Image source: The Motley Fool.
Ensign Group Inc (ENSG 0.29%)
Q2Â 2020 Earnings Call
Aug 6, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Ensign Group's Second Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your host, Chief Investment Officer and Executive Vice President. Chad Keetch.
Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary
Thank you and welcome everybody. We appreciate you joining us today, and as always before we begin, I have just a few housekeeping matters. We filed our earnings press release and 10-Q yesterday. This announcement is available on the Investor Relations section of our website, at www.ensigngroup.net. A replay of this call will also be available on our website until 5:00 PM Pacific on Friday, September 4, 2020. We want to remind anyone that may be listening to a replay of this call, that all statements are made as of today, August 6, 2020, 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 Inc., is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services through the other operating subsidiaries, through contractual relationships with such subsidiaries. In addition, our wholly owned captive insurance subsidiary, which we refer to as a Captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability, as well as for workers' compensation, insurance liabilities. All of our operating subsidiaries, including 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 Ensign or the consolidated company and its assets and activities, as well as the use of terms we, us, our and similar terms used today, 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 10-Q.
And with that, I'll turn the call over to Barry Port, our CEO. Barry?
Barry Port -- Chief Executive Officer and Director
Good morning, everyone. We want to begin today's call by thanking our operational leaders and their front-line teams for their inspirational efforts that require more than most could ever imagine. As they care for our country's most fragile and vulnerable, in the most intimate of healthcare settings, they continue to show up to work each day, donning an uncomfortable mask, gown, eye protection and other personal protective equipment, to do some of the most challenging, but important work, during one of the most difficult times in our industry's history. We thank each of them from the bottom of our hearts for doing so, with the utmost professionalism and selfless dedication. Our local leaders, caregivers and other front-line staff are deserving of all the praise that we can muster.
Appropriately, we often devote a lot of energy into acknowledging first responders and hospital workers for heroic work, in these life-threatening circumstances. Our sincere hope, is that we, as a nation begin to similarly recognize workers in the post-acute setting, with that same accord. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant. But because of the unselfish dedication of our talented leaders, and the heroes serving alongside them, we are optimistic that we can continue to thrive through this uncertainty. Their heroism and dedication over the last several months, has been truly inspiring.
We're pleased to report that in spite of continued unique challenges presented during the current global pandemic, the operational momentum we experienced in the first quarter continued into the second quarter, where we again achieved record-breaking results. For the second quarter in a row, we achieved our highest adjusted earnings per share in our history of $0.78, an increase of 100% over the prior year quarter, and slightly above a record-setting first quarter. The strong results came from quarter-over-quarter improvements and skilled mix across same store, transitioning in newly acquired operations, cost saving initiatives, improved collections, sequestration suspension, and improved Medicaid rates in certain states. We also continue to implement a number of actions to respond to the impact and uncertainty caused by the pandemic, including incurring additional COVID-19 related labor expenses, and the ongoing acquisition of unprecedented levels of PPE and other equipment.
We announced yesterday that similar to a few other well-capitalized, healthcare providers. in June we began returning all of the CARES Act provided relief funds that we received. These funds were meant to cover lost revenue and increased expenses tied to the COVID-19 pandemic, and we want to underline again that our results do not include any benefits related to those distributions. As you all know, most of our revenue comes to us from sources that are funded by taxpayer money, and as stewards of those funds, we know that there is a high degree of responsibility to the Company's government reimbursement. In addition, as a for-profit operator, our organization, tens of millions of dollars a year in taxes.
After taking a hard look at our balance sheet and our liquidity, including our strong relationship with our lenders and landlords, and after gaining a better understanding of our financial performance, after several months of operating in the COVID environment, we determined that it was not in the best interest of our organization to accept funds from rounds one, two or three of the CARES Act at this time. If there are additional future grants available, we will reevaluate the purpose and needs of those grants specifically considering the potential costly testing requirements or other newly mandated regulations.
Overall, our company is not being overwhelmed by COVID-19. However, as you might expect, similar to what the country as a whole is experiencing the impact, as varied market-by-market and building-by-building. More recently, as expected, our portfolio has experienced an increase in COVID-19 cases in our buildings, where the number of cases in the community overall are increasing, such as parts of Texas, Arizona and California. As of August 3, 2020, the company's 226 affiliated operations across 13 states had 909 confirmed COVID-19 patients in-house. Also as of August 3, 19 operations had over 20 COVID-19 positive cases. 46 operations had less than 20 cases, and 161 operations had no confirmed cases of COVID-19 in-house. To add some additional context, four of our operations at the request of the local healthcare community, proactively and intentionally dedicated their whole building to the care of COVID positive patients and 20 of our operations have dedicated entire wings to COVID positive patients.
