Ladies and gentlemen, thank you for standing by, and welcome to The Pennant Group Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

[Operator Instructions]. I would now turn the conference to your speaker today, Derek Bunker, Chief Investment Officer. Please go ahead, sir..

Thank you, Joelle. Welcome everyone, and thank you for joining us today. Here with me today I have Danny Walker, our CEO; Jenn Freeman, our CFO; and John Gochnour, our COO; and Brent Guerisoli, President of our Home Health and Hospice Portfolio Company, and who as we recently announced will become President of The Pennant Group beginning in 2021.

Before we begin, I have 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.pennantgroup.com. A replay of this call will also be available on our Website until 5:00 PM Mountain Time on Friday, December 11, 2020.

We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, November 11, 2020, and these statements have not been or will they 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, Pennant 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 Pennant 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 the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries.

The words Pennant, company, we, our and us refer to The Pennant Group, Inc., and its consolidated subsidiaries. All of our operating subsidiaries and the Service Center are operated by separate wholly-owned independent companies that have their own management, employees and assets.

References herein to the consolidated company and its assets and activities as well as the use of the terms we, us, our and similar terms used today are not meant to imply nor should it be construed as meaning that The Pennant Group, Inc.

has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Pennant 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.

With that, I'll turn the call over to Danny Walker, our CEO.

Danny?.

one, the ability of our local leaders to adapt to the changing reimbursement and operating environment; and two, appropriate reimbursement for care provided to higher nursing acuity patients. Since our inception, we have been committed to care for patients based on individual patient and community needs.

Often, this has resulted in serving underserved higher nursing acuity patients that were under reimbursed by PPS, and are now more appropriately reimbursed under PDGM. These two factors are resulting in strong performance under PDGM.

We are confident in our processes going forward and the ability of our local teams supported by field and service center resources to continue to adapt as we move past the novelty of the PDGM and it becomes a part of our ordinary operational cadence.

In our Senior Living business, local leaders continue to find ways to move their operations forward despite challenges stemming from the pandemic.

This determined execution was the foundation of our continued profitable results in the third quarter and quarter-over-quarter segment revenue, and adjusted EBITDA increases which is noteworthy in light of the pressures facing the Senior Living industry.

Our weighted average Senior Living occupancy declined approximately 370 basis points from the first quarter standing at 76.8% in the third quarter. This occupancy trend was ahead of national assisted living averages as reported by NIH by approximately 250 basis points.

Our occupancy hit a low point in August and since that time; we have seen a 40 basis point increase in occupancy across the segment.

While COVID-19 has impacted the senior living industry broadly, in particular, the restrictions on in-person touring and visitation, not every senior living community has been impacted in the same way or to the same degree.

Our local operating model is uniquely suited to equip our local teams to respond to local market dynamics including pandemic-related challenges. This operational resilience is occurring within a portfolio of assets we've assembled at a significantly lower cost basis than industry averages.

These two factors will help us weather this current storm and drive significant long-term shareholder value over time. Across Pennant, we continue to recruit and develop talented leaders attracted to our unique operating model.

We are pleased to issue strong 2021 revenue and EPS guidance, which reflects the strong expected growth over our twice increased 2020 guidance. The overall health of both segments continues to improve as our field and service center partners drive our operations forward clinically and financially.

These factors combined with our track record of disciplined growth, our strong balance sheet, favorable lease coverages, and healthy operating results position us well to drive further organic growth in our existing portfolio, and continue as an opportunistic consolidator in the highly fragmented Home Health, Hospice and Senior Living industries.

With that, I'll hand it off to Derek to discuss our recent investment activity. Derek..

Thank you, Danny. Before providing the investment update, I just want to echo Danny's thoughts and appreciation for the many individuals across Pennant. I'm deeply grateful for their commitment to providing life-changing service during a time when our communities needed it most.

It's through their efforts that we were able to provide strong initial 2020 guidance in the aftermath of a complex spin transaction, been a raised earnings guidance last quarter and again this quarter, and provide 2021 guidance that would represent very healthy growth year-over-year.

For those familiar with the Ensign story and our story before spinning off, this kind of performance is possible when you combine our innovative operating model, talented local leaders, and disciplined balance sheet management. The third quarter was illustrative of the momentum achievable when these principles are rigorously followed.

