Pennant Group Inc
NASDAQ:PNTG
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Good day, and thank you for standing by. Welcome to the Pennant Group Third Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Kirk Cheney. Please go ahead.
Thank you, Dorian. Welcome, everyone, and thank you for joining us today. Here with me today, I have Brent Guerisoli, our CEO; John Gochnour, our President and COO; and Lynette Walbom, our CFO.
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 p.m. Mountain Time on November 6, 2025. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 7, 2024, and these statements will not be updated after today's call. Also, any forward-looking statements made today are based on management's current expectations and assumptions 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, we do not undertake to publicly update or revise any forward-looking statements where changes arise from 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 independent subsidiaries, collectively referred to as the service center, provide administrative services to the other operating subsidiaries through contractual relationships with such subsidiaries. Words Pennant, company, we, our and us refer to the Pennant Group, Inc. and its consolidated subsidiaries. Our operating subsidiaries and the service center are operated by separate independent companies that have their own management, employees and assets.
References herein to the consolidated company and its assets and activities as well as use of the terms we, us, our, and similar terms do not imply 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-K.
And with that, I'll turn the call over to Brent Guerisoli, our CEO. Brent?
Thanks, Kirk, and welcome, everyone, to our third quarter 2024 earnings call. We are pleased to report another record-breaking quarter with strong results across our business. We are so grateful for the more than 7,000 amazing team members throughout the organization. Through the dedicated efforts, our leaders and teams drove new highs in revenue, census and earnings and our businesses are healthy and growing. Collectively, our Q3 consolidated results reflect revenue of $180.7 million, an increase of $40.5 million or 28.9% over the prior year quarter. Adjusted EBITDA also grew significantly to $15.1 million, an increase of $4.3 million or 39.2% over the prior year quarter.
Adjusted earnings per share for the quarter was $0.26, an increase of $0.06 or 30% over the prior year quarter. These results reflect our ongoing commitment to the 5 key focus areas we have highlighted throughout the year: leadership development, clinical excellence, employee experience, margin improvement and growth. We are a leadership company and developing local leaders remains at the heart of our operating model.
As the talent and experience in our operations and clusters deepens with strong portfolio companies and our efforts throughout our footprint, we are able to more quickly improve new acquisitions and grow seasoned operations. Thus, the significant investment we have made in our leadership group and development programs is the catalyst for enduring momentum. This investment continues as year-to-date, we have added over 60 CEOs-in-training and elevated nearly 40 internal clinical leaders in our newly expanded clinical leadership development program.
Shortly after quarter end, we added more fuel to our growth engine in the form of a follow-on equity offering. The purpose of this offering, which follows the expansion of our revolving credit facility in August, is to prudently manage our balance sheet and give us additional capital to grow. It was our pleasure during the marketing process to introduce new investors to The Pennant's story and help them catch the vision for the significant opportunity that exists in our platform and potential for future growth.
Now with 0 debt and abundant dry powder, we are well positioned to execute on the second portion of the signature purchase and the robust acquisition opportunities in our pipeline. Based on the sustained momentum in our business, we are again raising annual guidance and anticipate well-adjusted revenue of $665.3 million to $706.5 million, a 28.5% increase over 2023 at the midpoint, adjusted EBITDA of $51.9 million to $55.2 million, a 31.5% increase over 2023 at the midpoint and adjusted earnings per share of $0.90 to $0.96, a 27.4% increase over 2023 at the midpoint.
With that, I'll turn the call over to John to provide more detail on our third quarter operational results.
Thank you, Brent, and good morning, everyone. Our strong Q3 performance, both in same-store operations and new transitions demonstrates the ability of our local leaders and teams who thrive through periods of intense growth. Of note, we do not utilize a centralized acquisition team and instead rely on our local leaders with the support of service center partners to transition new acquisitions. As our results show, they do it exceptionally well, while continuing to accelerate performance in their local operations.
Our home health and hospice segment rolls on with increasing strength, generating quarterly revenues of $135.7 million, an increase of $34.2 million or 33.7% over the prior year quarter. This included same-store revenue growth of $12 million or 12.2%. Segment adjusted EBITDA of $21.9 million increased by $6 million or 37.5% over the prior year quarter. Segment adjusted EBITDA margin increased to 16.1%, a 20 basis point improvement over the prior quarter.