It is also important to clarify, some details regarding the spread of COVID-19 in nursing homes. According to recent independent studies by researchers at Harvard Medical School, Brown University, and the University of Chicago, the primary drivers of COVID-19 outbreaks are a function of location of facilities, as it relates to geographic prevalence, asymptomatic spread, and availability of testing, not quality ratings, infection citations, staffing or for-profit or not-for-profit status. That said, we continue to learn and find ways to help defend against outbreaks, and prevent the spread of COVID-19, and we believe we are prepared to operate effectively in the COVID environment for the foreseeable future. Our local leaders and caregivers, with the assistance of their service center resources, are methodically acquiring unprecedented levels of PPE and other supplies and equipment, and are providing the latest and best practices in both clinical protocols and safety measures at a significant expense.
As our local operators have responded to the needs of the healthcare community, our operations have seen an increase in the number of higher acuity patients, including COVID-19 positive patients. As the number of COVID-19 cases in the surrounding communities we serve has increased, especially in Texas, Arizona and California. Our state and county health leaders and local hospital systems have looked to Ensign affiliated operations to care for all varieties of high acuity patients, that can safely be admitted to or remain under our care. We continue to learn a great deal through this process and our local leaders are proactively preparing for and executing on plans to provide care for all patient types, whether COVID positive, negative or unknown.
As previously mentioned, our operations have at the request of the local community, dedicated entire buildings and wings to care for COVID-19 patients, which are generally skilled patients that need high levels of nursing care. These efforts vary building to building and market-to-market and are being done in partnership with local and state public health officials, to ensure compliance with infection prevention protocols, and the comprehensive recommendations provided by the CDC and other public health authorities. We reported yesterday that the vast majority of the decline in occupancies we've experienced began in the latter half of March, due to governmental satay-at-home orders, and pause on vital procedures in the hospitals and overall lower hospital occupancies, all of which directly impact patient referrals into the post-acute setting.
As COVID cases began to decline in late May and June, we saw an increase in occupancy and a slight decrease of skill mix, as the needs of higher acuity patients were fewer. More specifically, between mid-May to Mid-June, same-store and transitioning occupancy increased by 0.4%, and skilled days decreased by 1.1%. However, the recent influx of COVID-19 cases in several key states, resulted in occupancies that have begun to decrease slightly, while skilled mix improved, as the number of high-acuity patients increased. More specifically between mid-June and mid-July, combined same store and transitioning occupancy was down approximately 1.9% and skilled mix actually increased by 8.1%.
As you could see a pattern emerging, with COVID cases in the community increase, occupancies are negatively impacted, but skilled mix improves. As we compare these numbers with what we see happening more broadly, it is clear that our operators have remained flexible and shifting capabilities to respond to the needs of the local market. While the number of very sick people in the community increases, and as hospitals need assistance with higher acuity patients, including COVID patients, we see skilled days increase. At the same time occupancies declined, as extra precautions are taken on new admissions. When COVID retreats, occupancies begin to recover and skilled mix begins to normalize. While occupancies are lower than they were a year ago at this time, the fact that occupancy levels have remained relatively steady over the last few months, combined with the comparatively strong skilled mix, demonstrates the resilience of our model and our local leaders' ability to adapt to changing circumstances in their local healthcare markets.
As we said last quarter, this pandemic arrived at our doorsteps, at a time when our organization had never been stronger clinically and financially. Our local leadership model is shining through in these results, and our local approach is the reason why we were able to report such a strong quarter. As we've said before, Ensign was born in times much like these, and our model is not only designed to survive, but to thrive and grow in the face of uncertainty. Our current health, combined with our culture, proven local leadership strategy, healthy balance sheet, and the enormous potential in our newly acquired transitioning, and same store operations, gives us confidence that we are well positioned to manage through these unusual times, and a rebound to our pre-COVID path.
