been nor will 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 affiliates, do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason.

In addition, The Ensign Group is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned 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 operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly owned captive insurance subsidiary, which we refer to as the Captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability, as well as for workers' compensation insurance liabilities. The words Ensign, company, we, our and us refer to the Ensign Group and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center and the Captive are operated by separate wholly owned independent companies that have their own management employees and assets.

References herein to the consolidated company and its assets and activities, as well as use of the terms we, us, our, and similar terms are not meant to imply nor should it 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.

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 yesterday's press release and is available in our Form 10-Q.

And with that, I'll turn the call over to Barry Port, our CEO. Barry?

Barry Port -- Chief Executive Officer and Director

We're very happy to report another record quarter. As the healthcare system continued its march toward normalcy, we continue to see patient flows trending toward more traditional patterns and the momentum we saw in the first quarter occupancy has continued into the second. In fact, from the low point of our pandemic period census, which we hit in December of 2020, our same-store and transitioning operations have already improved by 52 percentage points. We were particularly pleased that we achieved sequential growth in occupancies from the first to the second quarter, which is especially impressive, given that we always expect a seasonal decrease in occupancies in the summer months.

The solid results were achieved by our local leadership teams who have remained an absolutely integral part of the healthcare continuum during the pandemic. These excellent results during what continues to be one of the largest global healthcare challenges in our history are what set Ensign affiliates apart. Our operations have played a pivotal role in the preservation of the healthcare continuum despite the great challenges they have faced because they adjusted and adapted to meet the acute needs of their markets. We are pleased to see that those efforts are being rewarded by their hospital managed care partners who have and continue to entrust our operations with the care of their patients.

While we are excited about our accomplishments for the quarter, we know that we can do so much better in so many ways and we look forward to seeing our operations achieve even more as they continue to make evident the enormous potential within our portfolio as we return to and exceed pre-COVID levels.

We saw continued sequential improvement in occupancy over the first quarter with same-store and transitioning occupancy improving by 170 basis points and 150 basis points, respectively. In addition, our managed care census for the same -- for same-store and transitioning portfolios increased by 33.9% and 27.9% from the prior year quarter, respectively. Our record results in the quarter came from a multifaceted approach that included efforts to improve occupancies but also involved a renewed focus on operational fundamentals, including operational expense management and improved cash collections. We also continue to benefit from sequestration suspension and improved Medicaid funding in certain states.

As the pent-up demand for healthcare services in our markets has continued to increase, our managed care skilled mix days and managed care average daily census improved again for an impressive fourth consecutive quarter. Also, our combined same-store and transitioning managed care revenues for the quarter were up sequentially for the fourth quarter in a row. At the same time, our skilled mix has remained higher than pre-COVID levels with a combined same-store and transitioning skill mix of 31.5% during the second quarter as compared to the first quarter of 2020 which was 29.3%.

We're also very encouraged to see that some of our more mature markets like most of Arizona and Colorado have already returned to pre-COVID occupancy levels. We expect the positive trend in occupancy to continue throughout the year, subject to some seasonality as volumes and higher acute settings and managed care utilization continue to increase.

Also, we want to just briefly touch on the potential resurgence of COVID in some of our markets. We're pleased to report that, so far, we've only seen a very minimal number of cases across our portfolio. However, we remain vigilant and despite the worrisome COVID trends, we remain confident that our local operators and their clinically focused teams will rise to any challenge ahead. If the new variant of the COVID virus persists, we have the ability to rely on the many, many lessons learned during the pandemic, including infection control procedures and treatment protocol. We also have many more tools at our disposal than we did when the pandemic first arrived on the scene, including access to the vaccine and many forms of testing. In addition, we are grateful that the federal government has extended the state of emergency to October 18, 2021, which keeps in place many of the regulatory and other forms of assistance helpful to patient care.

Throughout our history, staffing has been a challenge when the economy is performing well and unemployment is low. So while this challenge is real, it's something we have seen and managed through many different times before. In addition, these particular staffing challenges have some unique transitory factors that we do not anticipate to persist, including child care issues created by school closures and temporary unemployment benefits that have had a substantial impact on the labor markets. We've also seen some of these pressures being lifted in states that have ended certain unemployment benefits like in Arizona, where our operator saw an almost immediate increase in the labor pool. We fully expect that some of these temporary pressures will continue to improve.