Our home health continued to accelerate. Home health revenue increased 33.7% as total home health admissions improved 38.5%. Medicare home health admissions increased 30.8% and revenue per episode increased 4.9% each over the prior year quarter. We are also pleased to note that same-store home health admissions grew by 15.5% and same-store Medicare home health admissions increased by 8.6%, each over the prior year quarter. The driving force behind this growth remains exemplary clinical outcomes.
In Q3, our percentage of home health agencies with a star rating four and above increased to 73.5% and our acute care hospitalization rate of 13.3% remained well below the national average of 14.1%. In addition, we continue to trend ahead of the curve in home health value-based purchasing, where at present, over 80% of the operations we owned during the 2024 period project to receive positive adjustments to our 2025 revenues. These strong clinical outcomes make us a provider of choice in our communities, attract additional talented clinicians to our teams and ultimately lead to strong financial outcomes.
We also continued to drive improvement in our hospice programs as our existing operations set themselves apart in the community and we successfully transitioned recent acquisitions. Hospice revenue increased 24.6%, as admissions increased 22.8%, same-store admissions increased 12.2%. Average daily census increased 27.7% and same-store average daily census increased 12.8%.
During the period, length of stay remained steady. Each of these items is over the prior year quarter. We continue to see significant opportunities for hospice growth as we grow and develop talented business development teams in our local operations, improve length of stay through community education and build out continuums of care in new communities.
On the regulatory front, based on the 2025 final hospice rule, which became effective on October 1, we modeled a 2.9% rate increase to our Pennant operations. This modest increase will provide an appropriate update to reimbursement rates to offset the persistent impact of inflation. And as many of these costs have already been realized, should provide an additional tailwind through the remainder of the year. Last week, CMS issued the 2025 home health final rule, a negative 1.8% permanent behavioral adjustment and a 0.4% decrease to reflect the updated fixed dollar loss impact on outlier payments. These negatives are offset by a market basket update of 2.7%, the yield of proposed aggregate net increase of 0.5% in Medicare fee for services payments in 2025.
As applied to Pennant, based on our geographic distribution and the finalized wage index update, we anticipate a net neutral impact on reimbursement per episode under the 2025 final rule. The final rule's reimbursement reduction is half as large as the cut that CMS originally proposed. While we appreciate that CMS responded to feedback from us and other stakeholders regarding the unsupportable and ill-advised cuts originally proposed, we are hopeful that CMS will soon revisit its policy of scarcity relating to home health and recognize that properly reimbursing high-quality home health providers is necessary for patients and good for the public fisc.
As we've stated previously, Pennant began in and has thrived through periods of difficulty much like today. We know our local leaders will respond nimbly and appropriately to these changes as they have in the past. The cyclical nature of home health care reimbursement coupled with our strong clinical outcomes gives us confidence that the value proposition will be realized moving forward.
Our senior living business continues to perform well. Senior Living segment revenue of $45 million is up 16.3% over the prior year quarter. Adjusted EBITDA of $4.4 million has increased 43.8% over the prior year. Same-store occupancy continues to grow, reaching 80.2% in the quarter, a 100 basis point increase sequentially. This was paired with 7.8% year-over-year gains in revenue per occupied unit, As we have invested in leaders, increased occupancy, improved revenue quality, and enhanced operational performance, we have seen a consistent increase in margin, from 4.6% in Q3 2022 to 8% in Q3 '23 to 9.8% in Q3 2024, a 20 basis point increase over the last two years.
There remains some upside in this segment, and we are excited to continue to invest in its future. As we announced on November 1, after quarter end, we closed on the acquisition of 3 communities in Northern Wisconsin, through an attractive long-term triple-net lease arrangement. The transaction added 125 units to our portfolio in the state where we have CEOs-in-training prepared to operate and strong clusters and leaders ready to assist with the transition.
We continue to evaluate a robust pipeline of opportunities to purchase well-priced senior living real estate or step into favorable triple-net leases as landlords eagerly seek to attract and partner with higher bidders. We will remain disciplined as we evaluate these opportunities and continue to improve the operational fundamentals of our senior living business.
On the home health and hospice side, in August, we acquired the Washington and Idaho assets of Signature Healthcare At Home. The integration and transition of these operations is proceeding well, and we are beginning to unlock additional value in these businesses as we implement our unique operating model, share best practices and provide world-class support from our service center.