During the quarter and since we announced the acquisition of four Home Health agencies and two Hospice agencies, closed on the previously announced Home Health joint venture with Scripps Health, a leading nonprofit integrated health system based in San Diego, California, and successfully started two Hospice agencies.

These transactions bring the total number of operations acquired or started in 2019 and since 27. Each transaction represents a unique opportunity for our local leaders to drive outside; multi-year growth as they respond to local market conditions and take advantage of additional acquisition opportunities.

As evidenced by the different structures of these transactions, our disciplined growth strategy takes many forms. Our focus continues to be on the opportunistic acquisition of existing operation.

However, we do start-up operations and joint ventures as additional tools available for us to drive similar long-term results depending on the unique needs of the community and our leadership pipeline.

Each of these approaches create avenues to provide life-changing service, meet the needs of communities, and provide opportunities for talented local leaders to create value.

Although the joint venture structure is relatively new to us, we've successfully pursued this growth path many times throughout our history, and expect they will continue to be valuable elements of our operating strategies, particularly as our leadership pipeline grows, and we keep our balance sheet strong.

Although we will continue to be disciplined about how we allocate and spend capital, ensuring that we do so methodically and with a well-supported path to strong value creation for our stakeholders, we're excited about our deal prospects and where our pipeline stands.

We continue to see meaningful opportunities that fit our investment criteria, and we expect to see a similar pace of acquisition activity in the near-term.

For field and resource leadership talent, the strong performance of our operations notably in our Home Health and Hospice segments, our low leverage and strong fixed charge coverage and are consistent in growing cash flow combined to make us well-equipped to acquire an onboard additional operations in 2021 and beyond.

With that, I'll hand it over to Jen to provide more detailed financial performance.

Jen?.

Thank you, Derek, and good morning, everyone. Detailed financial results for the three months ended September 30, 2020, are contained in our 10-Q and press release filed yesterday. For the three months ended September 30, 2020, we reported total GAAP revenue of $98.4 million, an increase of $10 million or 11.3% over the prior year quarter.

GAAP diluted earnings per share of $0.15, and adjusted diluted earnings per share of $0.18. Non-GAAP adjusted earnings per diluted share of $0.18 represents 63.6% increase over spin-adjusted third quarter 2019 results of $0.11.

We had strong revenue and earnings per share results due to the consistent operational execution of our field leaders during a very difficult operating environment. We also benefited from a disciplined management of general and administrative costs.

Other key metrics include, cash flow from operations of $9.7 million in the third quarter, $70 million of availability on our revolving line of credit at quarter end, 0.59 times net debt-to-adjusted EBITDA if Medicare advanced payments have been paid back as of the end of the quarter.

As a reminder to listeners, our strong quarterly results do not include any funds from the Provider Relief Fund established by the CARES Act. We continue to benefit from the receipt of approximately $28 million in advance to Medicare payments, and approximately $5.3 million from the CARES Act payroll tax deferral program.

We expect automatic recruitment of the advanced payments to begin April 2021. Finally, please note that our year-to-date non-GAAP adjusted earnings per share results exclude the benefit of $1.7 million received because of the Medicare sequestration holiday, which offset our COVID-19 expenses and our adjustments.

As Danny mentioned, we are increasing our annual 2020 adjusted earnings per share guidance to a range of $0.75 to $0.80, the mid-point of which represents a 4% increase over our previously increased EPS guidance given in the second quarter, and the 39.6% increase over our initial 2020 guidance.

We also provided full-year 2021 revenue guidance of $430 million to $440 million and adjusted earnings per share guidance of $0.89 to $0.99 per diluted share, the mid-points of which represent increases of 14.2% and 21.3% respectively over our revised 2020 annual guidance.

The 2021 guidance is based upon diluted weighted average common shares outstanding of approximately 30.8 million and effective tax rate of 25.8%.

The inclusion of acquisitions announced year-to-date, the estimated ongoing effects of COVID-19, the exclusion of cost related to start-up operations, acquisition-related cost, redundant or non-recurring expenses related to spin-off transition services and stock-based compensation.

We believe our operating model and growth strategy enable us to be successful through changing operating environments. And our strong results here today give us confidence in our ability to meet our revised 2020 and newly issued 2021 guidance. And with that, I'll turn the call back over to Danny..