As we said today, we see and we expect to continue to see a significant impact from the pandemic on our results throughout the remainder of our year. But with several months of COVID behind us and following two record quarters in a row, we are raising our annual earnings guidance to $3 to $3.10 per diluted share, up from our previous guidance of $2.50 to $2.58 per diluted share, and we are affirming our annual revenue guidance of $2.42 billion to $2.45 billion. We are confident that we can provide this guidance for several reasons, including our better than expected results in the first half of the year, the operational adjustments being made by our local operators, and the benefits we receive from regulatory waivers, rate adjustments, and the other continued efforts already mentioned. While the pathway to achieving these results has and will differ significantly from what we expected when we gave guidance prior to the pandemic, we are confident that we are well positioned to operate in the current environment, but more importantly, to regain much of our pre-COVID momentum, as the flow of patients continues to normalize over time. As the year progresses, we will continue to evaluate the impact of COVID-19 across the portfolio and readjust as necessary.
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. The company paid a quarterly cash dividend of $0.05 per share of Ensign common stock. Due to our strong liquidity, we are pleased to continue our long-standing practice of paying a dividend to our shareholders. As a reminder, Ensign has been a dividend paying company since 2002, and have increased the dividend each year since 2002, and there are currently no plans to suspend future dividends.
Just a few days ago, we announced the acquisition of the real estate and operations of a post-acute care retirement campus located in Tempe, Arizona, which includes Tempe post-acute, a 62-bed skilled nursing facility, Desert Marigold Senior Living of Tempe, a senior living center with 72 assisted living beds and 90 independent living units. This was one of the several acquisitions that we had in the works, when COVID appeared on the scene, and is the first closing we have had since the pandemic started. Our transition process was a little different this time. But we are confident in our customizable clinical and operational plan, that will allow us to selectively acquire in the current environment. With this addition, our growing portfolio is now comprised of 226 skilled nursing operations, 24 of which also include senior living operations and other ancillary businesses across 14 states. Ensign now owns 93 real estate assets, 63 of which we operate. This portfolio of owned assets took less than five years to acquire, as compared to the 15 years it took us to acquire the 94 assets we spun out to CTRE in 2014.
I also want to give a brief update on our growth prospects. As we indicated last quarter, we had several deals in the pipeline that we halted temporarily, as we responded to the COVID threat. A handful of those operations are now slated to close this fall, while others will require a fresh look later this year or early next year. We are also beginning to see the deal flow start to pick back up. After essentially coming to a complete halt between March and June, we are now seeing sellers begin to resurface again. In some cases, some of the deals that we expected to see this year have been delayed, as the CARES Act funding has provided additional capital to provide temporary assistance to undercapitalized or struggling operations. However, we anticipate that there will be a significant influx of older and newer deals that come out of this pandemic.
As these current and future turnaround opportunities present themselves, we are doing more to refine our decision-making process to ensure that we are choosing the best available opportunities. While we are always very selective with each potential acquisition opportunity and pass on the vast majority of the opportunities that are presented to us, we will be even more selective in the coming quarters, in order to be sure that we have plenty of drypowder in 2021. Whether we are acquiring the real estate or entering into long-term lease arrangements, the health of our balance sheet will remain paramount. Our approach to acquisitions will continue to be based on paying fair and reasonable prices, using historical performance. Not on pro forma our future results that we will create through our performance. Most of the operations we acquire, start out with lower occupancies and lower CMS star ratings, and we build that into the purchase price. But when occupancies go down, we have significant cushion that's built into our model.
Lastly, as a brief update, we began the process of unlocking some equity value in seven or eight of our 73 owned and unlevered real estate assets. We have selected a few of our own assets and have built up significant equity value to take to HUD for very attractive long-term fixed rate debt. This process can take several months and will not be completed until next year, but we are preparing now for a wave of new acquisitions that we see on horizon in 2021.
And with that, I'll pass the call over to Barry for some more detail around operations. Barry?
Barry Port -- Chief Executive Officer and Director
Thanks Chad. We're very pleased to report that we are seeing some very promising outcomes across the organization, as we have seen improved clinical results among our patients. The vast majority of which were able to recover and return to home, while simultaneously limiting the spread of the virus, reducing the pressure on local hospitals, and doing so in a cost effective manner to further benefit the overall cost to Medicare and Medicaid programs. While this is a dangerous virus, we have toiled day and night to continue to develop effective care plans, that have resulted in above average outcomes, which has only added to the confidence of our local healthcare community.