As you may recall, Signature's Oregon assets represent the second and larger portion of the transaction, and we continue to prepare to close the acquisition on January 1, 2025. We are excited to welcome Signature's Oregon operations to the Pennant team and look forward to the bright future that we will have as one of the largest independent providers in the Pacific Northwest, even as we remain laser-focused on integrating the significant number of operations we have acquired over the past 18 months. Along with the second tranche of Signature, we continue to see a robust stream of meaningful acquisition opportunities in both segments. As we stated before, our growth is not the result of arbitrary quotas for capital deployment. We ensure that we have the right operational and clinical leadership to make an impact on a new community or market and prioritize investments that make sense for the long-term health of our organization.
With that, I'll hand it to Lynette for a review of the financials. Lynette?
Thank you, John, and good morning, everyone. Detailed financial results for the 3 months ended September 30, 2024, are contained in our 10-Q and press release filed yesterday. For the quarter ended September 30, 2024, we reported total GAAP revenue of $180.7 million, an increase of $40.5 million or 28.9% over the prior year quarter, GAAP diluted earnings per share of $0.20 and adjusted diluted earnings per share of $0.26.
Key metrics for the 3 months ended September 30, 2024, include $113 million drawn on our revolving line of credit and $4.5 million cash on hand at quarter end, 2.05x net debt to adjusted EBITDA and cash flows provided from operations of $18.7 million year-to-date, including $7.7 million in Q3. As Brent described above, after quarter end, we issued approximately 4 million shares of common stock, which generated [indiscernible] million in net proceeds for the company. We have used the proceeds to pay down our revolver, which is fully available to be deployed.
We now have abundant resources for future growth, including the $48 million acquisition of Signature's Oregon operations set to close in January 2025. Our year-to-date results and the impact of the equity offering on our outstanding debt and related interest expense married an increase in our full year guidance. Accordingly, we are revising and raising our full year guidance as follows: Full year 2024 total revenue between $665.3 million and $706.5 million, adjusted earnings per diluted share between $0.90 and $0.96 and adjusted EBITDA between $51.9 million and $55.2 million.
This updated guidance incorporates current operations and organic growth, diluted weighted average shares outstanding of approximately 32.5 million and a 26% effective tax rate. It anticipates continued strong operating performance through the end of the year, hospice reimbursement rate adjustments, decreased interest expense and contributions from our joint ventures and management agreements. It excludes unannounced acquisitions, the announced purchase of Signature's assets, start-ups, share-based compensation, acquisition-related costs or onetime implementation and unusual items.
I would now like to spotlight a few leaders in our organization who have achieved exceptional results. Their stories demonstrate the remarkable progress that can occur when local leaders build strong culture and develop high-performing teams of C-level leaders in our operations. Bluebird Home Health and Hospice, Boise, Idaho joined The Pennant Group through acquisition in 2023. Led by future CEO, Justin Stenquist; future CCO, Paige Ziemer, future CMO, Ali Lizette, and Director of Operations, Sarah Hamilton, Bluebird has focused intensely on culture and being a solution to health care community partners.
As a result, Bluebird has grown hospice census 80% and home health census 20% since acquisition, increasing top line revenue and bottom line earnings by 36% and 192%, respectively, each over the prior year quarter. Bluebird's success, coupled with the strong continuing performance of Pennant's long-standing Western Idaho Agency, Horizon Home Health and Hospice reaffirms our ability to support the agencies in the same community. At Safe Harbor, Home Care in San Diego, California; CEO, Jesse Madera; and Operational Leader, Luke Madera and [ Leslie Minichiello ], shine a light on the compelling opportunity that exists in private duty home care and veteran support services.
By focusing on the quality of care and the social determinants of health, they have filled the vital need in the local care continuum and shown that our operating model creates significant value in non-skilled care, just as it can in skilled care. Safe Harbor's revenue and EBITDA have grown 83% and 285%, respectively, each over the prior year quarter.
We look forward to the continued success that Jesse and his team will create in Southern California. At Harbor View Assisted Living and Meadowview Assisted Living, CEO Tammy Wagner, CWO, [ Essel Gazdzinski ]; and Wellness Director, [ Stephanie Copas ], continued to contribute to our healthy performance in Northern Wisconsin. This team has created an exceptional culture, which is evident in employee engagement results and turnover rates that are roughly 50% better than industry average. The healthy culture has driven occupancy up 900 basis points over the third quarter over -- to over 96%. Strong financial results have followed including revenue growth of 11% and EBITDA growth of 135% each over the prior year quarter.