Thank you, Jen. Before we turn to the Q&A portion of the call, I'd like to highlight a few individuals and teams that are examples of what we can achieve in each of our operations by truly living our core values and executing with our cluster-centered operating model with diligence and consistency.

First led by Executive Director Patrick Utley, and Director of Clinical Services, Tania Dudley, Comfort Hospice in Las Vegas, Nevada is an example of a team that has achieved significant results as they continue to address the needs of their local market.

Based on feedback from their partners in the community, patent team helped lead the acquisition of a Home Health agency to enable Comfort to provide both Home Health and Hospice services. In addition, Comfort has also expanded their services to address unique needs in surrounding small communities that were underserved.

These locally tailored solutions are possible because of our unique operating model and combined with the strong culture that Pat and Tanya helped cultivate at Comfort have enabled them to achieve 27% revenue growth and 38% EBIT growth quarter over quarter.

While achieving these results these local leaders demonstrated ownership by supporting their cluster partners through the transition of a new acquisition in their geographic footprint as well as other Pennant and Ensign partners in the coordination of patient care during the pandemic.

Another example I'd like to highlight is Lo-Har Senior Living in El Cajon, California, which is led by Executive Director, Kandy Franklin, and Wellness Coordinator, Amy Castillo. Having led Lo-Har for many years, Kandy and Amy have helped the building become an important part of the continuum of care in their community.

They have worked closely with partners in the Ensign Pennant Care continuum to tailor Lo-Har in an effort to be the senior living solution to providers, residents and their families.

Kandy and the teams' relentless focus on resident and family satisfaction even while navigating the pressures of the pandemic has driven higher occupancy this year over last year.

Kandy and Amy continue to drive value in their building, resulting in third quarter revenue nearly 6% higher than the prior year quarter, and EBIT nearly 27% higher over the prior year quarter. These results are reflective of what talented leaders like Kandy and Amy can do to drive sustained long-term value in the senior living space.

We again want to express our thanks and admiration for the leaders and staff in the field and at our service centers working diligently to care for thousands of lives each day. Our local leadership teams and the dedicated resources who surround them are the reason for our success.

And we could not achieve these results without their excellent execution through varying challenges. We will now turn to the Q&A portion of the call. As Derek mentioned, we are here with John Gochnour, our COO, and Brent Guerisoli, soon to be President of Pennant who are both available for questions about operations as well.

Joelle, can you please instruct the audience on the Q&A procedure?.

Thank you. [Operator Instructions] Our first question comes from Scott Fidel with Stephens. Your line is now open..

Hi, thanks and hi everybody. I have a couple of questions. First question just relates to the initial 2021 guidance and it does not yet include any future on announced M&A.

So I thought it might be helpful just to remind us what type of contribution M&A has made to your growth rates historically, and whether you think that the recent historical trends should be a relatively good indicator of the likely M&A activity that ultimately you'll look to execute in 2021..

Yes, hey, Scott. Good to talk to you. Thanks for joining the call. This is Derek. So I think you kind of answered the question, the second half of your question, at least on the historical trends and what we anticipate going forward.

Of course, we don't technically take it into our guidance but looking at it what we see so far, there's no reason that we don't feel like we can't continue that that same pace. Our leaders are in a strong position. We've maintained a good balance sheet, and we're excited about what we see out on the horizon.

So I think you'll -- looking at the past few years of our cadence and the depth of our acquisition activity is a good benchmark for where we stand going forward. And as far as you know, the contribution that we've had so far, maybe I'll ask Jenn to kind of give some parameters around that one..

Yes. So, hi, Scott, it's Jenn. For year-to-date, on the revenue side, we are seeing probably in this quarter or year-to-date I'll go with that, is about $2 million of revenue on the Home Health side, about $5 million on the Hospice side, and about $1.3 million on the Senior Living side.

And year-to- date 2019 is about the same level $3.1 million for 2019, about $7 million in Hospice for 2019, and then Senior Living was about $876,000. So that kind of gives you an idea of the cadence over the last couple of years..

Okay, thanks for those details. And second question, just want to hopefully drill into occupancy and senior living a bit more and you had mentioned that you've seen that sort of drop in up around 40 basis points.

Just interested in if you could help us in terms of what you've built into the implied force you guide in terms of what you're thinking about occupancy, relative to 3Q and then also sort of underneath that the 2021 guidance that you provided, what you're assuming, I guess, from occupancy off of that sort of 4Q trend line?.