In the meantime, rather than taking a passive approach, we are highly focused on ensuring that our culture and our overall experience is the best it can be. Our model encourages innovation in the face of challenges. For example, in one market, we've developed an in-house Nurse Aide training program that's generated over 150 CNAs in the last five months. We've also seen tremendous success in our nursing leadership development programs. In fact, over the course of the last few years, our clinical leadership was able -- were able to train and promote 22 of our nurses to a Director of Nursing role. We also continue to elevate our recruiting and have already seen success from these new efforts.

As we announced yesterday, we increased our 2021 annual earnings guidance to $3.55 to $3.67 per diluted share, up from the previous guidance of $3.54 to $3.66 per diluted share and affirmed our previous annual revenue guidance of $2.62 billion to $2.69 billion. The midpoint of this 2021 earnings guidance represents an increase of over 15% from our 2020 results, which were 103% higher than our 2019 results. Yesterday's increase comes from the strong results during the first half of the year, continued positive trends in occupancy and the continuation of state funding.

Our current health combined with our culture, proven leadership strategy, healthy balance sheet, the enormous potential in our existing portfolio and the tremendous acquisition opportunities on the horizon gives us confidence that we are well-positioned to not only rebound to our pre-COVID path, but to accelerate our growth.

Obviously, our performance wouldn't be possible without the enormous sacrifice and ownership that we see from our local leaders caregivers and other frontline staff. Our confidence comes from our belief that we have the best and the brightest leaders and caregivers in post-acute care. We again express our love and appreciation for all of our amazing team members, especially those on the frontlines for all that they're doing to serve their communities. We honor them and are so grateful for them. We certainly expect some challenges ahead, but we're excited about the year ahead of us and look forward to showing our dedication to all those that have entrusted us with the care of their loved ones.

And with that, I'll ask Chad to give us an update on our recent investment activity. Chad?

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Thank you, Barry. We made significant progress during the quarter in our effort to create a structure that will allow us to better demonstrate the growing value in our owned real estate. As you are aware, we took the first step in the fourth quarter of 2020 when we began reporting the results of our real estate portfolio as a new and independent reporting segment, which is comprised of properties owned by us and leased to affiliated skilled nursing and senior living operations and 31 senior living operations that are leased to The Pennant Group. Each of these properties are subject to triple net long-term leases and generated rental revenue of $16 million during the quarter, of which $12.1 million was derived from Ensign affiliated operations.

Also, for the second quarter of 2021, we reported $13.7 million in FFO, which represents an increase of 10.5% over the prior year quarter of $12.4 million. We hope that this extra disclosure will be helpful to our current and prospective investors who are familiar with our history of successfully incubating businesses as they evaluate this growing part of our business, which we believe is a key differentiator in the market.

Since our last call, our engaged advisors have helped us begin to prepare a structure inside of Ensign that highlights this value while not losing sight of our purpose-driven mission and allows us to retain the ownership in this real estate. We envision a structure that not only creates better visibility into the demonstrable value of our owned real estate, but also will provide us with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties, which we believe will give us a new pathway to growth with transactions that we would not have considered in the past. And even though we do not anticipate doing a public spin-off, one of our priorities in designing this entity is to create a structure that will preserve the optionality to access both public and private markets in the future.

As we have done in other transformative transactions, including two spin-offs and other new ventures, we are taking the necessary time to ensure that with the help of our experts and advisors that we're dotting all the I's and crossing all the T's in this important decision. As we do so, our focus is to implement strategies that will allow us to take advantage of our strengths to accelerate our growth and to enhance our purpose-driven mission to transform post-acute care. We are very excited about the new opportunities embedded in this chapter of our growth story. And we expect to make a more detailed announcement regarding this real estate strategy next quarter.

We're also excited about our recent acquisition activity. During the quarter, we ramped up our growth efforts with the addition of eight skilled nursing operations. After a brief pause on our acquisition efforts during the early months of the pandemic, our teams have shown their commitment to one of the things that drives our organization, which is to consistently and methodically acquire, not only in good times, but even when it would be easier to shut down growth while waiting out the store.

The following skilled nursing operations were acquired during the quarter and since: Boulder Canyon Health and Rehabilitation; Berthoud Care and Rehabilitation; and South Valley Post Acute Rehabilitation, all in Colorado, adding a total of 322 beds in that state. We also included Windsor Rehabilitation and Healthcare, which added 108 beds in the State of Texas; and Mira Vista Care Center; Shoreline Health and Rehabilitation; The Oaks at Lakewood; and The Oaks at Timberline, adding a total of 386 beds in the State of Washington.

