Ensign Group Inc (ENSG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen , and thank you for standing by. Welcome to the Ensign Group Incorporated second quarter fiscal year 2012 Earnings Conference Call. (Operator Instructions). As a reminder, this conference may be recorded.

And now it is my pleasure to turn the floor over to Greg Stapley, Executive Vice President. Sir, the floor is yours.

Thanks, Hughey. Welcome everyone, and thank you for joining us on the call today. Our 10-Q and our press release highlighting key financial result the and other developments for the quarter are both available on the Investor Relations section of our web site at www.ensigngroup.net. A replay of this call will also be available there until 5 PM Pacific Time on Friday, August 24, 2012.

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 the call. Participants should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign does not undertake to publicly update or revise any forward-looking statements for changes arises or result of new information, future events, changing circumstances or for any other reason.

In addition, any Ensign Group facility or business we may mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities as well as the use of the terms we, us, our, and similar verbiage is not meant to imply the Ensign Group, Inc. has direct operating assets, employees , or revenue or any of the operations of service center, the home health and Hospice business, the urgent care business or our cast of insurance subsidiary are operated by the same entity.

Finally, we supplement our GAAP reporting with non-GAAP metrics such as EBITDA, EBITDAR, adjusted net income and so forth. These measures reflect additional ways of looking at the operations which, when viewed together with our GAAP results provide a more complete understanding of our business. They should not be relied upon to the exclusion of GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP is available in yesterday's press release.

Before we get into operations, we customarily take a moment at this point to update you on the DOJ civil investigation that has been on-going since 2006. Last quarter, we reported that the government had asked for and we had delivered additional information for their review. We were informed their review and analysis continues and in the meantime, counsel for our special committee and counsel for the government are also attempting to develop a process to resolve in advance of any form of litigation, any civil claims the government may believe it has after concluding its investigation.

As we have historically done, the Company continues working to make improvement to its compliance programs and systems. At present, we cannot predict or provide any assurance as to the possible outcome of the remaining investigation, the likelihood or possible results of any resolution process or the possible outcome of any litigation that might follow, but we look hopefully toward the prospect of additional meaningful progress on this front in the months ahead. With that, I'll introduce Christopher Christensen, our President and CEO, who will get the call started. Christopher?

Thanks, Greg. Good morning, everyone. The second quarter saw performance running ahead of schedule in nearly every corner of the organization. Skilled nursing, assisted living, Hospice, and even our relatively young home health companies all gained strength as many operations achieved mitigation milestones early and outran even our fairly aggressive projections. If you haven't seen them already, just a few highlights.

Our adjusted net income climbed 9.8% to $14.6 million while adjusted earnings hit a record $0.67 per share. Same store occupancy grew by 114 base points to 83.1% with same store Medicare days increasing by 3.9% over the second quarter of 2011. And same store skilled mix days hit a record 30% with same store skilled revenue reaching 55% which is approaching the all-time high set in the second quarter of last year when Medicare rates were about 13% higher overall for us. These same store numbers are more representative of our operational performance.

Remember the consolidated metrics are pulled downward by the still maturing operations in the transitioning and recently acquired buckets which account for approximately 40% of our total portfolio. We extend our heartfelt thanks and give full credit to our local operators and clinical leaders, most of whom have performed spectacularly well in a very rough operating environment. The most successful of these are the ones who have built very solid clinical programs who deliver the highest quality care and who do it all in the spirit of close cooperation with local physicians, hospitals and other participants and their local medical community.

That said, most of our operations are still clawing their way back from the effects of last October's unprecedented Medicare cuts and therapy rule changes and they still have work to do and room to grow. Even with the pleasantly surprising results, we know that we did not by any means achieve our full potential in any single area , and we still see tremendous organic upside across the portfolio and throughout all of our operating business lines. In fact, we feel so confident about the near term that we're increasing our annual earnings guidance today, but I'll let Suzanne talk more about that in a minute. First, I would like to have Greg briefly discuss our recent growth and the acquisition landscape. Greg?

