Q1 2022 Pennant Group Inc Earnings Call

May 10, 2022

Okay.

Yes.

Good day, and thank you for standing by.

Welcome to the pennant group first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.

Ask a question during this session you will need to press Star then one on your telephone if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Mr. Derek Bunker. Please go ahead.

Thanks, Tanya welcome everyone and thank you for joining us today here with me today I have Danny Walker, our CEO , Brent here solely our president Jen Freeman, our CFO and John <unk>, 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 Dot group Dot com.

A replay of this call will also be available on our website until five P. M Mountain time on Friday June <unk> 2022.

We want to remind anyone that may be listening to a replay of this call that all statements made are as of today May 10, 2022, and these statements have not been nor 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 independent subsidiaries collectively referred to the service center provide accounting payroll human resources information technology legal risk management and other services to the other operating subsidiaries.

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 independent companies that have their own management employees and assets.

References herein to the consolidated company.

Its assets and activities as well as the use of the terms, we us our and similar terms used today are.

We're not meant to imply nor should it be construed as meaning that the pennant group, Inc has direct operating assets employees or revenue or.

Is that any of the subsidiaries are operated by the pennant group.

Also we supplement our GAAP reporting with non-GAAP metrics.

Viewed together with our GAAP results. We believe that these measures can provide a more complete understanding of our business.

Should not be relied upon to the exclusion of GAAP reports.

To non-GAAP reconciliation is available in yesterday's press release and available in our 10-Q.

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

You Derek and welcome everyone to our first quarter 2022 earnings call and thank you for joining us today to discuss our quarterly results. We are pleased with the step forward. The results this quarter represent although the quarter was still negatively impacted by the omicron variance in our local leaders across the organization.

Faced the uncertainties, there we were able to execute through the difficulties and make a meaningful step forward while.

While lingering headwinds and inflationary pressures remained to be effectively navigated. The momentum is building on a solid foundation that comes from adherence to our unique operating model and core values.

This disciplined adherence to culture is what enables us to weather storms and deliver both short term and long term results with that in mind I want to take a moment and complement our leaders, including those that are in the room with me today.

The tremendous work.

Move the organization forward clinically and financially through a rigorous commitment to our culture.

This commitment to culture and Recommitment when necessary is the foundation of our strategy within the marketplace and the greatest reason for hope in the future regardless of the operating conditions, we face.

I'm proud of the progress has been made to this point in our history. We are just scratching the surface of our enormous potential and there is a long and exciting road ahead, and I'm more confident than ever in the slate of leaders that will write that story.

Tenant in the years to come.

These leaders have been shaped by the difficulties that we've experienced in the recent past as a new public company facing a global pandemic and they have stepped forward remarkably as we turn to the future with resolve and collective wisdom Barnum experience.

Bright future lies ahead and and the results of this quarter attributed to those leaders and our hope in the future is reflective of our confidence in their ability to help lead the organization forward.

Adhering to our unique operating model animated by the strength of our core values.

And I am deeply deeply grateful with that I'll ask Brent to provide details of our quarterly results and and you'll take it from there. Thanks Danny.

Our focus over the past several quarters has been to one.

Ensure that each local team is executing at a high level with further towards the growth and rigor for cost management.

To focus on core opportunities across both segments and three elevate the core principles of our operating model that have driven historical success.

In the first quarter and since we successfully executed on these key initiatives and we will.

We continue to do so throughout 2022 to propel us with the healthy growth and performance in both segments, we have achieved throughout our history.

We are pleased that our focus on these key endeavors is generating positive results.

First to our home health and Hospice segment performance, we posted solid results. Despite some residual COVID-19 related pressures in the first part of the quarter. Our home health business continued to experience solid growth on all fronts with total admissions and Medicare admissions, increasing 11, 9%.

And 3%, respectively in home health revenue, increasing 12, 7% each over the prior year quarter. We also navigated ongoing labor challenges exacerbated by quarantine clinician during the omicron search and the early part of the quarter.