Yes, I'll let -- I'll let Jenn comment on that specifically. Our assumptions are that things are going to continue kind of where they're at, which is limited visitation, more a higher bar to get people to move in. We're not anticipating some kind of real change in that.

But, Jenn, do you have the specific numbers?.

Yes, I think you can infer from the earnings call scripts that's about the 40 basis points that we're seeing uptick and where we ended up last quarter. So if you take those two, I don't expect it to change significantly through the end of the year..

And then, Jenn, also assuming that similar type of trend in the baseline guidance for 2021 as well, around occupancy..

We're assuming an uptick in occupancy for 2021, but not at a significant client incline. So it would probably be similar to our Q2 levels around year-to-date..

Got it. And I guess, that's just conceptually, would be interested in all your thoughts on just given the news on the vaccine efficacy this week.

And as you think that I'm sure you've all started to drill into that, how I guess from a distribution timing perspective and next year, you think how quickly this could start to actually be distributed? And where your sense is that senior living facilities may be in the pecking order of actually being prioritized for the vaccine and those peckutaries [ph] are, Pete was just talking about nursing homes and other facilities being sort of at the front end of the pecking order.

So interested your thoughts around that?.

Yes, our position on that is that we're encouraged. We'll wait to see how it actually -- how the execution carries through. But we think that it could benefit us the second half of the year, maybe you see a little bit of it in the first half which would be really encouraging news.

The key there is the actual execution, finalizing it, making sure that communities are comfortable with it. I think once it's fully baked and available, I think distribution won't be that big of a difficulty.

We're really pleased with the availability of testing right now as things currently stand and so we're heavily relying on that and then working very hard to overcome some of the obstacles particularly as it relates to limiting in-person visits, when it comes to families making decisions around where to place their loved ones.

That's a real challenge that our teams are finding creative ways to be completely compliant but connect loved ones in their community to loved ones in our communities that are in our -- in our care settings. So that's kind of how I'm -- we're thinking about it.

Obviously, the timing could move rapidly and you could see it if you kind of relieve some pressure early in the first half of the year. But, like the world we're waiting and watching. And for us we are doing everything that you would expect to do without it coming.

We don't see it as a complete solution to what people are going to have to face as they think about this, but we think it would be an enormous help. So --.

I understood. And then just one last one for me, I guess would be for Jenn.

Just any projection that you would be able to share just on expected operating cash flow for 2021? I know you gave us a few of the moving pieces around CARES with the advanced Medicare payments and elsewhere so we if you tied back into it, but just essentially if you do have a formal projection for that..

Scott, I'm going to have to get back to you on that one. This -- and we'll put it in our investor deck on what our projection is..

Okay. All right. Thank you..

Yes. I think generally, Scott, we're on a good track there and we feel really comfortable so we would expect it to continue to improve the way we've seen in 2019 and 2020, so..

Thank you. Our next question comes from Frank Morgan with RBC Capital Markets. Your line is now open..

Good morning. I guess first a housekeeping. You made a comment, I think, about adjusted EPS.

And I couldn't tell, did you say that excluded the 2% add-on payment? Could you just go back over that language again about the effect of the 2% add-on the temporary?.

Yes. Yes, it's a great question. Jenn can provide specifics. But we made the decision to -- for the sequestration holiday, which is the 2% increase, we have excluded that from our earnings. And then we've used that to account for basically our COVID-related costs.

So in the first couple of quarters that the cost exceeded -- or the first quarter that it was available to us, the cost exceeded that sequestration holiday which took place in May, started in May. This quarter, there's a little bit of -- the sequestration exceeded our COVID costs that we've separately identified.

We expect that might be the case in Q4. So Jenn, you want to add anything specific there? We view that as a temporary payment change. And so for specific reasons we decided that -- to exclude it even though it could on a short-term basis be more favorable to us..

Hi, Frank, this is Jenn, and thanks, Danny. Yes. So if you look at our adjustments, our non-GAAP adjustments and even a lot for from our segment EBITDAR from operations to our consolidated combined income from operations, you'll see reference to net COVID-19 related costs.

So that includes both the components of COVID-related costs, related to both increased payroll and supplies expenses. And then that is offset. In that there's a footnote on that line, which references the sequestration holiday and the amount of revenue that we have received.