Thanks, Christopher. Q2 was relatively quiet on the acquisition front , but we picked up some high quality assets with great upside that we're pretty excited about. All were purchased at prices we believe provide us with a competitive advantage in these target facilities market place. For example, in Utah, we purchased Zions Way Home Health and Hospice, a thriving home care provider with multiple agencies in Southern Utah and Page, Arizona, both great markets.

Our home health business has been a bright spot this quarter as our earliest acquisitions from 2010 are starting to show early signs of maturation. In fact, since our acquisition just two years ago, our first home health which was Horizon Home Health in the greater Boise market, that company has increased its revenues by almost 50% and its net income by 115%. Remember that the growth strategy on the home, health and Hospice side is similar to the pattern we followed in building our skilled nursing business where we buy beaten down assets and operations for a fraction of what performing assets would cost and then build value mostly organically.

While this growth strategy will always drag down our overall occupancy skill mixed revenues, skilled mix days and other consolidated metrics on a quarter over quarter basis, this is what provides us with that tremendous built-in organic upside we exploit to create significant value over time. Applying that model to home health because we developed the skill sets to build almost from scratch internally, our home health operators have been able to purchase underutilized licenses very inexpensively, keeping their overhead low and allowing them to expand their geographies and build profitability much more quickly and frankly with much greater margin for error if they need it than we see others doing in the same home health and Hospice arena.

We're gratified to see this strategy working so well for our home care leaders after only 26 months of operation and we still see lots of upside ahead in our existing home health and Hospice businesses.

Continuing with other acquisitions, in Idaho, we acquired yesterday a 49-bed skilled nursing facility located just outside Boise as well as the sister facility, a 45-bed skilled nursing and 24-unit assisted living campus in Salmon, Idaho. Both nursing facilities are solid performers that have great upside as they transition from a more traditional convalescent care model to our higher acuity skilled format. We also continue to trying to reduce our real estate costs wherever possible by purchasing our leased properties. This not only has an immediately beneficial impact on EBIT, it also eliminates future revenue escalations and fixes our real estate overhead going forward.

We announced yesterday we have successfully exercised a purchase option to acquire the underlying real estate for 74-bed southern California skilled nursing facility which we have operated under a lease since 2003. We also expect to close one additional option exercises in the near term. Together, these transactions brought our total portfolio to 107 facilities, six home health and four Hospice companies all in 11 states with 10,291 skilled beds, 1,799 assisted and independent living units and over 2,100 home health Hospice and private duty patients being served. Of the 107 facilities we operate, 83 are Ensign Group owned and 62 of those owned facilities are owned free of any mortgage debt.

We continue to seek compelling opportunities to spread the Ensign Group operating philosophy across the country and we have additional acquisition, growth and diversification prospects in the pipeline. In fact, we're currently considering pursuing a couple of larger portfolios which we would plan to take down in stages if we get them. Although it is far too early to tell if our efforts will bear fruit, we could be very busy in Q4 and into the early parts of 2013 if any of those efforts are successful.

We'll keep you posted on meaningful developments on that front as they occur. And just by way of update on the urgent care business, as mentioned on prior calls, we'll be opening our first company own and operated urgent care locations in the northwest toward the end of the third quarter. We expect them to dilute our earnings this year, we anticipate that these locations will be accretive during the course of 2013. And with that, I'll hand it back to Christopher.

Thanks, Greg. We get regular questions about what we're doing to produce results like this quarter's when our average daily Medicare rates are still 13% lower now than they were a year ago. While some things are universal like growing census or increasing acuity across a facility's patient base, how that census has grown and how the acuity has increased varies widely from market to market and facility to facility and leader to leader.

That's why Ensign Group's facility centric leadership model is so critical in times like these. One of the best things our operator have done this year to grow census and skilled mix is to reconnect with the hospitals, their local physicians and other stakeholders in their local medical communities. In our shoreline facility in Long Beach, California, for example, Executive Director [Amman Engrin] and his director of nursing Elsie have made huge strides inside the medical community.