Despite these difficulties our local leaders exercise rigorous cost discipline, leveraging best practices inherent in our operating model better resource support on attracting and retaining new talent at a robust tools that helps us provide tailored care to our patients. These efforts led to adjusted EBITDA margin improved.

<unk> of 110 basis points compared to the fourth quarter of 2021 or.

Our clinical results kept par with our growth with our average CMS star rating at four four stars compared to a national average of three five stars are average re hospitalization rate at 14, 5% compared to the national average of 15, 4%.

<unk> marks and other clinical measures.

In our hospice agencies, our local leaders confronted challenges largely related to lingering COVID-19 headwinds impacting referral patterns discharge rates and length of stay our hospice admissions were up 11, 8% over the prior year quarter with average daily census, modestly down three 3%.

We saw this trend began in the fourth quarter last year and continue into the first quarter.

The higher percentage of our patients began hospice care later in the end of life period, we continue to experience pressure on our average discharge length of stay throughout much of the first quarter.

However, as COVID-19 cases began to fall our ADC improved throughout the quarter.

So far in the second quarter, we are seeing incrementally higher hospice average daily census, with ADC in April up one 6% over March on the regulatory front CMS proposed a two 7% hospice payment rate increase of which we have projected at 257% rate increase before sequestration.

For fiscal year 2023, among other updates.

<unk> recognition of the importance of this care setting in our health care landscape.

Shifting to our senior living segment, we continue our recovery by taking strong.

Taking a strong step forward in most key metrics, we closed on our transfer of five senior living communities to our partners at enzyme in a transaction that we believe benefits all parties involved including the residents and their families.

This gives us a more streamlined portfolio as we head into the remainder of 2022.

Allowing us to continue to generate momentum more quickly in our remaining communities.

Also continue to attract and develop senior living leaders, who are contributing to and.

And will be instrumental in our turnaround and the segments. We know that exceptional operational results starts with talented local leaders and resource support.

And as we've been building our leadership strength in this segment, we're beginning to see some of the fruits of that effort.

Senior living segment revenue was $33 4 million increased.

$2 4 million over the prior year quarter.

Adjusted EBITDA of $1 6 million represents growth of 800000 over the fourth quarter of 2021 and $1 $7 million over the prior year quarter.

These results reflect improvement in several measures across the board when compared to the fourth quarter of 2021, including 20 basis points improvement in occupancy 100 basis points improvement or increase in revenue per occupied room, and a decrease of 100 basis 180 basis points and our cost of services.

As a percentage of revenue when excluding the loss on impairment while.

While labor challenges linger.

And we saw average wages continue to tick up in the first quarter. It was at a slower pace than we saw for much of 2021, and so far is in line with our expectations.

Aid us as we attract new residents we've invested in additional sales tools and resources that allow us to expand our marketing outreach better track and follow up with leads and target high ROI leads across multiple channels. These efforts are contributing to solid occupancy growth across our portfolio, which.

Continuing into the second quarter as April same store average occupancy improved 80 basis points over March.

There is tremendous upside remaining.

And our senior living segment and we're excited about the momentum building in our clusters in markets as our local leaders execute.

Overall, we are pleased with the progress made in the first quarter in a challenging operating environment marked by persistent COVID-19 headwinds and ongoing labor pressures.

Our operators clinicians resources and service Center partners all share a single focus on operational excellence.

Great for their persistence dedication and hard work.

And I am confident as we continue to perform we can achieve exceptional financial and clinical results.

I've asked John to provide an update on our recent acquisitions.

Thanks, Brent during our past few earnings calls we shared that one of our key focus areas is improving the cultural foundation and operational results in our many recently acquired operations over the last two years through pit pandemic surges, the heavy volume of our acquisitions and some lingering spinoff related.

System implementations, causing delays in the ramp in performance at some of our recently acquired agencies I am pleased to report that we are now seeing the material improvement we expected.

To share a few examples of how our local leaders have moved the dial in significant ways in their recently acquired agencies.

Okay.