We are also pleased to be expanding our continued and growing relationship with CareTrust and are happy to announce that in connection with this transaction in Washington, CareTrust extended the our lease term by 10 years on the first to expire master lease pool. We are grateful for the strengthening of our long-standing partnership with CareTrust and look forward to working closely with them in the future, including a transaction that we hope to announce in the very near future.

With these latest additions, we have added 17 properties to our organization since the pandemic began last year. Given our first priority is always to make sure our existing operations are strong, we have been extra diligent to ensure that each new addition had the full support of the healthy market, a proven leadership plan and a clear pathway to strong clinical and financial performance. Each of these new additions have been carefully selected and were acquired at attractive prices and terms. We are very excited to watch these operations become solid contributors to their clusters as they follow proven Ensign principles.

As we look ahead to the remainder of the year and into 2022, the pipeline for our typical turnaround opportunities remains strong. That pipeline continues to be impacted, however, by the extension of certain COVID-related government programs that have and continue to help distressed operations. We anticipate an increase in the number of opportunities, once these programs wind down.

In the meantime, we have a handful of deals that we expect to close yet this year and also expect additional opportunities to come our way this fall. We have a lot of capacity to grow, including from a leadership and capital perspective, but we will always make sure to stay true to our principles of disciplined growth.

As we mentioned in our release yesterday, we have over $340 million in available capital. In addition, we have 75 completely unlevered real estate assets. We continue to work on unlocking some equity value in a handful of our owned and unlevered real estate assets through long-term fixed rate HUD financing. We expect to close this process on four of those operations and hope to have an announcement on that in the next few weeks.

And, with that, I'll turn the call back over to Barry. Barry?

Barry Port -- Chief Executive Officer and Director

Thanks, Chad. Before Suzanne runs through the numbers, we'd like to share an example that demonstrates what dozens of our operations across the portfolio have done to adjust to the changing operating environment. As we have stated in the past, the true strength of our operating model comes from the talented, driven and compassionate facility leaders who are constantly innovating and finding ways to be the provider of choice for the communities they serve. As a result, even mature same-store operations within our portfolio have tremendous potential for organic growth.

For example, Bella Vita Health and Rehabilitation Center in Glendale, Arizona was acquired in 2002 and has been a highly successful contributing part of the Bandera portfolio for over a decade. Last year, during the height of the COVID pandemic, Bella Vita received a contract to operate a 40-bed specialty unit, which allowed the local acute hospitals to discharge active COVID and COVID-recovering patients to preserve their ability to care for the most critically ill. This and other efforts solidified Bella Vita's already strong relationship with local providers, hospitals and continuum partners and resulted in record financial results in 2020.

This year as COVID cases have plummeted, and the unit closed, CEO, Tedd Glazebrook and Director of Nursing Jennifer Clay adjusted their strategy to meet the changing needs of their community, while improving fundamentals like culture and expense management. As a CMS-rated 5-Star operation, they continued to invest in clinical training and requested increased audits from their clinical support resources. They took their leadership team on field trips to other high-performing cluster partner facilities in the Phoenix area to learn and share best practices related to PDPM and billing and they scrubbed their contracts with vendors to ensure that their facility was receiving the best pricing and services.

Recognizing the need to regrow census, as the COVID unit was closed, the Bella team met with local managed care organizations, physicians and other referral sources and sought feedback on how to better serve the needs of the Glendale community. In response to the direct feedback they received, the team then parlayed the feedback into enhanced behavioral health capabilities and a quicker and more seamless admissions process. As a result, in Q2, Bella Vita grew occupancy by 14% to 97%. Skilled mix also skyrocketed from 28% to 50% for the quarter and as a result, quarterly EBIT improved 110% from the same quarter in 2020, all while maintaining Medicare 5-Star quality ratings and successfully completing deficiency-free infection control surveys.

We hope that this example is helpful in illustrating all the different levers our local operators have to pull to quickly and responsibly adjust to the needs and the feedback of their healthcare partners.

With that, I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance. And then we'll open it up for questions. Suzanne?