Amman, who is a licensed physician in India and parts of Europe, has rapidly built positive relationships with other physicians in Long Beach with surprising results. Amman and Elsie are visibly helping the local physicians to provide outstanding quality care to their patients. Shoreline which already enjoyed occupancy in excess of 95%, has nevertheless increased its skill mix revenue to 62%. Resulting in 139% increase in EBIT since this time last year. And we believe shoreline's operation which are included in our same store bucket are still not fully mature.

Another thing our operators are doing is retailing their service offering to meet specialized needs in their communities. In quarters past, we've shared with you the great work being done by of some our operators to add subaccute ventilator units and respiratory therapy programs to their existing skilled nursing service offerings. Where the needs are dictated by their local markets.

At a different end of the spectrum, our Park Avenue facility in Tucson, Arizona, once a special focus facility and one of the least desirable convalescent homes in its market has recently opened a new secure behavioral wing that was almost immediately full. In addition CEO Ellen Cote and COO Sheila Summey have consistently inch by inch and month by month and sometimes grueling made the incremental changes necessary to resurrect the facility's reputation and standing in the community.

To the point where today, it is one of the finest and most desirable skilled nursing facilities in the market. As a result, Ellen skilled mix revenue is over 50% and her EBIT climbed 137% since last year. With occupancy still at only 64% and that has increased a lot from where it was when she got there, you can see that park avenue still has huge potential upside and they're clearly on a path toward achieving that built-in upside.

Another way our local leaders are making a difference especially in recent acquisitions is by really taking ownership of their facility and operations and simply applying the Ensign Group culture and philosophy. On the assisted living side, for example, executive director Eric Terrell at our Lexington assisted facility in Ventura, California, is setting records. Eric is not only a great operator but a great marketer. Since he took over Lexington when we acquired it from a national assisted living operator in March of last year, Eric and his team have increased occupancy to over 95%, increased the EBITDAR margins to over 36%, and increased their EBIT by 107%.

On the skilled nursing side as hurricane health and rehabilitation in tiny Hurricane, Utah, CEO Tyler Hooks and his director of nursing Jeremy Wood have taken a small facility that was already operating fairly well when acquired it one year ago yesterday and built its reputation as an outstanding high acuity skilled nursing facility and more importantly a great and comfortable place to recover quickly from strokes, surgeries, falls and other kinds of life events that place our patients in nursing care.

Today, one year after the experienced Ensign Group leadership team took over the facility and its market, Hurricane's revenues have almost doubled. Occupancy has increased to more than 83% and EBIT is up 521%. And as a recent acquisition, Hurricane skilled mix revenue of 38% still a long way from the current same store average of 55%. So you can see that Tyler and his team still have plenty of room to run in their market. And yes, it is called Hurricane and not hurricane.

It has not been easy to mitigate and neutralize the approximately $80 per day drop in our daily same store Medicare rate initially produced by the October 1st changes. In fact, we really still haven't done so as our Medicare daily rate this quarter was still exactly $79.55 a day below last year, but these wonderful stories and many others like them illustrate plainly great leaders who take true ownership of their operations and markets and participate meaningfully in their clinical and operational performance can still post incredible quality and financial results without worrying about what is going to happen with reimbursement rates every year.

There are dozens more stories like these and I cannot stress enough the importance of having highly competent and motivated local leaders at the helm of every single operation. But perhaps our results will convince you that this factor alone makes Ensign Group very different from traditional nursing home operators.

Moreover as wonderful as the examples are, in each case, we would emphasize these operations are far from mature and significant organic upside exists not only in the recently acquired and transitioning facilities, but also in our more mature facilities, most of which continue to grow and perform and outperform month after month and year after year. I really could go on all day but with that, I'll turn the time over to Suzanne to provide more details on the company's financial performance and then we'll open up for questions. Suzanne?

