The Ensign Group, Inc. (ENSG) Earnings

Management highlights

- **Culture and Clinical Model Differentiation - The company's guiding mission is to dignify post-acute care via consistent delivery of exceptional clinical and resident experiences. Core values (organized under the CAPLICO acronym) act as an operating discipline that influences hiring, leadership development, employee retention, and clinical execution. - The company's proprietary One Clinical integrated care model aligns therapy and nursing as equal clinical partners, rather than separating therapy as an ancillary service. Interdisciplinary teams coordinate around shared patient goals to improve functional outcomes, reduce complications, and enhance quality of life. - Clinical results significantly outperform national and regional benchmarks: same-store quality measure ratings are 23% above state averages, Cycle 1 survey results outperform state averages by 18% and county averages by 26%, rehospitalization rates are 15% better than the national average, and long-stay emergency department visits are 24% better than the national average. Over 80% of skilled nursing operations hold a 4 or 5-star CMS quality rating, with performance exceeding national averages across all 15 quality measurement categories. The company currently has zero CMS Special Focus Facilities. - **Workforce and Leadership Stability - The company's "Customer Second" core value prioritizes supporting employees to enable exceptional resident care. Director of nursing turnover continues to improve, overall RN retention is 8% better than the state average across the company's 17-state footprint, and administrator turnover is 46% lower than the state average. Leadership stability drives consistent quality, operational efficiency, and strong financial performance. - **Acquisition and Growth Strategy - The company added 20 new operations (all including real estate assets) in the quarter, bringing total acquisitions since 2025 to 71. Recent acquisitions include 19 facilities in Texas and 1 in Iowa, adding 2,392 skilled nursing beds, 100 senior living beds, and 55 independent living beds. The "first who, then what" mantra prioritizes identifying qualified local leadership before closing any acquisition; the company passes on opportunities where it cannot secure suitable leadership. - The company runs a continuous Administrator-in-Training (AIT) program, with an average of ~54 AITs in training at any time, creating a deep pipeline of future facility leaders. This decentralized, local leadership-driven model removes corporate growth bottlenecks and supports scalable, sustainable growth. - Standard Bearer Healthcare REIT added 23 third-party-leased assets in the quarter, expanding diversification of its tenant base and enabling closing of larger portfolio deals that include assets not suited for Ensign operation. - **Financial Performance Highlights - Q2 2026 GAAP diluted EPS was $1.68, up 16.7% year-over-year; adjusted diluted EPS was $1.92, up 20.8% year-over-year. GAAP net income was $99.7 million, up 18.2% year-over-year, while adjusted net income was $114.3 million, up 22.5% year-over-year. As of quarter end, the company held $262.3 million in cash and cash equivalents, with $592 million available under its line of credit, totaling $850 million in dry powder for future investments. The adjusted net debt-to-EBITDA ratio is 2.0x, maintaining strong balance sheet strength through a period of active acquisition. The company has increased its annual dividend for 23 consecutive years.

Guidance

- Management upwardly revised full-year 2026 diluted earnings per share guidance to $7.75 to $7.85, up from the prior guidance range of $7.48 to $7.62. The midpoint of the new earnings guidance represents 18.7% year-over-year growth over 2025 results. - Management also upwardly revised full-year 2026 total revenue guidance to $5.87 billion to $5.92 billion, up from the prior range of $5.81 billion to $5.86 billion. - The guidance reflects strong current momentum in occupancy, skilled patient mix, labor and agency cost management, and includes expected contributions from acquisitions that have closed and are expected to close by Q3 2026. Management noted that if newly acquired operations (particularly the recent large Texas portfolio) outperform the current projected transition timeline, guidance would be revised upward to reflect those results.