It's been a little over 18 months since we closed on our home health and hospice joint venture with Scripps Health, a large not for profit health system in San Diego, California in those 18 months, our home health leadership team of <unk>, London, Tim Johnson, Antena Mcmahon has relentlessly focused on improving clinical cultural and financial results of the local.

Team in San Diego working closely with their service Center resource partners. The team implemented clinical best practices, improving the agency from a CMS star rating of three at the time of transition to four five in Q1 2022 at.

At the same time and through the challenges of transitioning to a new EMR and through the pandemic employee satisfaction improved leading to internal referrals and growth in the clinical team.

This clinical and cultural progress has demonstrated our capability to community partners, resulting in a 15% increase in census in the first quarter over prior year quarter and dramatically improved top and bottom line financial results.

Importantly, we have also worked closely with our scripts partners to develop clinical programs that allow us to better serve more acute patient needs in the home setting. These programs are helping to reduce hospitalizations and improve outcomes for chronic care patients at a reduced cost.

While we have made tremendous progress we feel like we are only scratching the surface of what we can accomplish in San Diego together with our partners. We are extremely grateful for the trust. They have placed in us as other acute care organizations evaluate their home health and hospice strategy. We believe we are well positioned to partner with them and providing quality care and <unk>.

Proved clinical and financial outcomes.

More recently, we added first call hospice based in Sacramento to our growing California market led by administrator, Adam bone and director of patient care services.

<unk> and first calls first 12 months independent family. This team has exemplified the impact that can have in a new community, Adam and Jesse and their team worked to create a foundation of clinical excellence built on the core values and culture, we share across tenant the results have been remarkable first call has increased its age.

<unk> from the mid <unk> at the time of acquisition to 82 as of the date of this call and grew its EBITDA from 177 and it's <unk>.

First quarter post closing to 378000 in Q1 2022, an increase of 113% and.

In addition to this Adam Jesse and the team have provided southwest support for their partners in the California market and elsewhere across our home health and hospice portfolio.

Seaport script home health in first call Hospice are just a couple of examples of agencies. We've acquired over the past two years that are generating significant contributions to our financial results acquisitions. We acquired in 2020 collectively grew adjusted EBITDA to $1 9 million in the first quarter 2022, a 51, 7%.

Over the prior year quarter.

Our disciplined growth strategy works and we have the leadership talent best practices key relationships and balance sheet for that to continue this pattern with that I'll turn it over to Derek to provide an update on our recent investment activity Eric.

Thanks, John .

As Brent mentioned during the quarter, we closed our transaction with the partners that enzyme to transfer to them five senior living communities, all of which share a campus setting with ensign affiliated skilled nursing operations.

Nick Covid impacted environment, we're sharing kitchen laundry and staff became increasingly costly and complex. We believe that combining the operations of these particular campus settings will allow for care staffing and other strategic refinements that would better address the needs of residents and families.

Since the end of the first quarter, we acquired a home health agency in Montana State in which we currently provide hospice services.

Spanning the continuum of care, we can provide we can offer patients and referral sources.

In addition, we acquired the real estate underlying our 82 unit assisted living and memory care community in Twin Falls, Idaho, which we will continue to operate.

Tapping our revolver to fund this small transaction, we improved our financing costs and we will capture the future appreciation as we continue our turnaround at this community and across the segment.

As we keep the momentum building in our senior living segment and evaluate more opportunities to acquire senior living operations being able to use our balance sheet and competitive cost of capital is just one arrow in our growth quiver. We will continue to work closely with key partners like enzyme to the nurse do their new standard bare healthcare REIT as well as our landlords and banking partners.

To help finance the real estate underlying senior living operations that we strategically pursue and acquire.

Overall, our acquisition pipeline is solid with lots of opportunity in both segments. While we continue to be very disciplined as we look to deploy capital we see several dynamics that fever strategic buyers like ourselves that are focused on continuing the legacy of sellers, providing an exceptional employee.

<unk> and delivering quality clinical care.

We regularly engage with owners of high quality businesses, both on and off market.

And we look forward to partnering with them in bringing their business into the pennant family in the future.