Thank you, Christopher and good morning, everyone. As our mitigation efforts continue to be rolled out, we are pleased to be reporting record adjusted non-GAAP earnings of $0.67 compared to $0.61 per share in the second quarter of 2011. Fully diluted GAAP earnings per share were $0.57 for the quarter. GAAP earnings include unique and unpredictable items that are not representative of our long-term operational performance.

Accordingly, we provide with you non-GAAP numbers in order to highlight our operational performance quarter over quarter and more importantly, year over year. For example, this quarter we believe that investors get a clearer picture by our inclusion of adjustments for expenses associated with response to the on-going DOJ matter, the tentative settlement of a staff class action lawsuit in California, as well as normalized rent costs recorded in connection with one operating facility for a lease that's not yet open and operating but for which GAAP requires us to record a lease expense.

We also exclude a net benefit of a lower than normal consolidated tax rate which we normalize by increasing it to approximately 39%. As always, we exclude acquisition-related costs and amortization cost related to intangible assets acquired.

In reviewing the strength of our financial position for the six months ended June 30th, cash and cash equivalents at the quarter end were $32.8 million and the Company generated net cash from operations of $25.1 million. Free cash flow for the 12 months ended June 30th was $31.8 million. This number was impacted by aggressive Cap Ex and renovation projects to update our real estate portfolio,implementation of new technologies and of course the associated depreciation that is now starting to show up in the Delta between our EBITDA and net income. Overall, we're pleased with how our operations have performed thus far under the new Medicare rates and therapy rules.

Under our current plan, mitigation efforts will continue to be implemented through the third and fourth quarters with some seasonality anticipated in the third quarter. We note that as in the case of quarter during and after periods of robust acquisition activity that these consolidated results were achieved despite the downward pull of still maturing operations in transitioning and recently acquired buckets which account for more than 40% of our portfolio.

As we look forward to the second half, we would remind you that Q3 is historically our softest and least predictable quarter. With more often than not tracking behind Q2 sequentially. We have often had significant adjustments in the insurance front as well as seasonal jobs and census and overall performance declines during the third quarter among other challenges. In addition, you may recall that last August, we indicated that the (Inaudible) impact of October 1, 2011 change would be approximately $32 million on an annual basis of which $28 million would be lost revenue and approximately $4 million would be increased therapy cost.

We also estimated that our unique financial and operating structure only approximately 15% to 25% of the cuts and cost increases would actually drop to the bottom line. This initially proved true with the results hit net income in Q4 of being about 16%. Part of the reason that we were impacted less than our peers is due to the design of our incentive compensation system first facility leaders. To participate in the performance of their operations and accordingly experience some fairly severe personal composition impacts as the cuts took their toll last October.

Now that mitigation efforts are gaining traction, the same principle will hold true. We expect incentive compensation for those operators who are leading the way to rebound somewhat faster than revenue or earnings. For the overall impact of the efforts to net income will be positive but will again be somewhat muted due to these unique system. We believe these systems and the incentives they create are the facility level are a key contributor to our current success.

We are pleased to be able to share the fruits of that success with those who have given their all to make it happen. With operating results year-to-date running ahead of schedule and prudent Medicaid reimbursements taking effect later this year in key states, the recent announcement of the 1.8 net Medicare basket update which will go into effect October 1st, we're raising our previously announced annual guidance. Revised earnings projections for 2012 are $2.48 to $2.56 per diluted share. On $830 million to $846 million in projected revenue. We anticipate that most of the increase will come in the fourth quarter. These projections are based on diluted weighted average common shares outstanding of approximately $22.1 million. No additional acquisitions or disposals beyond those dates.

The exclusion of the acquisition-related cost and amortization costs related to intangible assets acquired exclusion of normalized rent expense assets on open facility, exclusion of expenses related to the DOJ matter, tax rate at an historical average of approximately 39%, the effects of an announced Medicare market basket update, anticipated increases in overall Medicaid reimbursement rates and exclusion of the costs associated with the settlement of their California class action.