So in Q3, we received $1.1 million in sequestration revenue and year-to-date is $1.7 million..

Got you. And then, also, now that you've actually -- you're talking about a couple of new de novos coming online. I think you also said those will get -- the cost delays and de novos will get back out of your adjusted numbers.

But maybe talk a little bit about those de novos and where they are and what sort of the expected ramp up time and when those may roll -- when it may actually flip over and rolled into adjusted numbers?.

Yes. And Frank, this is Derek. Great question.

So just to step back really briefly, these startups are really part of a strategy that we've been deploying since our -- really our inception of our Home Health and Hospice company as part of our overall growth strategy and it's dependent upon the local market dynamics, the availability of acquisitions that fit our investment criteria, our leadership pipeline, ties of our local leaders, right, there's a number of factors that as we evaluate our growth that, we can pull in order to fit our solution to that tailor -- to that local market.

Sometimes -- most of the time it's a tradition acquisition of, our bread and butter which gives us a platform to grow in that market and expand. Sometimes it's, as the case in these two that we announced, they're within sort of that broader startup umbrella which can take a number of forms itself.

But there the key point is that the long-term potential for us is the same whether it's a traditional acquisition or a startup, we underwrite and evaluate our investment in the same way.

Sometimes, obviously, that break-even might be a little bit different, obviously, as the startup versus a traditional acquisition, but the same -- but we do a startup with that same long-term return potential in mind. And so these were -- we've done eight or nine of these kinds of startups previously, and this is more of the same.

And maybe I'll ask Brent, since he's newly joining this call to kind of comment on the operational decision making behind those..

Yes. Thanks, Frank, for the question. Just a couple of things. So first, we did the startup operation in Washington, it's a certificate of need state that allowed us to get into it, a Hospice opportunity that goes alongside one of our Home Health operations currently there in the state.

The other one is in Southern California, we added an existing license that allowed us to, again, go into a market with a leader that was prepared to really operate and be successful in that local community. You asked a question about, sort of, when did they start to contribute? We view these in many ways.

Like our acquisitions, the goal is to be operationally accretive as quickly and safely as possible. And, realistically, there's an 18 month to 24 month window that we're targeting, but obviously, we'd like to do that even sooner, but that's sort of the expected time line anytime we do a startup operation that we quickly get to a level of accretion..

And maybe a Jenn question.

The -- in terms of when those actually flip over into your adjusted numbers when they're no longer excluded, is there a specific event or is it just truly a matter of time, how is that going to work?.

It's either a matter of – Frank, it's Jen. It's either a matter of time or a -- or the triggering events as when they show profitability for two quarters..

Show profitable for two quarters. Okay. And I guess just staying on Home Healthcare and Hospice side. I'm just curious, I mean, they were -- there was really strong rate growth, it looks like episodic rate growth, oh, gosh, a little over 10%.

But I'm curious if you could kind of parse that out? How much of that was just the ability to adjust to new PDGM payment system, any kind of significant change in acuity? And I'm guessing the sequester holiday is probably in that numbers, just not in the adjusted numbers?.

That's correct..

Yes. That's correct, Frank. And this is John. I'll take a stab at that. Our Home Health operators have done an extraordinary job of responding to this reimbursement change. And what you're seeing in that 10% increase quarter-over-quarter, I think it's important to look at the full year-to-date as you consider the true implications of PDGM.

But really, we've met and performed extraordinarily well. The results in the third quarter is the result of a couple of things. One, we continue to see our LUPA percentage trend down from its height during the pandemic, we've continued to manage that very effectively, our operators in the field are very cognizant of it.

We continue to see an improvement in the accuracy of our coding and simply capturing the proper acuity of our patients and making sure that that's well-documented. We're also effectively seeing an increase in institutional early episodes. So we saw about a 2% increase in those episodes. And so overall, we're seeing a really nice impact from PDGM.

Our operators are continuing to respond and to meet community needs. I think, as you think about that overall increase, I'd point you back to what Danny said. Really a lot of that increase is based on the fact that the care for patients that we've always cared for.

Our strategy has always been to be the provider of choice in the community to meet referral sources needs. Whatever the acuity of those patients whether they were nursing heavy or therapy heavy we wanted to be that provider who can meet those needs.