To help illustrate these results, we would like to offer a few examples. As the COVID-19 outbreak began in suburban Washington state, we had an early view from our operations, is how to defend against COVID entering our facilities, prevent the spread and in cases of outbreaks, initiate clinical practices to improve outcomes. Our model facilitated the sharing of best practices among operators, clinicians and medical directors. One excellent example of this, is Sunview. Respiratory & Rehab in Youngtown, Arizona. During the early weeks of the pandemic, CEO, Sean Hill, and COO, Marla Sanchez, together with the Arizona Resource teams, tirelessly prepared for the eventuality of COVID in their facility. They participated in COVID education, rigorously applied CDC guidance and CMS regulations, and attained mask gowns and other recommended PPE. Under the direction of their Medical Director, Dr. Omar Hassan, they also developed a COVID-19 focused clinical program, and provided proactive training to the nursing staff and care staff. Unfortunately, in June, COVID entered Sunview, and when universal testing was conducted, many residents and numerous staff were quickly identified as COVID positive.
The Sunview team was prepared and immediately went to work executing their response plan, which included enhanced assessment, monitoring and implementation of high acuity clinical interventions, and practices normally carried out in emergency departments of acute hospital settings. In order to sustain the enhanced interventions and elevated staffing levels that this type of care required, Sunview utilized the benefit waivers approved by CMS, as well as their existing managed care partnerships to qualify eligible beneficiaries for skilled reimbursement, which also allows them to implement an aggressive treatment plan without intrusive transition between two different healthcare settings. As a result of these actions, the facility only had to transfer a handful of residents to acute hospitals during the entire outbreak. This not only benefits our community through keeping care access maximized at our acute hospitals, but also improves the quality of life of our residents, since they can receive many of the same services they would have received at the hospital, without leaving Sunview. This aggressive treat in place approach, has yielded incredible clinical outcomes, as well. As of today Sunview is COVID free. Nearly all affected residents have recovered, resulting in a COVID mortality rate of only 2.3%. By comparison, CMS reported that the mortality rate for skilled nursing residents nationally for the same time period was 26% to 30%.
Another example seen at Southland Living in Norwalk, California. They showed us how many of our facilities have provided skilled services to high acuity patients, while allowing the local acute hospital to maintain bed availability, and simultaneously reducing risks related to moving frail patients. Under the direction of Nat Flake [Phonetic], CEO & Shony del Pilar, COO, Southland's interdisciplinary team began a rigorous program of change of condition monitoring, along with early clinical intervention. The objective was to elevate the level of care at the facility to address emerging clinical needs in-house. As a result of these efforts, Southland had a 66% decrease in transfers to the acute setting for the same period in the prior year, despite an increase in medical frailty in both their new admissions and long-term care residents.
By applying the lessons learned across several geographies and by providing the local leadership with tools and resources rather than directives, our affiliated facilities have been able to achieve prevalence and mortality rates far below the national average. It really is in times like these, that Ensign's unique operating model really shines. Our leadership and our operating model are the reasons why we have adapted and will continue to adapt during this unprecedented time, and it's one of the reasons why we have seen our acuity and outcomes improve. As our leaders have appropriately utilized their skill and place approach, we have saved CMS millions of dollars in unnecessary hospital observation stays, fewer life threatening transitions of care, and lower mortality rates. These savings are the direct result of early intervention and enhanced clinical treatments, that are possible only as a result of the waiver for the three day hospital stay in select managed care relationships. Rather than attempting to rollout a one size fits all approach across many markets with varying local restrictions, our CEO-caliber leaders and their clinical partners, with the support of a world-class service center, are very carefully working with local governments, hospitals and their managed care partners to be a solution for this pandemic.
Now, I'll pass the call over to Suzanne, to provide more details around our quarter and guidance. Suzanne?
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Thank you, Barry and good morning everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include, GAAP net income was $40 million, an increase of 95% over the prior year quarter. Adjusted net income was $43 million, an increase of 99% over the prior year quarter. Consolidated GAAP revenues were $585 million, an increase of 19% over the prior year quarter. Same store occupancy for the quarter was 73.7% which was down 5.9% from the prior year quarter. Same store skilled mix days was 31.4%, an increase of 100 basis points. The same store Medicare days were up 16%. Transitioning occupancy was 76.1%, which is down 3.8% over the prior year quarter. Transitioning skilled mix days was 25.5%, an increase of 360 basis points, and transitioning managed care revenue was up 12%. The company's liquidity remained strong for the six months ended June 30, with cash generated from operations of $174 million, and free cash flow of $147 million. As of July 31st, we had cash and cash equivalents of approximately $100 million, and $320 million of available capacity under our revolving credit facility.