In getting you the numbers, I would like to remind you again our business can be lumpy from quarter to quarter and year to year. This is largely attributable to variations in reimbursement rates, delays in changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activities and other factors. Financial statements were included in the Q and the press release. We would be happy to answer any specific questions you may have later in the call. I'll turn it back to Christopher to wrap up. Christopher?

Thank you, Suzanne. Thanks to everyone who has been on the call. We hope this discussion is somewhat helpful. In fact, we sure hope you have some questions today because we would love to talk more about this quarter. As always, I want to conclude by thanking our outstanding partners for their continued efforts to make Ensign Group the best company in the healthcare industry. We want to acknowledge their dedication to their residents and their families. I would also like to thank our dedicated service center team who worked tirelessly as well to support the field and help Ensign Group forge ahead. We would like to thank our shareholders again for your support and your confidence. Hughey, if you can instruct everyone on the Q&A procedure, please.

Yes, sir. (Operators Instructions). Our first question in the phone queue comes from Kevin Campbell with Avondale. Please go ahead. Your line is open.

Good afternoon or morning to you guys. Great quarter. Thanks for taking my questions. Wanted to start on your comment about looking at larger deals and really your balance sheet and where you are now in the balance sheet. Your leverage ratio, where you are now. Where you would go at its maximum, where you feel comfortable going to, taking on additional debt, how you might finance any deals, any comments you can make on that would be great.

Great, thanks, Kevin. Thanks for the nice compliment. And also just for everyone's benefit, Christopher's got a terrible cold today so if he sounds a little less than enthusiastic, it is not about the numbers, it is about how he feels. Your question about our ability to take on more acquisitions, I'll just start and then I would like Christopher to finish. But as you look at some of the portfolios and things that are out there, what we're sighing is there is a number of things that can be acquired for relatively little money up-front, some of the lease deals.

And there is a wide variety of financing available out there at pretty attractive rates out there, particularly for somebody who's got a balance sheet like ours. In terms of how high -- where we would be comfortable leveraging those every deal kind of stands on its own. And some of the more compelling might justify a little higher leverage while others we remain very, very conservative on that front and would probably not jump too far outside the strike zone to go after one of those. We have always said that we were comfortable pushing somewhere into the low 3s on leverage multiple. Christopher, anything you want to add to that?

I'm glad you asked that question, Kevin. I think we do so for short periods of time for the right deal. We've also been pleased and I think Greg mentioned this earlier but we've been pleased we've had some potential sellers, none of these deals are obviously done but we have some potential sellers that are willing to allow us to take these in troches and so we can give each operation the attention that it needs and that would also help us with the help of our balance sheet. So I think Greg's right. We talked about this a lot. We would feel comfortable going into the low three times, maybe even mid for brief periods of time and only for a very, very compelling deal where we could still follow the principles we believe in. My fear in expressing we're looking at some of the deals is people might think we've changed the way we're doing deals and we're not changing that at all.

Remember this, too. When you do the kind of deals that we do, where you're picking up stuff for cents on the dollar and then working over -- really, over fairly short period of time, those things start to produce bigger EBITDAR, the ratio comes back down fairly quickly. As you do that. So when Christopher says we would look at doing for a fairly short time, what that implies is we might be willing to stretch for something we thought we could turn pretty fast and pretty well so the number could come down pretty quickly.

Just to give context, we're at 2.1 times.

That was my next question. Thank you very much. Could you maybe give us a little more clarity on the incentive comments you made, Suzanne and just maybe give us some details as to exactly how you structure that comp so we can better understand that well.

That's a good question. Some of that we won't talk about because it is really for internal use only but it is a matter of bringing in folks who are extraordinary leaders who understand how to build an organization and as they add value, they participate in some of the value that they add. It is that simple.

And just so that you know the metrics that they use to calculate their incentive which is largely very objectively calculated, not only include financial metrics but also clinical milestones that they have to meet so that they're providing great quality care all the time in their facilities. Very important to us that the facilities perform because we believe and have learned time and again, over time, that good, quality care always precedes great financial performance.