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

Thank you, Barry. And good morning, everyone. Detailed financials for the quarter are contained in the 10-Q and press release filed yesterday. Some additional highlights for the quarter include GAAP diluted earnings per share of $0.87, representing an increase of 19% over the prior year quarter. Adjusted diluted earnings per share was $0.89, an increase of 14% over the prior year quarter. Consolidated GAAP revenues and adjusted revenues were both $638.5 million, both increasing 9% over the prior year quarter.

GAAP net income was $49.4 million, an increase of 23% over the prior year quarter. And adjusted net income was $50.9 million, an increase of 18% over the prior year quarter. Other key metrics, as of June 30, include cash and cash equivalents of $198.4 million, cash flow from operations of $108.4 million and $340 million of availability on a revolving line of credit. We continue to de-lever our portfolio, achieving lease-adjusted net debt to EBITDAR ratio of 2.2 times. These improvements are attributable to growth in our EBITDAR from same-store, transitioning and newly acquired operations as well as enhanced cash collections.

We own 95 assets, 75 of which are unlevered with significant equity that provides us with even more liquidity. In addition, we continue to return all Provider Relief Funds that we have received to-date, which as of June 2021 totaled over $153 million.

As we mentioned last quarter, suspension of the 2% sequestration was extended through December 31, 2021. The suspension have and will continue to have a positive impact on the revenue, depending upon how the pandemic affects our Medicare census.

Last week, the Federal Health Emergency was extended for another 90 days to October 18, 2021. With this extension, the federal government will continue to provide various waivers and FMAP funding. However, Medicaid reimbursement and the timing of payments vary substantially by state. Currently, we anticipate two of the states in which we operate to continue to have approved funding.

We are raising our 2021 annual earnings guidance to $3.55 to $3.67 per diluted share and maintain our annual revenue guidance of $2.62 billion to $2.69 billion. The midpoint of this updated 2021 earnings guidance represents an increase of over 15% over our 2020 results. Our increased 2021 guidance is based on diluted weighted average common shares outstanding of approximately $57.8 million, a tax rate of 25%, inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax, the recovery of COVID-19 pandemic with the primary exclusion coming from stock-based compensation.

In addition, 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 general economy on our census and staffing, the short-term impact of our acquisition activities, variation in insurance accruals, surges in COVID and other factors.

And with that, I'll turn the call back over to Barry. Barry?

Barry Port -- Chief Executive Officer and Director

Thanks, Suzanne. We want to again thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We recognize the heroic efforts of our nurses, therapists and other frontline care providers who have courageously faced this pandemic and provided life-enriching care to our residents and their families. We also are appreciative of our colleagues here at the Service Center, who are working tirelessly to support our operations and enabling us to succeed in spite of the challenges that we faced. Thank you for making us better every day.

We'll now turn over to the Q&A portion of our call. We'll be joined by Spencer Burton, our Chief Operating Officer. Latif, can you please instruct the audience on the Q&A procedure?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Frank Morgan of RBC Capital Markets. Your question, please.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning or good afternoon. Yes, I guess maybe starting at a high level, I'm curious about any kind of update on the acquisition, market opportunity. I know you alluded to some federal dollars that may have kept -- delayed some of these acquisitions recurring. But just curious kind of any thoughts on when the timing you think that might improve and the opportunities may or those might come to fruition? And how much of that's driven by -- perhaps what comes out of the PDPM final rule? I guess I did my first question.

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Yes. Thanks, Frank. I think we're -- it's interesting because we're seeing a pretty steady flow of opportunities that most, I would say, are unrelated to kind of COVID-related items. They're just sort of folks retiring and getting out of the business for various reasons and kind of the typical deal flow. We still expect a bigger pipeline in the near future. I would say, now a lot of this depends on some of the things you mentioned, including the PDPM final rule. I think that just be yet another issue for a lot of these smaller and distressed operators.

I think we see -- usually, there is an uptick kind of in the fourth quarter as folks are planning and wanting to get a deal done in the tax year, those kinds of things. So we do anticipate that and then really 2022 is probably where we're going to see most of that deal flow.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. And I know, obviously, you've got the extension of the Federal Emergency through October and you mentioned I think a couple of states that have already approved -- got some approved funding increases there. So are there any -- maybe color on the states that you have it and how meaningful are those states and then how would you handicap other states that might also apply for that funding?

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

Yes, Frank, a great question. I think we've been talking about this every quarter since it started. And really there's two states that have been strongest, and for us, our California and Texas, and those are the key states that we rereferenced. Obviously, those are our two largest states and say it is a pretty meaningful portion of what we've been seeing for FMAP the last couple of quarters.