With that, I'll turn the call back over to Brent for concluding comments.
Thanks, Lynette. As we conclude, I'd like to once again thank all the operators and clinicians who, like those highlighted above, dedicate themselves sincerely to providing life change to our patients and residents. You are truly making a difference in the lives and communities we serve, and it is an honor to work alongside you.
With that, we'll open it up for questions. Dorian, can you please instruct the audience on the Q&A procedure?
Absolutely. [Operator Instructions] Our first question comes from the line of Ben Hendrix of RBC Capital Markets.
Congratulations on the quarter. Just a quick question on your views of the upcoming presidential administration. Just wanted to get your thoughts on the backdrop -- the regulatory backdrop for both segments under President Trump's first administration or first term and how it contrasts under the current administration and what you're expecting going forward overall in terms of -- for an operating backdrop?
Yes. Thanks for the question. And the first thing I'd say is that, obviously, we're agnostic about politics as far as the way that we operate the business. Our focus is on controlling the things that we can control. Happy to share a few the things that we anticipate based on the experience that we've had in operating over the last 12 years through multiple democratic as well as the first Trump administration. The first thing that we noticed is there has been an increase -- a pretty significant increase on the regulatory enforcement side over the last [indiscernible] that was relatively different than what we saw during the Trump administration previously.
And so we're optimistic that as CMS continues to consider what's the best way to approach reducing fraud in the industry and all of the things that they're responsible for that they'll recognize that burdening good quality providers with significant post-payment audits and things like that isn't necessary.
The second thing on the reimbursement front, [indiscernible] 3 years now of flat to declining reimbursement on home health. That contrasts with [indiscernible] had under the Trump administration, where we saw more solid reimbursement patterns where we saw increases that actually corresponded with the inflation that we felt. So I think those are the 2 biggest things that we'd highlight. Again, our focus is truly on delivering the best possible care to our patients and controlling the things that we can control. So how we'll respond to the election? We want to make sure that all of our employees are in a good spot. We want to make sure that we are able to continue to grow at the pace that we've been growing, that we continue to have acquisition opportunities to take the quality of care that we have to new communities and that we continue to control the things we can control.
Our next question comes from the line of Scott Fidel.
Okay. Great. Yes. First question, just wanted to just sort of follow up on some of the M&A commentary. And clearly, M&A is sort of in full flight right now across the businesses. But certainly, it feels like there's a bit of an inflection right now on the senior living side, where you've done several transactions recently. I definitely noted John's comments around seeing a healthy pipeline on that side. So it feels like perhaps that side of the business, you're getting more comfortable again with M&A on the senior living side.
So I was hoping maybe you could sort of frame sort of how you're thinking about capital allocation towards M&A across home health and hospice and then senior living. I know that you just sort of look opportunistically at where the opportunities are, but also it would be helpful if you wanted to maybe give us some framework around how you're thinking about allocating growth capital towards each of the 2 major segments.
Yes. Great questions there, Scott. And I think you framed it well. And really, when we look at opportunities, there's 3 determinants that we're considering. The first is, we're a first-who-than-what organization. Do we have leaders ready to go to step into opportunities? And then the second is we grow where we have [indiscernible]. So if we have healthy clusters, healthy markets, we're going to invest and those leaders there are looking for opportunities to grow. So they find great leaders through our CIT pipeline. And then we look to grow in those areas. And then the third is really that we have good opportunities, right? [indiscernible] the right way, and we see there's an opportunity to grow and develop and really create value.
What you're seeing on the senior living front, and you pointed it out, this is really a reflection of the strength that we're experiencing in our senior living business. And so Wisconsin has been one of those markets in particular that we just announced this acquisition. We've had -- we've done other acquisitions more recently in Wisconsin. We're growing in a healthy way. We've got strong teams in place. And so we've got significant opportunity to grow there.
We are going to grow in both segments. And we're an opportunistic growth company, and so we're going to grow where we have strength and where there's great opportunities. The great thing is our pipeline is robust. We talked about Signature. There's other opportunities in the pipeline as well that we anticipate bringing on board in 2025. And so from that standpoint, we're going to allocate capital where we think we can create the most value.