Our organic and strategic investment opportunities are tremendous and we're excited for what we can accomplish on this front in the rest of 'twenty to 'twenty to 'twenty two and beyond.

With that I'll hand, it over to Jen for a review of the financials Jen.

Thank you Derek and good morning, everyone.

Detailed financial results for the three months ended March 31, 2022 are contained in our 10-Q and press release filed yesterday.

For the three months ended March 31 2022.

Total GAAP revenue of $113 9 million, an increase of $8 2 million or seven 8% over the prior year quarter.

Diluted earnings per share of three cents and non-GAAP adjusted earnings per diluted share of 11%.

An increase of <unk> 50.

<unk> 57, 1% over the fourth quarter 2021 equal to the prior year quarter.

Note that our non-GAAP adjusted earnings per share results for the three months ended March 31 2022.

<unk> the benefit of the Medicare sequestration holiday as well as the effects of all COVID-19 related expenses and lost revenue.

While difficult to perfectly captured six centers and lost revenue considering the trajectory we were on entering the fourth quarter as 2021.

Estimate that the first quarter results were negatively impacted by COVID-19.

The amount of $1 million or approximately <unk> <unk> earnings per share.

<unk> revenue of at least $3 million and approximately $500000.

Specifically identify expenses across both segments.

And increased wages, including over time compared to the fourth quarter 2021 period.

Additionally, the first quarter included the benefit of about a half a million dollar adjustment in the company's insurance reserves for workers compensation, and general and professional liability to align with incurred wages and claims experience.

Key metrics for the three months ended March 31 2022 included.

The $8 5 million drawn on our revolving line of credit and $3 6 million cash on hand at quarter end.

2.03 times net debt to adjusted EBITDA in 208 times Medicare advanced payment has been paid back at the quarter end.

Automatic recoupment of the advanced payments began in April 2021.

Which we have repaid approximately $27 million through May eight 2022, and we expect.

Repay the remaining.

<unk> 3 million within the payback period.

Cash flow provided from operations of 707.

700000, excluding impact of the automatic recoupment of advance payments.

As mentioned in our press release yesterday, we are affirming our fiscal year 2022 guidance of annual revenue between $450 million and $460 million and annual adjusted earnings per diluted share of between 60 and 72 cents.

Our first quarter results are roughly in line with our expectations for a modestly slower start to the year as we anticipated the pandemic to linger into the first quarter.

Our census, and staffing and other operating challenges will likely persist for the foreseeable future and continue to cause some chop in our near term results. We are confident our leaders across the company are strong and capable of confronting these headwinds and with that I'll hand, it to John to highlight a couple of our local leaders.

Jen, it's my pleasure to spotlight a few leaders in our organization, who have achieved remarkable results through operational excellence.

<unk> River home health in Kennewick, Washington, Executive Director, Eric Weiss and clinical director Tracy Repko have led a clinical and operational transformation that has positioned the agency as a critical piece of that price City health care continuum. The Columbia River story began with the acquisition of the agency out of bankruptcy proceedings in 2018.

At the time, we stepped in the agency was at risk of no longer being able to offer services over the last few years. The local team has executed on our vision to become the strongest clinical team and the community. The agencies published CMS Star rating of four five stars and acute hospitalization rate of 10, 3% set the agency apart from its peers.

As we see consistently across our platform exceptional clinical results lead to exceptional financial performance in Q1 of 2022, Columbia River's revenue grew 21%, while EBIT grew 81, 5% both over the prior year period.

Financial progress demonstrates the power of our local leadership team that sets a vision executes on that vision to produce strong clinical and operational results and develop a culture that sets it apart and the community that it serves.

Similarly, our Kenosha senior living in Kenosha, Wisconsin. The first team led by Executive Director Steven St. Louis Director of business development, Kristine Gomez director of operations, Melissa corporate and director of nursing tablets of Martin set out to transform their community through the consistent application of best practices together they focused on.

Building, a solid foundation of trust within their team instilled a culture centered on our core values of accountability and ownership and made strategic investments and the right people and processes that drove a dramatic improvement in occupancy as well as a stronger payer mix. The combined impact of these and many other actions helped us team drive occupancy.