As Chad mentioned, we also own 93 assets, 73 of which are unlevered, with significant equity value that provides us even more liquidity. In March 2020, the federal government began to undertake numerous legislative and regulatory initiatives designed to provide relief to healthcare providers during the COVID-19 pandemic, including the waiver of the three-day qualifying stay, the CARES Act, which provides among other things, provider relief funding and then accelerated advance payment program for Medicare, which equates to approximately $100 million for us. More specifically, the company received directly and indirectly, approximately $110 million of the provider relief funding under the CARES Act including rounds one, two, and three. To date, all provider relief funds have been returned. In addition, the CARES Act temporarily suspends the automatic 2% reduction of Medicare claims reimbursement, otherwise known as sequestration, for the period of May 1st, 2020 through December 31st, 2020. This suspension of sequestration had and will continue to have a positive impact on our revenue, the magnitude of which will depend on how the pandemic affects our Medicare expenses for the remainder of the year. The Federal government also increased estimates 6.2%, which depending upon the state, will provide an increase in Medicaid rates, the temporary increase in funding, and the timing of payments varies by state. But eight of the states in which we operate have already approved increases, and several others are looking to do so as well.
As Barry mentioned, we are increasing our previously announced 2020 annual guidance to $3 to $3.10 per diluted share, up from our previous guidance of $2.50 to $2.58, and we are maintaining our previous annual revenue guidance of $2.42 billion to $2.45 billion. The midpoint of this 2020 guidance represents an increase of 56% of our 2019 spin adjusted results. Our 2020 guidance is based on, diluted weighted average common shares outstanding of approximately $55.5 million, a tax rate of 25%, the inclusion of acquisitions closed to-date, the exclusion of losses associated with start-up operations, which are not yet stabilized, the inclusion of anticipated Medicare and Medicaid reimbursement rates increases, net of provider tax, the resurgence of and no resurgence of COVID-19 pandemic, with the primary exclusion coming from stock based compensation. Additionally, other factors that could impact quarterly performance include, variations in reimbursement systems, delays and 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, variations in insurance accruals, the resurgence of COVID-19 pandemic, and other factors.
And with that, I'll turn it back over to Barry. Barry?
Barry Port -- Chief Executive Officer and Director
Thanks, Suzanne. Before we move on to questions, we just want to reiterate, again that our optimism expressed today is based entirely on our confidence in our local teams and our proven model. Our success has, and will always be due to their daily commitment and sacrifice and their ownership of our culture and organizational mission. We're grateful to our shareholders for your confidence and support. We cannot adequately express our appreciation to our colleagues in the field, and at the service center for making us better every single day. Thank you all.
And with that I will now turn the time over to Q&A. Operator, 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. I guess with the guidance update you've provided today. It looks like sort of the implied guidance for the back half of the year could be as much as a $1.54 in the second half of the year. Is there anything we should be thinking about, in terms of the cadence there between the third and fourth quarter? I know there is bit of a normal seasonal pattern for Q3, but anything that we should be mindful of, when we think about just sort of the cadence in the second half?
Barry Port -- Chief Executive Officer and Director
Yeah, I'll let Suzanne fill in the gaps here Frank. Look, I think we expect that kind of the -- the general path that we've seen over the last few months to continue through the third quarter, and our hope is that we start to see a recovery in the fourth quarter, in terms of overall occupancy. But there are some things that will cause some fluctuation, some of which are relatively known, others of which are fairly unknown. We're receiving some temporary Medicaid rate enhancements at the moment, some of those will burn off. There might be some offset to that from just regular state reimbursement increases. The length of the three-day stay waiver is fairly unknown quantity there. Though, we expect it to run through the end of the third quarter and hopefully end of the fourth.
So those are some things that are impacting it. Suzanne, can you think of others that are...