Let me ask you this. You commented positively on Medicaid pricing for the first time in awhile. Just talking about expecting improvements there. So could you maybe give us a little more color as to which states you're expecting improvements. Is it broad-based? Why are you expecting improvements given that budgets -- obviously we know budgets are passed but state budgets are still pretty tough and the economy is obviously very tough. So any color you can give on Medicaid pricing would be helpful.

Yeah, another great question. Remember, I'm not sure we've shared this openly but I'm sure you've heard it from others. We've been beating up for three years in terms of Medicaid reimbursement and when that happens, many of the -- I'll use the term loosely but many of the marginal operators have some real struggles. There are often many of them. And in order to help them so they can continue to stay in business, the states have to, at some point, raise reimbursement when they've gone too far in the reductions or where we have stayed very level, for an extended period of time. We've been in a reducing reimbursement environment really on the state level for about two and a half, three years. So in the states where we're going receive some pluses, those are small compared to the negative we receive but they're large for us because we've been so used to have the reductions over time.

But to give you some specifics, we are already starting to see some increases in the state of Utah which is our third largest state. And also in Arizona which is also -- sort of tied with you on Utah as our third largest state. That's the third and fourth, about the same in terms of number of beds. And that we won't see until the fourth quarter but again, we saw some very large decreases over the last two years in Arizona and so we're getting some of that back. Most states that we're in, we're seeing a minor increase or level which is better than we've seen in the past.

That actually almost counts as an increase compared to what we've been dealing with again in '09 and 2010 and 2011 and that's what we see in most of the other states. We've already seen an increase in the state of Idaho. And some of the states we're in, feels like I'm dancing around this -- some of the states we're in are really cost based -- they're based on a cost report we fill out. Sometimes it is on a quarterly basis, sometimes it is on an annual basis, so we don't really know where we'll be until that is prepared and each quarter, each year and it frankly fluctuates in the states where it varies quarter by quarter. But again, a decent, positive in Arizona, a decent positive in Idaho and Utah. Slight positive in a few other states and flat in all the other states that we operate in. That's a big, big step forward for us after what we've dealt with the last three years.

Absolutely. Two quick questions on guidance. Do you assume anything in the back half of the year related to the business interruption insurance? And then secondly, can you give us some color on the rent expense that's going away from the one that you purchased already and then potentially the annual impact of those that you said you expect to do in the near term.

So on the first question, you asked, I think a simple answer is yes. We did build that in. We expect to get that insurance before the end of the year. Second question I'll ask Suzanne to answer because I'm not sure I can read her notes.

On the one that we purchased about $90,000 net savings because you take the rent out but you have to add that depreciation in. So it is about $90,000.

Is that an annual number or quarterly?

That's for the remainder of 2012.

Okay. And the other ones that you have that you said you might exercise in the near term, maybe what's an annual number associated with those and is that in guidance?

Yes, it is include and the guidance and it is the combined number. Netting the rent and the depreciation is about $275,000.

Annually?

That's for the remaining period after we actually exercised them.

Estimated time that we will exercise adoption.

Okay. Do you have an annual number associated with those just as we're looking out into next year?

About $650,000.

Okay. Great. Thank you very much.

Thank you.

Thank you, sir. Our next questioner in queue is Robert Mains with Stifel Nicolaus. Please go ahead . Your line is now open.

Thanks, good afternoon or good morning. Then on the continued topic of Medicaid, could you describe sort of your DSO experience outside of California which is kind of dragging the numbers up?

Yes. Our DSO really on a same store basis is not going up. Any time we have a large number of new acquisitions, you know, relative to our size, will you see our DSO begin to inch up and that started in late 2010 and it has continued as our stream of acquisitions seems to have gained momentum. But you'll actually see that begin to fall again unless we happen to acquire a large number of facilities again because our same store has moved by about a day and a half total over the past four years.

So in terms of state by state, we do -- it's no secret in our industry it is a little bit more difficult in states where we have a large managed care contingency that's substituting for Medicaid or contract with Medicaid to handle Medicaid for the state and so states like Arizona, we do have a little bit higher DSO. I guess on a percentage basis, I would say it is a lot higher DSO. But it is where we average across the board about a DSO of about 40. Arizona would be more like 46, 47. But most of our states with the exception of Washington where a DSO is much better and Colorado where a DSO is much better, average between 34 and 44 DSO.