78, 1% in the first quarter of 2021 to 99, 3% in the first quarter of 2022, a remarkable increase of 27, 1%. This translated into revenue growth of 38, 9% and EBITDA growth of 96% each in the first quarter over the prior year quarter. These.

<unk> results are evidence of what's achievable across our senior living segment under the stewardship of the right leaders.

And with that I'll turn it back to Dani.

Thank you John .

We appreciate the time, you've taken and we will now Tonya if you could please instruct the audience on the Q&A procedure.

Certainly as a reminder to ask a question you will need to press star one on your Touchtone telephone to withdraw your question. Please press the pound key.

One moment.

Our first question will come from Ben Hendrix of RBC capital markets. Your line is open.

Hey, guys.

Thank you noted really strong.

SaaS.

Occupancy improvement in April in March and then with the example, you just shared it looks like there is strong.

Occupancy growth in your established facilities I was just wondering if you could kind of give us on a consolidated basis kind of how your accident, how you exited March.

And into April and how you expect occupancy to progress over the over the course of the year just in terms of.

Timing.

Yes.

Yes, so I mean, we've talked about it already so we saw.

Pretty sizable response to our occupancy growth.

The first part of the year was a little bit of a struggle, but as we progressed into March and then into April like you. Just mentioned, we saw pretty significant growth I'm haven't Gen look the specific numbers, but what we're seeing is as things are opening up as the labor environment is improving as we're building. These stronger team, we're seeing a pretty strong response.

And that's where the census growth we anticipate.

As as things open up a little bit more.

<unk> been consistent throughout the pandemic if things have opened up we've seen strong occupancy growth and then.

Mission to that.

I'm just getting the numbers right here I Havent, John you got it yes.

Going into April from March we see now.

Occupancy increasing by 80 basis points.

Okay. Okay that makes sense, thank you and just if.

If I can just one more you mentioned the acquisition of real estate underlying the Idaho, the twin falls Idaho.

Yes.

Facility can you kind of give us just an overview of where real estate ownership strategy and kind of how you weigh that against.

Leasing from either standard bear or any other third party.

<unk>.

Landlords. Thanks.

Yeah sure. Thanks, Ben this is Derrick.

For us it's just another lever, we can pull and our growth strategy. We will continue to pursue operations that we still have a lot of organic upside that we can provide a lot of value to our stakeholders.

As you know some sometimes in those senior living acquisition opportunities real estate as part of that transaction.

Using our own balance sheet is one tool that we have and we may continue to grow that over time.

Healthy way and we'll continue to work closely with like I said, our partners at and Science is there read through our other landlords and through our banking partners to finance those so what we wanted to do is ensure that if we felt like there was a transaction, where we have strong leadership and strong clusters in our senior living.

And those markets and we wanted to pursue it that we had.

Different levers, we can pull to finance an acquisition.

There and so our balance sheet is just one of those over time, we expect that we will continue that we can add to our real estate portfolio.

We're not going to do that to the exclusion of working closely with our existing partners with whom we expect to grow those relationships over time as well.

Thank you.

And our next question comes from Scott Fidel of Stephens incorporated your line is open.

Good morning.

Jordan Bernstein after Scott Fidel.

That's on the quarter I'd like to drill down a little bit and continue the conversation on the M&A strategy as a follow up on the previous conversation.

Just wondering whether what you anticipate on the M&A run rate for the rest of the year.

Sure Good question.

We feel really good about where we stand today.

Both in terms of the <unk>.

Performance of our recent acquisitions, which for US we want to take care of what we've recently acquired before we continue to deploy capital as.

As well as the our balance sheet and and the acquisition landscape. We're our pipeline is pretty strong.

And we feel like the conversations we've had with sellers with potential sellers have really been positive.

And picking up and as we kind of look out it's always difficult to forecast.

Those conversations will look like over the next 12 months, but we see signs that it will continue to be strong and so we're excited to continue our.

Historical kind of acquisition pace.

In our home health and hospice segment in particular, where we have strength.