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
No, I think you covered them really well, Barry. I think that, as we've been talking about the end of the -- the state of emergency is declared through the -- basically end of October, and with that, follows a lot of those FMAP additional state funding continue. So there is some relief there for additional COVID expenses that we expect to incur during Q3 to actually be offset by the Medicaid funding, the extra Medicaid funding, and then, get our overall rate increase for Medicare, that's our standard one that will kick in, in Q4 and then all the state, standard increases kind of filter in at the end of Q3, and then fully in force in Q4 and so you've got that. And then just the skilled in place, and we do know that's going to be -- it looks to be in place all of Q3, but that might burn off in Q4, depending upon the declaration of the state of emergency.
Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary
Yeah, let me just add to that too, this is Chad. I mean, obviously with occupancies, as we've described in the prepared portion of our remarks. COVID -- the prevalence of COVID in the communities we're in is also something to watch, and that impacts both occupancies and mix, as Barry described, and so that clearly could impact things as well.
Frank Morgan -- RBC Capital Markets -- Analyst
So it almost sounds like 3Q might be better than 4Q? I mean, it sounds like with a lot of the continuation of these programs, is that a fair way to think about it or do you think it could be fairly equally weighted between them?
Barry Port -- Chief Executive Officer and Director
Yeah, I don't think we expect it to be better Frank. If anything, it might be the same or slightly down from Q2. But now with...
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Q4 being -- definitely, Q4 being stronger.
Barry Port -- Chief Executive Officer and Director
We're trying to give clarity though through the whole remainder of the year. It's really difficult to do quarter-by-quarter.
Frank Morgan -- RBC Capital Markets -- Analyst
Yeah. I understand. So net-net, a lot of the programs that may run through the third quarter, as those wind down, the rate increases if we don't weigh for Medicare in the fourth quarter and maybe higher occupancies, would make it slightly better potentially, theoretically a little bit better. In terms of the states that have these special funding. I know you talked about a number of states that have actually passed through the FMAP increase. Are these big important states to you? Like how would you rate the magnitude or the benefit that you're getting through the temporary FMAP increase?
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Yeah, that's a great question Frank. You know, when we kind of think about what states actually have the FMAP program in place. If California -- California has a very strong program in place. Texas has a very strong program in place, and Arizona has had -- and they are a little bit different on the program they have. They have a strong program, but it's more of a -- a full -- a whole dollar program versus California and Texas have a daily rate program in place. And so all of our larger states have these programs in place, and so California and Texas specifically have their programs in place through the end of the emergency, based upon how they've laid everything out. They expect to go through -- at least we expect them to go through the end of emergency, based on everything we've been told.
Frank Morgan -- RBC Capital Markets -- Analyst
Got you. And then, interesting on the commentary about the M&A and then also the financing -- debt financing on some of your unencumbered assets. Any kind of early read on like how much equity you could pull out of those buildings and maybe how we could extrapolate across the rest of your unencumbered portfolio?
Barry Port -- Chief Executive Officer and Director
Yeah, that's a great question, Frank. We've been consistent in trying to point out, that we have a lot of untapped value in those owned real estate assets. The one thing I'll just point out is, as we talked about, those 93 owned assets have been acquired in the last five years. So a good portion of those are newer assets, at least to Ensign, and a lot of them are going through that transition phase that we talk about, as a key part of our model. So a lot of those are, I would say, are not kind of at full value, so to speak. But that said, I can give you some sense on the HUD loan, as one tool that we have, to basically take some of that equity off the table and use it to fund future growth. We're looking at under 10 assets, HUD programs are pretty specific in how they're structured. But if you're looking at a 75% loan-to-value on those assets, it represents around $120 million in loan proceeds. So if you could maybe looked at that as a way to say -- what again eight or nine of those assets would be worth. So that gives you some sense. But you can't necessarily extrapolate that across all those owned assets, because again so many of those are still in the transition phase, as newly acquired are transitioning assets. But it's definitely a great question, and something we look at and talk about all the time, and we're also still evaluating ways that we can illustrate and show that value to our investors, because it is a significant source of liquidity, as both Suzanne and I mentioned, and its really nice to have.
Frank Morgan -- RBC Capital Markets -- Analyst
Sure. And I'm assuming those 10 assets that you're financing, those would be some of the more mature, those assets that are closer to sort of that equilibrium of steady state performers, than those that are in the ramp-up, I would assume -- is that the case?
Barry Port -- Chief Executive Officer and Director
That's right. That's exactly right.