There are other states that we feel like there is a very strong possibility that they're going to get in. And it's baked into kind of the higher end of the guidance as we go through things like Arizona and some of the other states. Yes, there is just a couple of other states that we do feel like there is an opportunity for us to get some additional funds. Just not the same magnitude as the California and the State of Texas.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. And those California, Texas, those are baked into your updated guidance?

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

Correct.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. Okay, maybe [Speech Overlap] one last high level -- I'm sorry, go ahead.

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

No, that's correct.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. Yes. One last high-level question. You mentioned that you saw a fairly immediate impact in the labor pool in some of the states in markets where the unemployment extended benefit had ended. Maybe talk about those states and are there any states at the top of the list that you think might also be getting close to premature or on early basis dropping those extended benefits?

Barry Port -- Chief Executive Officer and Director

I don't know that there are any others that we foresee dropping out before kind of the September timeframe. I'll tell you one that we saw, an immediate impact with and this is still very anecdotal because it was very recent. As in the State of Arizona, it's been reported to us by several of our operators that they saw an almost immediate uptick in the number of applicants they see for positions in their operations and that's continued.

So we hope that's the case in states like Texas. We certainly need more folks in the labor pool, a lot of those that have been impacted by the extended unemployment benefits are folks that we can use immediately, so.

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Seven out of our states have had an early end to the unemployment benefit and we are seeing some gradual loosening, but we think there's many factors at play. Some of them are just the efforts that we've been making all year long. There's schools going back into session. There is a lot of play, but it certainly isn't hurting to have that unemployment go away and get people motivated again to get back to work.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. And I think Barry, you, in your prepared comments, you talked about the expectations for continued improvement in occupancies. Just any color, is that to be improved? Maybe some color around kind of how you see the skill mix developing as that occupancy continues to grow?

Barry Port -- Chief Executive Officer and Director

Yes, I mean, I think we saw the dip in skill mix that we expected to happen from the height of the pandemic back in December and that gradually kind of tapered down to a more normal number, which is what we've been seeing recently. It's still higher than where we were last year, which is good to see. I think that's a mix we're really comfortable with and hope to stay at and we hope to just see our overall occupancy continue to climb.

We almost always by June and July, we see occupancy start to dip and thankfully, we hadn't seen that go into June and we still haven't seen that be the case. So we're hopeful that our trend of improvement continues in spite of the summer months and continues to get stronger as the fall comes near.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. One last one, maybe a Chad question. On this potential new structure that you're putting together, maybe if you could just talk about, would it have an effect on your balance sheet or your leverage level and just would it in any way change your ability to bring more turnaround assets onto the books? And I'll hop off. Thanks.

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Yes, no, the transaction or structure itself won't have a material impact on our balance sheet. We're not looking to do any sort of significant borrowings or anything like that in connection with what we're talking about. That said, we do think it will give us access to different forms of borrowings in the future. We'll always be careful to make sure that we're watching our balance sheet and being very careful about that. And obviously, our leverage levels are really low, which gives us a lot of that dry powder that we talked about.

So in terms of doing additional turnaround opportunities, I think as I kind of mentioned in the script, there are a lot of deals that we see that cross over state boundaries, the states that were not in, and other factors that might make it a deal that isn't one that we would want to operate. And in many cases, we find ourselves not participating in those processes. And I think what we're thinking and hoping is it a structure like this would help us both potentially do those on our own and lease to third parties or partner with other real estate entities as well to find ways to do deals that in the past we wouldn't have done. So we are excited about the additional pathway we think it will give us to grow.

Frank Morgan -- RBC Capital Markets -- Analyst

Thank you. Thanks for the questions.

Operator

Thank you. Our next question comes from Tao Qiu of Stifel. Your line is open.

Tao Qiu -- Stifel -- Analyst

Hey, good morning and thank you for taking my questions. So the first question is too on investment. The full Washington State assets transition from Five Oaks to you, was a pretty interesting transaction. I think you mentioned that you expect another transaction with CareTrust soon. I assume you are getting more inbound calls from them was either because their existing operators are in distress or they're making a strategic decision to realign the portfolio. Any color on the opportunity set there and your criteria in terms of taking of these assets? And also if you look at the pipeline today, how much of that will be owned versus leased?

