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Ensign Likes Sea Change

Ensign Group Inc., the smallest of Orange Co-unty’s three publicly traded nursing home companies, appears poised to grow through tough times brought on by government reimbursement cuts.

“As other skilled nursing facilities go out of business, (Ensign) will likely buy some of the more distressed assets and will be able to grow their way through the cuts a bit easier,” said Kevin Campbell, who follows the Mission Viejo-based company for re-search firm Avondale Partners LLC in Nash-ville, Tenn.

Ensign now owns about 70 nursing homes and leases another 27. It counts annual revenue of about $650 million, and its $137.1 million of long-term debt as of June 30 is relatively low, Campbell recently told Reuters.

Ensign also had $38 million in cash at the end of the second quarter, and just secured a $150 million credit line with Wells Fargo & Co. and SunTrust Banks Inc.

It’s looking for opportunity amid the recent tumult touched off by the reimbursements cuts, with plans to buy more nursing homes and related businesses, Executive Vice President Greg Stapley said on a second-quarter earnings call.

“As we stay nimble and keep close track of our markets, we expect to see both opportunistic and strategic growth opportunities, things that might not appeal to others but are just what we’re always looking for,” Stapley said.

Ensign has struck the most aggressive posture locally.

Skilled Healthcare Group Inc. of Foothill Ranch, which has yearly revenue of some $820 million, had $486.6 million in long-term debt as of June 30.

The company had been planning a sale but pulled itself off the market after the reimbursement cuts were announced last month.

Skilled Chief Executive Boyd Hendrickson said his company is “just going to look for the right opportunity. I think there is going to be a lot of dust-settling for a month or two relative to valuation.”

Irvine-based Sun Healthcare Group Inc. has about $1.9 billion in yearly revenue and a relatively low long-term debt load at $150.5 million as of June 30.

• Headquarters: Mission Viejo

• Business: Nursing homes

• Founded: 1999

• Ticker symbol: ENSG (Nasdaq)

• Market value: About $475 million

• Notable: Relatively low debt, cash on hand, credit line in place

Sun leases many of the nursing homes it operates from Sabra Health Care REIT Inc. in Irvine, which it spun off last year.

“Initially, we had held cash to take advantage of acquisition opportunities,” Sun Chief Financial Officer L. Bryan Shaul said in an earnings call last month. “With the lack of clarity in the reimbursement environment that emerged earlier in the second quarter, we decided to hold cash in order to provide us with maximum flexibility and options.”

Meanwhile, Ensign sees the ongoing uncertainty increasing “our competitive position as we add beds at compelling prices,” according to Stapley.

Temporarily depressed prices for real estate create some cost-savings for Ensign, helping to offset uncertainty on reimbursements “while allowing us to enjoy those built-in savings for as long as we hold those assets,” he said.

Late last month, Ensign said it would buy the underlying real estate of two California nursing homes that it’s operated for years, (see Healthcare column, page 66).

Ensign’s aggressive posture comes in the wake of federal regulators’ announcement in July that they will cut government payments to nursing homes by more than 11% starting Oct. 1. Those cuts are expected to save the government nearly $4 billion a year.

Shares of nursing home companies, including Ensign and its two local rivals—Sun and Skilled—took a major hit on news of the cuts.

They’ve all recovered some of the recent declines. Ensign’s shares are down by just 3% since the beginning of the year, to a market value of about $475 million last week.

“Now they have made the significant cuts, I don’t think the outlook will get worse,” Campbell said. “This is sort of a bottom in my mind for the stocks.”

Campbell said he’d be surprised if Congress or the Centers for Medicare & Medicaid Services would make additional cuts to nursing home companies, “given the magnitude” of the latest round.

“To be sure, the rate cut imposed by (regulators) will have a severely detrimental effect on the health of the industry as a whole,” Ensign Chief Executive Christopher Christensen said.

Ensign believes that the cut should be “reconsidered immediately” by regulators and Congress, if necessary, according to Christensen.

“These good skilled nursing providers should not be forced into survival mode just because regulators miscalculated the amount by which the services demanded from the industry would increase as hospitals discharge patients sooner and sicker under rule changes by those same regulators just one year ago,” Christensen said.

Earlier Cuts

Ensign was founded in the aftermath of an earlier round of reimbursement cuts for nursing homes under a “prospective payment system” initiated by regulators in the late 1990s. Seven of the top nine nursing home chains at the time landed in bankruptcy reorganization.

Christensen said that background led Ensign to build an operation “exactly for times like these.”

The company acknowledges “as a foundational principle the unpredictability of operating in an environment where bureaucratic fiat and pure politics sometimes trump common sense,” Christensen said.

Ensign emphasizes its local leadership and gives them power to make “decisions on the fly, which are necessary to respond appropriately to all manner of changes in their marketplace,” he said.

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