As reimbursement has changed to more appropriately reimburse those high nursing acuity patients, it's generally helped us a little bit. So I think looking at the year-to-date numbers is the right way to look at that. We're still early and -- but we're very pleased at where we're at..

Got you.

And then maybe on the cost side, in Home Healthcare, any levers that are remaining to be pulled there as you adjust to PDGM or is it simply the rate growth is good enough that you don't have to do any other changes on the cost side and a lot of other operators have talked about the mix of LPNs versus RNs, those kind of things, number of visits, is there anything left to do on the cost side?.

Yes. Frank, there's always opportunity, right; we're always seeking to provide extraordinary clinical outcomes as efficiently as possible.

We're really pleased with the way that we've been able to move particularly overall visits per episode; we're seeing that number continue to pull down in an appropriate way and at the same time, as we're seeing our outcomes continue to improve.

And so we feel like we'll continue to push to provide that care, pushing clinical outcomes up and the efficiency up as well. We do have room to move on that -- on the use of mid-levels of LPNs, and COTAs, and PTAs. And that's something that we're looking at, and measuring and tracking.

But ultimately, our approach is to focus on the unique needs of the patient and to make sure that wherever we can, those visits are performed by a mid-level, wherever we can, we're using Telehealth and we're using technology to assist according to the plan of care and according to physician direction, and in doing so to be just as efficient as possible in delivering the best quality care..

Got you.

And then maybe one on just, when you look at the acquisition opportunities that you're seeing out there today, is it -- are you really starting to see any impact at all of agencies that are starting to, kind of, freak out over PDGM or the start of the repayment of the advanced payments, or the grant monies, whatever burning off, or is it still just you're doing a lot of off-market transactions that are very specific or any what I would call PDGM induced selling?.

Yes. We're certainly seeing a lot of off-market opportunity, but as far as the, kind of, those pressures that we all anticipated coming from PDGM, that would, kind of, stoke the M&A pipeline. We're seeing that too. We're having those conversations as part of our pipeline, as various providers are impacted in different ways as they try to navigate PDGM.

It doesn't have the same impact.

And obviously, with the complication of COVID, it's hard to parse out directly the pandemic impacts from the PDGM and isolate those, but it's all part of that conversation and we see the -- that impact in a number of areas, we expect it to continue to create some opportunities for us to help and be that buyer partner for them, and to carry on the legacy and to bring all the tools that John has just mentioned, to bear into that agency.

So it's definitely a part of the pipeline, we expect it to be part of -- a bigger part of the conversation next year as well..

Got you. Just one final one and I'll hop back in the queue.

Just obviously, a lot of the talk and concern about this surge that seems to be underway today, so this is a parting question any -- how do you view your business today relative to, kind of, the initial surge, really, both for the Home Healthcare and Hospice side as well as the senior housing side, and in terms of how you feel like you're prepared for that going forward? Thanks..

Yes. Thanks, Frank. Obviously, it's a significant surge that's ongoing. On the Home Health and Hospice side, we anticipate there could be another slowdown of elective procedures and things like that. We're prepared to make the corresponding adjustments operationally that we need to make.

Like we saw in the first significant wave earlier in the spring, we -- our Hospice continued to grow through that period of time and so we expect that our operators will continue to do that.

The -- on the Senior Living side collectively the testing and the overall, kind of, clinical procedures were just in a better place, we were in a good place when it first hit. Increasingly, our leaders are more comfortable and confident in their ability to interface with families and explain how we're keeping their loved ones safe.

And that's why we feel good about the incremental occupancy increases there.

So we feel good about our position, our ability to track and support our staff members in the first phase, our emergency fund and our critical needs fund that we've used to supplement federal and state programs around keeping staff safe and continuing to pay them while they're out on quarantine or whatever the circumstances might be, those are fully active.

And so I would just say we feel a lot more confident in our ability to work through this next surge than we were even at the beginning. And as you can see, we fared quite well through the first unexpected surge. So that's our thinking there..

Thank you. [Operator Instructions]. The next question comes from David MacDonald with Truist Securities. Your line is now open..

Hey, guys. I just got one or two left.

One just wanted to come back to the start-ups and just make sure I heard the timeframe right, in terms of, to accretion, was that 18 to 24 months? And then the second part of that question was, when we think about prioritizing these, and you touched on this a little bit with the Washington location, but should we think about CON states, and markets where you can co-locate a start-up with pairing either Home Health and Hospice together? Are those, kind of, the priorities when we think about where to put these start-ups?.