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Yes, so I guess I'll start with your last part first. I mean, we have done quite a few lease deals over the last year and we still think that's a really attractive way for us to grow, assuming the coverages are healthy and the lease yields all makes sense and we'll continue to do that in the future. That said, our real estate strategy is also important to us and the extent we have the opportunity to buy real estate, especially for distressed assets that maybe don't have much in terms of coverage or sometimes no coverage at all, that might be a little bit more difficult to structure a 30-year lease around, those are the times when it makes a lot of sense for us to buy the assets and then obviously improve them to a point where they do produce coverages, etc.

So that -- and I guess in terms of what we prefer, I guess it's a combination of both and that's been our history and we'll continue to do it that way, remaining true to the opportunity and staying opportunistic about it.

We don't start the year saying we're going to do X number of deals and this many leases and this many purchases. We just approach each opportunity individually and evaluate those opportunities.

With respect to our recent activity with CareTrust, this was an opportunity that essentially the existing or the prior operator is really looking to exit the business, and we actually have had a relationship with the prior operator and of course, have long partnership with CareTrust. And so it was a really sort of win-win situation for everybody. The party exiting the business was able to hand their operation over to someone that they know well and trust very, very much and handed us, entrusted us with continuing what they started. And then from both our point of view and CareTrust's point of view, we're able to just expand that relationship and continue to move forward.

In terms of the future deals, I think we'll always look to be there for them when they have tenants like that, that are looking to move on or maybe pair off certain states or other things like that and then of course, new opportunities as well.

So really just appreciate the relationship we have with CareTrust and all of our REIT partners that understand us and our strategy to grow and we look forward to doing more and more with them in the future.

Tao Qiu -- Stifel -- Analyst

Got you. So just a follow-up on the real estate platform. I think one of the opportunities you have mentioned in the past is that you could potentially take on assets that may not be operated by you. How big is the opportunity there? Are you starting to build a pipeline today?

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Yes, great question. It is something on our minds and we are starting to think along that path. How big the opportunity could be is, it could be very significant. But that said, one of the reasons we're doing it the way we're doing it is we don't see ourselves as just a real estate company or just an operator. We're both. And so -- and with that, our operations and our operational focus is our core of who we are and we're never going to lose that. And with that, I think we can use that point of view to really help potentially other operators that are in states we're not in.

We're currently in 13 states. There is a lot of states that are very attractive, but we just don't know much about. And this pathway that we're talking about potentially could help us even get a look into new states and to look into other ways of doing things and we think we have a lot of knowledge and information that we can share at the same time.

And so I think it's something we're excited about. I do think it will help accelerate our growth. But we're going to stay true to who we are and how we grow and work. It's not going to be something that dramatically changes our approach to acquisitions.

Barry Port -- Chief Executive Officer and Director

And Tao, I'd just add one small thing. I agree with everything that Chad has said. We really like the industry that we're in. We see enormous opportunity to transform post-acute care and we know we can't necessarily do that all by ourselves. And so strategically, to expand our mission, we hope to align with other great operators that we know are out there and that will take some time to vet and find and maybe even help develop over time. But it's enormously important for us strategically to have a way to be able to align with other good operators or potentially future good contributors in our space.

Tao Qiu -- Stifel -- Analyst

Got you. Sounds good. My second question is really about the volume trends. I think in the last two weeks, the public hospital operators have reported very strong patient volume and surgical volume this quarter. I think that should be very positive refill to your census numbers near term, but I think a few companies also commented that they saw demand got pulled forward into earlier quarters, therefore, expect volume to be trending softer through the end of the year in their guidance. Considering the fact that your guidance suggest a ramp-up in the second half, how should we think about the demand on the post-acute side toward year-end?

Barry Port -- Chief Executive Officer and Director

Yes, it's a good question and really it's a really nuanced answer because every state is tremendously different and every hospital system is on kind of a different path, even within similar markets. Our optimism is representative of the states that we operate in, the geographies that we know well, the trends that we see locally, but also understanding that there -- we're kind of in uncharted territory somewhat as well and things can ebb and flow and they might. But again, seeing our strength through the summer months, which is something fairly uncharacteristic in our space, it gives us a lot of confidence about where we're headed at the moment.

Tao Qiu -- Stifel -- Analyst

Yes, thanks for the color there. Just one more if I may. The managed care patient days have seen very strong growth into the second half of last year and I think the census this quarter was also very robust. So speaking of normalization to pre-pandemic levels, should we expect that you will be able to sustain kind of a higher managed care day mix given all the alignment you have made to commercial payers?

