Last week, Ensign Group (Nasdaq: ENSG) posted another quarter of impressive results. The company — which primarily has operated skilled nursing facilities since spinning off Pennant Group (Nasdaq: PNTG) in 2019 — also announced some senior living acquisitions.
The positive earnings come so regularly for Ensign, including in tough market conditions, that some people question whether they can be legitimate — doubts that Steve Monroe acknowledged (and dismissed) in the SeniorCare Investor last week.
Steve’s post got me thinking further about what drives Ensign’s consistent success. Unfortunately, Ensign CEO Barry Port and other company execs do not speak to the press. But through comments in the company’s earnings calls, as well as interviews we’ve done with leaders of Pennant, I have a few observations.
In this week’s exclusive, members-only SHN+ Update, I offer my analysis of Ensign’s formula for success and offer key takeaways, including:
- The company has the right incentives to drive success at every level
- Spin-outs have helped create strong owner-operator alignment
- The model has the potential for greater cross-continuum innovation
Incentives at every level
Many senior living providers tout how they empower local leadership, but Ensign execs talk more than other operators about tying compensation to success at the community level.
In the earnings call last week, Port spoke about “flag awards” that are bestowed on communities that post “nearly perfect” scores over a calendar year across more than a dozen “qualitative, quantitative and cultural categories.”
“The staff in these operations and only the staff, not the administrators or other senior leaders, receive substantial financial rewards for their achievement,” Port said.
While higher base pay is needed across the senior living and care sector, I think more providers could take a cue from Ensign and find ways of linking financial rewards for frontline workers with the quality of a community’s performance. I’m confident that doing so could help attract and retain these workers even in the midst of the current labor market pressures. Some providers have taken steps in this direction through profit sharing or employee stock ownership plans.
Ensign’s executive directors and other leaders at the local level also have financial incentives to excel.
After spinning off from Ensign, Pennant Group continued these practices across the company’s senior living and home health operations, and Pennant CFO Jennifer Freeman described the approach in our Bottom Line series.
Essentially, local leaders are grouped into “clusters” and then incentivized both for the performance of their communities and the performance of the cluster. This approach not only encourages individual achievement but incentivizes collaboration among leaders in particular market areas.
Entrepreneurship is expected of cluster leaders, who even bear responsibility for identifying acquisition opportunities in their markets.
This approach also encourages the professional development and advancement of leaders within the company, which pays off in smooth succession planning. In 2012, Brent Guerisoli was executive director and CEO of an Ensign affiliated home health company, then rose through the ranks of Ensign and, after the spin-off, Pennant. Last week, he took the reins as Pennant Group CEO.
And Guerisoli succeeded Danny Walker, who began his career with Ensign Facility Services back in 2007, beginning his ascension through the ranks.
Spin-offs have also been part of the Ensign playbook. In 2014, the company spun off real estate investment trust CareTrust (Nasdaq: CTRE), and the Pennant spin off occurred five years later. Most recently, Ensign created a captive REIT, Standard Bearer.
The spin offs have enabled Ensign to unlock real estate value while also creating career advancement opportunities for leaders within the company, as the examples of Walker and Guerisoli illustrate.
And in each case, the relationship between Ensign and the newly formed entities remained strong. For instance, Ensign properties were the “foundation” of CareTrust’s initial portfolio, while Pennant and Ensign created a transition services agreement that included Ensign having a right of first refusal on future acquisitions. And 30 Pennant communities currently are leased from Ensign.
These arrangements have created strong owner-operator alignment while also providing greater flexibility and opportunities for value creation by each entity. Ensign’s recent acquisitions of 3 senior living communities offer a case in point.
“Several of these acquisitions involve senior living operations that were part of the spin out of certain assets to The Pennant Group, Inc.,” Ensign’s earnings release stated. “After several years of operating independent of Ensign, both Pennant and Ensign determined that due to the nature of these buildings, most of which are part of healthcare campuses that include Ensign affiliated skilled nursing operations, the operational efficiencies and other strategic advantages justified returning these operations to Ensign.”
With concern about owner-operator alignment on the rise, it appears that Ensign has created a strong ecosystem of real estate and operations, built on a foundation of shared values among the leaders of the companies involved.
At the same time, each business can diversify by pursuing other partnerships. Standard Bearer added six new real estate investments last quarter, leasing all of them to Ensign affiliates, while Ensign affiliates also entered into seven new long-term leases with third-party landlords. And in its earnings release last week, Sabra (Nasdaq: SBRA) flagged a growing relationship with Ensign within its portfolio.
So, Ensign has healthy optionality about what capital structure will be the best fit for a particular property. While Pennant and CareTrust are fully independent entities, Ensign in a sense can turn to these spin-offs as “family,” while also working with “friends” like Sabra. No doubt this helps to drive success by aligning the goals of a particular asset with the appropriate owner and operator.
Unlike Ensign, the spin-offs have not clocked solid results quarter after quarter. But because of this, I think the spin-off companies have provided reassuring demonstrations of the culture at Ensign, which should help allay fears that Ensign’s performance is too good to be true.
For example, Pennant struggled in its second year. Then-CEO Walker could easily have focused on the tough market conditions of 2021 — Welltower CEO Shankh Mitra was describing a “perfect storm” of challenges besetting the sector at that point. But Walker did not deflect blame, saying:
“We know that sustainable clinical and financial results are achieved when our investment activity is well calibrated with the health of our current operations and bandwidth of our leaders and resources. We haven’t struck this delicate balance well enough over the past 18 months.”
I took Walker’s comments as a demonstration of certain values ingrained in him as he came up through the Ensign ranks before taking the helm at Pennant: To focus on factors within the company’s control, be forthright about failures as well as successes, and systematically work to address shortcomings.
Pennant’s share price has continued to spike and dip, but I believe the company will find a more solid footing, and perhaps already has; shares are up 18.73% over the past month.
Innovation across the continuum
Ensign clearly has a formula for success, and with about a 350% gain in market capitalization over the past five years, I understand if the company doesn’t want to change a thing.
As Stifel analysts put it after the company’s latest earnings: “What’s not to like?”
If I have one knock on Ensign, though, it’s that I think the company — in concert with Pennant — could be driving more innovation in the senior housing and care sector as a whole.
The spin-offs have yielded benefits, but also have separated Ensign’s skilled nursing operations from Pennant’s senior living and home health ops, at a time when I think that payment systems and consumer expectations are driving toward greater integration and coordination across these settings.
And with their “cluster” strategy, I’m not sure that Ensign or Pennant are well-structured to fully leverage their scale, including by launching insurance products or entering into at-risk contracts with payers.
I believe that to sustain success in the longer term, all senior housing and care providers will need to adapt to value-based reimbursement, and I hope that Ensign and Pennant will make smart moves in this area. Certainly, the companies are positioned to do so.
Pennant, for instance, already works with Medicare Advantage on the home health and hospice side. In Freeman’s Bottom Line interview of 2019, I was most excited by the comments she made about expanding MA into the senior living business:
“For us, it would be an opportunity to provide a combined offering to our payer partners within our footprint,” she said. “We already have the systems and the processes in place to take on Medicare Advantage and we would love that to happen. There are lots of opportunities in that area, and our focus on senior living as a health care setting dovetails with Medicare Advantage.”
So, while the Ensign/Pennant model has driven much success in the past, I’m eager to see how the model adapts and changes in the years ahead.