Segment performance

1. **Skilled Nursing Operations (core operating segment)**: Consolidated GAAP and adjusted revenue for the overall firm was $1.4 billion in Q2 2026, an increase of 17.3% year-over-year. Newly acquired operations acquired since 2025 make up 18% of the total company portfolio. Same-store Medicare revenue increased 6.1% and same-store managed care revenue increased 6.1% year-over-year, while transitioning acquisitions saw 16.2% managed care revenue growth year-over-year. 2. **Standard Bearer Healthcare REIT**: Generated $44.1 million in total rental revenue for Q2 2026, of which 85.7% ($37.8 million) came from Ensign-affiliated operations. The REIT reported $24.7 million in FFO for the quarter, and held an EBITDAR to rent coverage ratio of 2.4x as of quarter end. It owns 177 total properties, with 140 leased to Ensign affiliates and 38 leased to third-party operators, making third-party leases 21.5% of its total property portfolio.

Risks & headwinds

- Newly acquired assets (most notably the recent large set of Texas acquisitions) currently have lower occupancy than the company's average, require significant clinical and operational turnaround work, and are not expected to be accretive to earnings for some time. Variations in reimbursement rates, state budget delays, general economic conditions impacting census and staffing, short-term disruption from acquisition activities, and insurance cost volatility can all impact quarterly performance. - CMS updates to five-star quality rating methodology, which force distribution of facilities across star categories, will impact all industry participants, though the company expects minimal net impact to its overall ratings relative to peer projections. - Turnaround of underperforming acquired facilities depends on successful leadership recruitment and retention, clinical culture transformation, and rebuilding referral partner trust, which can take longer than projected and impact short-term financial results.

Analyst Q&A

• Q: How is the updated CMS five-star quality rating methodology impacting Ensign's ratings, and has exiting the Special Focus Facility designation meaningfully boosted referral growth for turnaround facilities like The Reserve? /

  A: CMS's updated methodology is not unexpected, and will impact all industry participants. Early analysis shows Ensign is seeing far less negative impact than the American Healthcare Association projected, with improvements in other areas offsetting most of the expected downward pressure, resulting in very little net change to the company's overall five-star rating count. For The Reserve, steady occupancy and referral growth was already well underway for three years while it was still on the Special Focus Facility list, driven by tangible local clinical results, so exiting the designation did not dramatically change its existing strong growth trajectory.

• Q: Is the recently expanded share repurchase program an ongoing capital allocation priority, and will it crowd out acquisition spending? /

  A: Share repurchases have long been part of the company's capital allocation strategy, and the recent expansion reflects management's view that the stock was undervalued when the plan was approved. The program will not impact the company's core priority of funding acquisitions and internal investments, alongside the ongoing dividend, as the company maintains substantial liquidity to support all priorities.

• Q: What is the typical timeline for reducing contract labor and improving retention at newly acquired turnaround facilities, and could faster-than-expected transition drive upside to guidance? What is Standard Bearer's strategy for third-party leased assets? /

  A: Most recent large acquisitions follow the company's historical turnaround trajectory, which shows gradual performance improvement over quarters and years, with the majority of gains coming over multi-year horizons. The recent Texas acquisitions are all low-occupancy, low-skilled-mix assets, which are performing in line with current projections, and are not expected to be accretive for some time. If they transition faster than projected, guidance will be revised upward, as the company always updates guidance to reflect actual performance. For Standard Bearer, the top priority is owning assets operated by Ensign; third-party leases are primarily used to enable closing of large portfolio deals where some assets do not fit Ensign's operating strategy, such as assets in new geographies or senior living assets Ensign does not operate broadly. The company's largest third-party tenant is the Dependent Group, and it is gradually expanding its base of third-party operator relationships, with significant incoming interest from smaller operators.

• Q: How is the company's performance in the underpenetrated Southeast region, and how has its approach to retaining existing leadership after acquisitions evolved? /

  A: The Southeast is a high-potential region with strong population growth, favorable labor and regulatory conditions, and the company has already seen strong success in Tennessee and South Carolina, with additional growth planned in Alabama and other adjacent states in the near term. Mature Southeast facilities can reach the same mid-90% occupancy levels the company sees in other regions. The company has improved its process to identify and retain qualified existing local leadership during acquisition due diligence, including early access to incumbent leaders to vet cultural and operational fit. Retaining qualified existing leaders, paired with training and cluster support, has been successful in recent large acquisitions, and will continue to be a core part of the company's growth strategy, alongside the ongoing AIT leadership development pipeline.