Yes, that's a great question, David. So a couple of things. First, I'll let Jenn and then Brent confirm on the timing.

But usually, these start-ups -- our strategic focus there is these adjacent markets, where we already have existing teams with existing strength and existing reputation, and then the lever, if the best lever to pull is a start-up, then that's the path we'll go down based on, sort of, a rigorous application of our investment criteria.

The CON structure in Washington obviously creates unique barriers to entry there. And so we're very pleased to have been awarded the CON up there and so that is just literally bolting it on to an existing operation. So generally speaking, that 12 -- that 18 to 24 months is, kind of, how we think about the overall timing.

Once they reach accretion, we include them in our earnings after two profitable quarters. But the other one is in California, and it, kind of, fills in a gap between two operations, actually, three operations is, kind of, in the middle and so it clusters really well with our existing operations.

And those existing leaders, just as we've talked about our cluster model, they recruit and train new leaders, and then they create these opportunities for those leaders.

And so these -- it's -- the one in California has three operations that have surrounded it and they've carefully prepared a leader and they're -- kind of going into that space that this leader that they've been training and working with, is already familiar with, and so the likelihood of being successful quickly is really strong.

Our general thought is that our start-up expenses and, kind of, drag on our operations just won't be significantly changing. These are just, kind of, like Derek mentioned, we've done these in the past. We don't ever intend to do hundreds of these, and we just will just methodically deploy them.

So, Brent, do you want to comment a little bit of on how we get them to profitability?.

Yes, I mean, again, it goes back to our model, which is local leadership, right, and the local teams that see an opportunity and when that opportunity presents itself, whether that's via an acquisition or via a start-up, we take the best path forward based on the situation.

And in particular, with the start-ups, we talked about that 18 to 24 month time frame, but our expectation really is the total cost of the investment is repaid and recouped in that 18 to 24 months. So that doesn't mean that we're first making more profitable within 18 to 24 months.

That means the total cost of going into it and then what we're delivering overall to the organization has paid back, any upfront capital expense to get that off the ground. And so, again, it's always going to be driven by the local teams and we're just getting better and better as we go through these experiences to do it in a reasonable time frame..

And then I guess my last question would also be just on the joint ventures given some of the pressures that the hospitals have seen since the outbreak of COVID.

Can you just give us a sense of how much more interest you guys are hearing from those types of deals, conversations around joint venture type relationships? Just any additional comments you could provide that would be helpful. Thanks..

I'll turn -- I'll ask John to fill that one. Go ahead, John..

Appreciate the question. And I think one of the things that we're excited about this quarter is, is getting fully started on our joint venture with Scripps Health down in San Diego. It's been a project we've been working on for a long time very closely with our Scripps partners and we're excited about it.

We've talked a little bit about this idea comes from the book Great by Choice about shooting bullets before cannon balls.

And our goal in this transaction has been to find the right partner in the right market and to do an extraordinary job of transitioning this agency and making sure that it is -- it produces extraordinary clinical outcomes, is profitable and self-sufficient, and really impacts the community.

And we think that by doing that, we're going to set an example in a model that other health systems are going to really want to follow. So we're -- there's definitely demand out there. There's definitely conversations that we're having.

But our real focus right now is on making sure that this transition with Scripps Health goes extraordinarily well and that that positions us to be an effective partner to others who might be in that scenario..

Yes, and then just as far as the general communication with other systems, there are ongoing conversations out there.

I think, in general, systems are looking for solutions and we're working hard to position ourselves as a very unique partner in that regard that deploys our local leadership model that really integrates with that hospital system, so that they get the opportunity to continue to orchestrate that local operation and don't feel as though they have to fit into some pre-set structure that might be dictated by other structures out in other markets.

So a lot of these hospital systems are very localized. And we're looking forward to continuing to have those conversations. So thanks for the question, David..

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Danny Walker for closing remarks..

Yes, thank you. And we want to thank all of you who have joined us.

We again pause to give thanks to the veterans that have served in this -- in the country and that are part of our team and also to our staff members who have continued to plod forward and really just do extraordinary heroic things in the middle of a, kind of a historic operating environment.

We're really grateful for the strong results that have been delivered and we look forward to continuing that in the fourth quarter and on into 2021. Thank you for joining us..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..