Frank Morgan -- RBC Capital Markets -- Analyst
Okay. And then -- so now that you've got this money and the M&A opportunities that you see out there. I'm just curious, I mean you talked about the revamp of the interest of doing things now. Like the opportunities you've seen today, are these mostly turn assets or would these be assets where people were just -- you just don't want to deal with COVID, don't want to deal with the world we're in today or -- any way you could characterize the opportunities that you're seeing now?
Barry Port -- Chief Executive Officer and Director
Yeah, that's a good question. I would say, we have some of our typical sellers that are just, for one reason or another, they're just looking to exit the building, exit the industry. Maybe it's a family owned business and the next generation doesn't want to continue, or there is -- maybe if there is some private equity investors that are looking to liquidate their interest and things like that. So we have sort of the kind of standard non-pandemic related sellers that are out there. But that said, I think there is definitely a group of sellers that -- because of COVID, and even just sort of PDPM, which is not something that we've talked a whole lot about, but just the continued regulation and everything that it takes to run a skilled nursing facility, we're seeing a lot of those folks that are -- if you're getting through it right now, because of some of the CARES Act funding that's helped immensely. But as that burns off, we will be very interested in selling.
So we're seeing a little bit of both, but in both categories. It does represent a very healthy pipeline for 2021.
Frank Morgan -- RBC Capital Markets -- Analyst
Got you. I will hop back in the queue. Thanks.
Operator
[Operator Instructions]. Our next question comes from the line of Scott Fidel of Stephens Incorporated. Your line is open.
Scott Fidel -- Stephens -- Analyst
Hi, great, thanks. Good afternoon, everyone. First question, just interested, in terms of what you're seeing more recently around occupancy rates from some of the lower acuity patient cohorts? And then what type of external or engagement activities you might be undertaking to reramp occupancy around some of the lower acuity individuals?
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
So maybe just on the occupancy, I think we quoted some numbers as there -- as Barry went through, looking kind of mid-May to mid-July, we were down 1.5, but our skilled mix was up 6.9%. I mean I think what we have seen when we analyze our numbers is, as COVID comes into specific area, that we actually see that occupancy go down and -- the overall occupancy go down, and save really it's those lower skilled patients that we're actually seeing that occupancy, both private and Medicaid, the occupancy go down. And as we have COVID come into that area, then we actually see the skilled mix go up, and so because we're scaling in place, or passing or going over the three day qualifying waiver for the stay at the hospital, we're actually seeing that increase and we are helping relieve the overall system in that area, and taking those higher acuity skilled patients. And so it's kind of really equal to how heavy COVID is impacting that specific area, of how we're seeing those. It varies building by building specific, and I don't know if that answered your question but, it's is a very hard thing to say?
Barry Port -- Chief Executive Officer and Director
Yeah. And Scott, I think one thing to may be remember is, is some of the reductions you see in occupancy are somewhat deliberate, both on the part of the kind of the hospital system, but also just again, elective cases being shut down. And so those things are naturally temporary phenomenon. I can tell you also that, as we look at kind of the world of outbreak buildings that we've experienced so far, which we have quite a bit of experience across a wide range of geographies. As you look at those and you see kind of the path that they went down. When COVID enters, you see a pretty sharp reduction in occupancy. You see COVID kind of work its way through things and then resolve and then you see a natural path back upwards to kind of more stable occupancy. And again, as we look back at our own experience in our outbreak buildings, that path is clear in every single building. They're all happening at different times across the entire portfolio, and you have new outbreaks happening and new challenges emerging. But as we study those trends across our portfolio, it gives us a pretty high degree of confidence, that as things begin to normalize, which they most invariably will, in terms of volume through the healthcare system, we feel like the portfolio overall will kind of follow a similar path that we saw, all of our individual buildings go through on a building-by-building and market-by-market basis.
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
I think that's kind of reemphasized by like how the -- if one can see, what the managed care has seen for utilization right now, they're projecting that. In second half of 2020, they are projecting an increase in their utilization, and so I think to Barry's point, that's really how we're mirroring because, as their throughput increases and their utilization increases and so does ours, and so really looking at that as a consistent pathway and pattern that we're seeing.