The other thing just to bear in mind on the senior living side, oftentimes, it's not really a capital allocation question because there's no upfront cost unless we choose to invest in real estate. And we have done a couple of those. We did the 2 buildings earlier this year in Utah, and those have been really, really strong for us. And we'll look for opportunities on the real estate side where it makes sense. But we're kind of slowly moving into that because for the most part, we want to focus our allocating dollars to investing into opportunities where we can create value.
So that's kind of the way that we're going to approach it. We're excited about both of our business lines and anticipate continuing to see strong growth across the board.
Okay. Great. Got it. And then next question definitely was interested in the sequential jump in the home care revenues. I'm assuming that, that was from probably the first tranche of Signature. So maybe there was a bit of a different business mix there. Maybe can you sort of confirm that? And then sort of talk about the profile of that business? And then also whether as you're looking at additional M&A opportunities in the HHH side whether you are more interested in growing that home care business line as well.
Yes, Scott. Really appreciate the question. And I'll highlight a couple of things. First of all, we're really excited about how home care is trending. Some of this is based on pulling some -- the way that we're allocating the revenue between Medicaid and PCS, so that we create more clarity about how much revenue is in that home care and other bucket to really highlight the progress that we're making on the non-skilled side. The PCS business has done really well.
The other thing -- there's 2 other things that are captured there. One is our provider services business, which is our geriatric primary care and palliative care business where we're building out continuum in markets across the country, and we're really excited with the progress that, that's made and kind of the exponential growth that we've seen there. And then we're also capturing the Hartford management fee in that line.
So that's sort of the things that have been pulled. There's a little bit of sort of reallocation from some of the Medicaid rates that were previously captured up in home health and hospice and are now appropriately captured with home care so that we make sure that you can see how that business is trending. And then the other 2 components that I just mentioned. But I'll just highlight the strength of our home care business. We highlighted what Jesse and his team have done in San Diego. That's true kind of across the board. We're really excited about the group of leaders we have there. Their passion for using home care as a solution for some of the social determinants of health issues that abound in our society. And so we do see that as an opportunity and a growth area where our model can uniquely impact individuals who are struggling and need that nonskilled support.
So I think you'll see us continue to evaluate opportunities and look to grow in that side of the business as well.
Okay. That's helpful color. It's good to know that the Hartford is in there, too, because just in the third quarter alone, it sort of moved towards like a $50 million annualized revenue business for well below $20 million in the first half. Okay. And then just 1 last question for you. Obviously, you've been operating in this very tight rate environment in home health for several years. And hopefully, we can be optimistic that maybe there's sort of a different rate regime on the way with the new administration.
But in the meantime, just at that sort of net neutral rate that you talked about, do you feel like you can maintain your home health margins with the other levers that you have even grow them? Or do you think there will be a little bit of a diminution for the Medicare home health fee-for-service business in '25 on the margin side?
Yes, Scott, we remain confident in the unique ability of our operating model that is focused on local leaders standing and transparently seeing the impact of everything from a revenue change to a change in a way that they're operating their business and the cost impact of that decision just the capability that, that model has to respond to these difficult changes in reimbursement. Any time you have 5.4% labor -- an increase in our labor cost and you get a flat reimbursement update, it's difficult to maintain margin. And I think our home health operators have done an extraordinary job of seeking to operate more efficiently, continuing to encourage our clinical teams to operate at the top of their licensure to be as productive as possible so that we can be the best community.
We've done a better job this year of retaining that talent and improving our turnover, which is what's driven this growth. And so while it's a huge headwind to not receive an update in the inflation environment that we are operating in. I think what you've seen over the last 3 years continues to be our focus. Control the things that we can control. Can we build better relationships with institutional referral sources? Can we do a better job making sure that we're driving the best clinical outcomes so that our payers will recognize that and give us better rates on the managed Medicare side and the managed care side? There's different tools that we use to offset that Medicare rate what we view as really a cut. I mean it's essentially flat to just very, very modestly down. But I do think you'll continue to see progress on the margin side because of what we're built for.
And I think we've shown that over the last 12 years that even in periods of uncertainty and difficulty on the reimbursement side, our model will allow us to emerge successfully.
[Operator Instructions] And I'm showing no further questions. So this will conclude the question-and-answer session. I would now like to turn it back to Brent Guerisoli, CEO, for closing remarks.
Okay. Well, thank you, Dorian, and thank you, everyone, for joining us today.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.