Okay, I might have misunderstood the hold-back going on in California. That's not adversely affecting DSOs?

Yes, it is adversely affecting DSOs.

But it just started.

Okay.

We've only had about a million two held back to date. Because it didn't start when they said it was going to start. It actually started in April instead of last year.

Got it. Okay. Thanks.

Remember, we're only reporting as of June 30th, of course, so the impact will be felt more in the third quarter than it was in the second quarter.

Right. Okay. And then on the topic of acquisitions, you talked about potentially some larger deals in your pipeline. Just kind of curious as to what your sense is of the motivation of sellers. Is this just kind of normal course of business or is there something going on that is getting more people to kind of seek an exit?

They're kind of all over the map. We've looked at some stuff lately, I'll give you three examples. In one case, we looked at a portfolio where the private equity firm that had been involved with the Company that was for sale has just been there for far too long and it needs an exit strategy. It is time for them to go. In another case, you have a large national chain who has decided they're going to reposition their business and their assets and that they're going to nonrenew a group of leases that will now come back to the market place.

In another case, this is fairly typical of a lot of the smaller operators that have been around for a long time. Another case, we have a couple of operators who are retiring or have already retired or semi retired and who are kind of staring at the prospect of higher capital gains rates in 2013 and saying maybe now is a good time to get out. It kind of runs the gamut and it is nothing you wouldn't expect. But there does seem to be a lot of potential deal volume out there right now. With pricing frankly all over the map. And in some rational and some not.

Okay. And in the case of lease non renewals, you would just assume lease?

We would step into a new lease of those facilities if we did those deals.

Okay. And then the last question I had, you talked about -- it is obvious the strength you had in the quarter. There's been an undercurrent in the industry that second quarter was kind of weak and maybe because hospital admissions were off and therefore they weren't referring a lot of people to (Inaudible) and you saw a good increase. My question is that in your view, part and parcel of what you're doing in turning around under performing facilities or do you think that beyond that, in some of your stable facilities that you're taking share as well.

I think it has everything to do with the sort of operators that we have and the level of ownership that they have and the reaction they have to changes in the market place. It is much easier for them to change when they see things happening versus waiting for direction. And I know that sounds like we keep beating the same drum but to say anything else would be to lessen the dramatic impact they've had on the organization. Our same store census is up. Over last year. So we don't know if we're taking market share. We have not seen the effects of lower census in our hospitals across the board. Maybe in a pocket or two here and there. We've heard anecdotally but overall, we're doing fine.

Got it. Okay. That's what I needed. Thank you very much.

Thank you.

Thank you. Next questioner in queue is Peter Sicher with Sidoti & Co. Please go ahead. Your line is open.

Good morning, everyone.

Good morning.

I just had a quick question. Could you provide any additional color on the ALIL business because by my count, you guy have added 177 beds since the end of last year and that total unit count is starting to get up I think near 15% of your overall units. Any additional color there would be really helpful.

We probably don't talk about it as much even though it is growing quite rapidly on a percentage basis because it still represents a very small percentage of our overall revenues. I would guess that it represents about 4.5% of our overall revenues and so that's probably why we don't talk about it. But we did talk about the Lexington and Ventura. We are following the same path on the assisted living front that we do in independent living front that we do on the skilled nursing front where we're looking for those C and D properties and putting a significant amount of money into them and turning them into maybe B plus properties, A plus properties in terms of their operations and the service level. Our census has actually grown over the last year and a half on a same store basis by a significant amount and I guess I'm going to turn to Suzanne if we didn't provide that. And ask her what that growth is.

That growth was about -- it is 85 days, actually.

When you're talking about the C and D properties and turning them into B properties, when you guys are looking at potential A.L. facilities, are there minimum size? Is there an ideal size you guys are looking for? In terms of bed counts, something too small if it has 35, 40 beds.