Scott Fidel -- Stephens -- Analyst
Yes. Understood. And maybe taking the other side of the patient mix, and clearly, the strong acuity shows during the second quarter and we certainly see that in significant increases in your average daily rates and then in your margins as well. I'm interested just to the extent you can parse for us, even before the COVID crisis began, you had already been showing that increase in acuity, and which way it has been translating into some of the stronger pricing stats as well. Clearly, you've had this bolus of COVID patients coming in and also impact that too in the second quarter. Is there any way that you could sort of give us some more insight into sort of drilling down between -- let's call it the non-COVID higher acuity patient mix, in terms of how the trends may have been impacted there? And then obviously we know that and you've seen the new COVID patients as well, driving up the acuity?
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
So I think one of the easiest ways to see this pattern and pathway is looking at -- a small little area that we have been breaking up for last couple of years of the other skilled. We talked about that being our sub-acute and our higher acute, and really what that group of payers boils down to is, its of really high acute clinical patient, and really that's where the touching ground of all of you know, some of the complex clinical stuff started. And now over the last year in the preparation for PDPM, we were talking and you've heard us talk about this expansion of these highly complex, clinical care pathways that we're developing and putting in place. And so I think what you see with the last kind of quarters through Q4, Q2 -- Q1 and then Q2, is that continued expansion of those clinical care pathways, which then has resulted in higher complex, clinical management and higher complex medical management, which is one of the key conditions, that as you look through PDPM, that nursing focus, the nursing delivery has really been something that we've been able to execute on. And so I think it's that continuation of that growth, and what COVID does, is it actually -- payers and partners right into those higher clinical care skill sets that we've been developing for the last year and a half, two years.
Scott Fidel -- Stephens -- Analyst
Okay. And then just one last one for me, just interested in your thoughts on the final Medicare SNF rates and policy changes for 2021 came in at 2.2%, not that far off the last couple of years. Just in terms of the rate itself, and then some of the policy changes that CMS included in there, how you're thinking about those relative to what you were expecting to see? Thanks.
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Great question. But in terms of that 2.2%, consistent with what we are expecting the proposal is at 2.3%, really diving in and looking through some of the changes that are encompassed in there, not a significant amount of changes that really impact how we pull this sell-through, if anything, some slight positives for us, that allow us to capture some of the things that we're already doing, allow the -- right now really captures of additional clinical procedures that we already had in place. And so if at all, somewhat positive to some of those additional things that we were doing, are already caught up in the rate, But really really pleased with the rule and pleased with the relatively light number of changes that are outside the rate itself, but the few that are in there are positive for us.
Scott Fidel -- Stephens -- Analyst
Okay. Great. Thank you.
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Thanks.
Operator
Thank you. We have a question from the line of Frank Morgan, RBC Capital Markets. Your line is open.
Frank Morgan -- RBC Capital Markets -- Analyst
You actually almost answered it in that last comment, I was wondering, the PDPM update, I think you hit on most of that. But --- it's particularly in light of COVID, but any other thoughts, that's fine if not, I'm good?
Barry Port -- Chief Executive Officer and Director
Yeah, look I can just clarify a little further and that a little more color. Prior to COVID, we saw a pretty even split between kind of what I would call a rehab tight patient and a medical management type patient, which is more of a COVID related diagnosis, more nursing heavy. And during the pandemic, we've seen that shift to more -- where you've only got less than 20% of a rehab focused patient and somewhere around 60% to 70% on this medical management kind of high complexity type patient profile. So I mean that's what the shift has looked like. As far as our patient profile and as far as PDPM performance goes, we continue to cater toward that more complex patient type. We have spent a lot of time, not just learning the PDPM system, but continuing to do what we've done for the last, I would say 10 years, which to be that type of facility that can take the higher acuity patient and drive the kind of outcomes that that you would expect. And so for us, that continued transition continues to go well for us.
Frank Morgan -- RBC Capital Markets -- Analyst
Thank you.
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Thanks, Frank.
Operator
Thank you. At this time, I'd like to turn the call back over to CEO, Barry Port for closing remarks. Sir?
Barry Port -- Chief Executive Officer and Director
Thank you, Latif, and thank you everyone for joining us today.
Operator
[Operator Closing Remarks].
Duration: 54 minutes
Call participants:
Chad A. Keetch -- Chief Investment Officer, Executive Vice President & Secretary
Barry Port -- Chief Executive Officer and Director
Suzanne D. Snapper -- Executive Vice President andChief Financial Officer
Frank Morgan -- RBC Capital Markets -- Analyst
Scott Fidel -- Stephens -- Analyst