Barry Port -- Chief Executive Officer and Director

We sure hope so. I mean, that's our focus and intent and we have a lot of good things going with our managed care partners and we continue to have very in-depth discussions about how we can partner, take on more risk, look for opportunities to enhance services that we offer to their members, and then even just providing direct feedback and data that shows our outcomes-focused results that we achieve so that we can collaborate and continue to adjust.

So again, we see -- we've seen this kind of gradual trend over time with managed care. We -- part of it is a function of returning to normalcy, but we believe another piece of that is just our expanding relationships with our different partners. So we expect that to continue.

Tao Qiu -- Stifel -- Analyst

Great. That's all my questions. Thank you and congrats.

Barry Port -- Chief Executive Officer and Director

Thanks, Tao.

Operator

[Operator Instructions] Our next question comes from the line of Scott Fidel of Stephens. Your question, please.

Scott Fidel -- Stephens -- Analyst

Hi, everyone. Just had a couple of quick ones here. First one, just wanted to ask on earnings seasonality that's embedded in the outlook for the balance of the year. Traditionally, you tend to have 3Q EPS, looks pretty consistent with the second quarter and then you have a bit of a pickup in the fourth quarter from the 3Q numbers. Just interested, just given all these different dynamics at play this year, whether you still see that type of seasonality as realistic or anything that you just want to call out around 3Q versus 4Q anticipated earnings?

Barry Port -- Chief Executive Officer and Director

Yes, your observation is absolutely spot on, Scott and that's our expectation is that third quarter is historically challenging similar to second quarter. And so we expect the two although second quarter wasn't as challenging for us as we expected, but we feel similarly about third quarter that we did about second quarter, expect that to be somewhat comparable, although we'll see. And then fourth quarter is almost always a much stronger month for us and so we don't see much deviation from that historical cadence.

Scott Fidel -- Stephens -- Analyst

Okay. And then just one question on a separate topic. So it looks like the final FY 2020 case deferral has put it on beat, so that could be dropping about pretty much any day right now. So just would be helpful if you just want to remind us on some of the base case assumptions that you have for FY 2022 that you've built in at this point in terms of rate? And then just I guess sort of final thoughts heading into the final rule here up on the proposal that CMS has had to recalibrate the PDPM model in -- any dialog that the industry has been having with CMS you think that could make some traction around CMS maybe recognizing at least more of a phased-in approach to that when we get to the final rule? And that's it for me. Thanks.

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

Thanks, Scott. I'll try to take that in phases. So that's a lot of different things right there. And first and foremost, right, just a reminder, April, they dropped the preliminary rule. I think the market basket average that they kind of put out there and that preliminary rule is 2.3% and the one unique thing that that preliminary rule had in it for us, particularly, is it held the value-based purchasing component of the rate increase, flat, meaning everyone is kind of treated equally, and for that aspect, that actually takes that rate down. So that will be lower than our market basket average if that kind of stays flat.

So -- and that's not outside the norm for us. On average, what we've seen for these rates are between 1% and 3% increase. We aren't reliant, our process isn't reliant on that market basket increase, really what we do is look at how to continue to drive acuity and ensure that our systems that we don't think are fully developed for PDPM in the first place continue to capture additional acuity and so those are the assumptions built into the guidance.

With regards to kind of overall strategy with regards to if there is going to be a phased-in approach or not a phased-in approach, I mean I think what we continue to hear is that if anything happens which most have kind of stepped away from that right now that there would be some huge adjustment, but if there was some adjustment that it would be phased in. I think more people are saying that they do not expect to face an adjustment at this time.

Scott Fidel -- Stephens -- Analyst

Okay. Thank you.

Operator

Thank you. At this time, I'd like to turn the call over to CEO, Barry Port for closing remarks. Sir?

Barry Port -- Chief Executive Officer and Director

Great. Thank you, Latif and we'd like to thank everyone else for joining us today. Appreciate you being on the call, and we are grateful for the questions. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary

Barry Port -- Chief Executive Officer and Director

Suzanne D. Snapper -- Chief Financial Officer, Executive Vice President

Frank Morgan -- RBC Capital Markets -- Analyst

Tao Qiu -- Stifel -- Analyst

Scott Fidel -- Stephens -- Analyst

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