Yeah that generally would be too small unless it is on the same campus as a skilled nursing facility that we might have. Or in the same campus as an independent living facility. But really it isn't really about the size. It is about how the particular campus fits with the community that it's in. And obviously the amount of money we have to pay given the condition of the operations and the facility and then the third thing obviously is whether we have a leader that's ready to go in if the facility is under performing.

We just sort of feel like that we're appealing to the masses. That most people have a very difficult time affording a $6,000 or $7,000 a month price tag every month for assisted living care but I think there are people that can afford a third of that or half of that much easier and we feel like the model is working. Now, having said that, the model hasn't proven itself out yet because the fact is half of our assisted living facilities are still in the infancy stage. They have only been part of us for less than 18 months.

We feel like after we have them for two and a half, three years, you'll see an even more dramatic improvement. Greg and Suzanne mentioned the 85 basis point improvement but if you were to take that over the last 18 to 24 months, you would see something in the line of 100 basis point improvement on the same store properties we have. We expect that to be duplicated in the stuff that we've acquired over the last 18 months.

Great. Thank you.

Thank you. Our next questioner in queue is from James Bellessa with D.A. Davidson and Company. Please go ahead. Your line is open.

Good morning.

Hi, Jim.

Congratulations on another terrific quarter.

Thank you.

Now I heard something there when I was listening, the vibrations and the quiver of the voice went up when you were talking about something was happening at the end of this year and we're supposed to stay tuned. I missed what the subject was.

Uh-oh. I'm not sure. What were we referring to? I wasn't paying attention. I'm not the psychologist that you are.

You said something about some type of activity or acquisitions or build-out or something was happening.

Was it the discussion about how much money we're going to save by exercising some more of our lease options?

What kind of options did you say?

We have some lease options left to exercise this year.

I see. Maybe that was it. We're supposed to stay tuned for that?

That might have been part of it. I think maybe if it was my voice quivering is because I have sore throat, but it might have been some of the acquisitions we're taking a look at as the landscape is very good right now.

Good. The damage from the storm wasn't as great as you had previously thought. How much was it or magnitude of size and maybe EPS or dollars or whatever you can give it out as?

Well, it was less expansive -- it didn't impact as many operations as we thought it might. It did impact one of our operations in a significant way and still is. But I think on an EPS -- remember we're expecting to get this back. I think on an EPS basis, the one facility that was impacted probably turned out to be about $0.02.

Okay. Most of that should come back less the $100,000 deductible for each -- for just one facility now?

Yeah, we took the $100,000 deductible in the quarter already.

Oh you took that?

Right. For two facilities.

Because I think we were talking over you, Jim . We've taken $100,000 deductible at two of our operations in the second quarter. So everything we get back from that will be a positive.

Okay. And then you were talking earlier about the leverage and this ratio called I believe net debt to EBITDAR ratio. And that's on a trailing 12-month basis. Historically in my model, I think I was replicating what you were using when you first went to public with a Cap ratio of 12%. With a lower interest rate environment that we're in now, is it appropriate to continue to use 12% or should it be some lower ratio which, of course, pushes up the net debt to EBITDAR calculation.

I think that the 12 seems like a good number for us right now, where we're at. And as we lower the number of leases, that is going to impact us less and less because we're continuing to purchase a lot of those lease assets the impact of that would be less.

And I heard that the figure was roughly 2.1. It wasn't called out in the press release. My calculation was 2.16. Does that sound like it is in the ballpark?

That sounds like it is in the ballpark. 2.1, 2.16.

Okay. Thank you very much.

Thank you, Jim.

Thank you, sir. (Operator Instructions). Presenters, at this time, I'm showing no additional questioners on the phone lines. I would like to turn the program back over to Christopher Christensen for any closing remarks.

Thank you, Hughey. I don't have any closing remarks. I just want to thank everyone for joining us today, and thanks for your help, Hughey. We appreciate it.

Thank you, sir. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.