And so while we don't have any quotas are targets for how we deploy that capital we feel really good and we're really optimistic about continuing.

To grow there.

Very good. Thank you and then I guess to go off that you say conversations with sellers are positive I guess my follow up there would be no Howard private valuations progressing have you seen a step down in price given public market Retractions.

Valuations have continued to be there hasnt been a dramatic CS mix shift there.

What we're seeing and we've.

A lot of our deals have been built upon strong relationships with those sellers and not uncommon to be off market.

Where we can really see eye to eye and not just on valuation, but all the other intangibles that are important to a seller when they are considering their objectives.

So as we've as we've stayed disciplined there we've still been able to find a lot of opportunity in valuations that we see as fair going forward.

There might be some softness and maybe some bigger deals or elsewhere in the landscape.

We've continued to see a lot and what we would call pretty fair valuation.

Sellers consider both our offer as well as their other priorities.

Very good and then one last one if I may I guess, just shifting gears to COVID-19.

The strategy and approach to Covid and the remainder of the year. It doesn't seem like you're calling out a specific amount, but you remain conservative in terms of guidance, but can you speak to that conservatism a bit.

I think Jordan as you think about the remainder of the year Covid is it is still an unknown. There is still a lot of uncertainty that exists we see the variant in the northeast increasing in the number of cases, there and we want to recognize that for all we can control.

That's something that we can't control and so what we're focused on is how do we make sure that we're prepared how do we make sure that we continue to have the most robust clinical practices, how do we make sure that we're staffed appropriately.

So that if things do change in the environment, we're prepared for that change and we're able to operate through it successfully.

I would just add as well and we've talked about this the importance of strong leadership team and what we've seen consistently throughout the last two years the operations the communities, where we have strengthened our leadership.

The Covid impact has been.

It's been less and so certainly there is an impact but.

People want to join a team where theres, a strong culture, where theres, a strong vision and a strong direction.

Our effort over the last couple of years has been to renew the strength of our leaders and to help develop them and then we talked about some of the resources that we've put into recruiting and development and developing better business development practices and so all of those things are efforts to combat some.

The challenges related to Covid, but we're confident as we continue to follow that thesis of investing in local leaders.

We will have positive returns.

Nobody can predict exactly whats going to happen.

Our history has shown that where we have leadership we find success.

Alright, Thanks, I appreciate all the color.

Let's start with that.

Yes.

Ladies and gentlemen, if you'd like to ask a question. Please press Star then one.

To withdraw your question. Please press the pound key.

Yes.

I'm showing no further questions. This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by.

Any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Mr. Derek Bunker. Please go ahead.

Thanks, Tanya and welcome everyone and thank you for joining us today.

With me today I have Danny Walker, our CEO , Brent <unk>, our president Jen Freeman, our CFO and John <unk>, our CFO before we begin I have a few housekeeping matters.

The earnings press release, and 10-Q yesterday. This announcement is available on the Investor Relations section of our website at Www Dot group Dot com.

A replay of this call will also be available on our website until five P. M Mountain time on Friday June <unk> 2022.

<unk> 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.

The 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 a 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 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.

It should not be relied upon to the exclusion of GAAP reports.

GAAP to non-GAAP reconciliation is available in yesterday's press release and available in our 10-Q.

And with that I'll turn the call over to Danny Walker our CEO .

Thank you Derek and welcome everyone to our first quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results.

We are pleased with the steps forward. The results this quarter represent although the quarter was still negatively impacted by the omicron variance in our local leaders across the organization.

<unk> faced the uncertainties, there we were able to execute through the difficulties and make a meaningful step forward.

The tremendous work.

Move the organization forward clinically and financially through a rigorous commitment to our culture.

This commitment to culture and Recommitment when necessary as the foundation of our strategy within the marketplace and the greatest reason for hope in the future regardless of the operating conditions, we face.

Im proud of the progress that has been made to this point in our history. We are just scratching the surface of our enormous potential and there is a long and exciting road ahead, and I am more confident than ever in the slate of leaders that will write that story.

Tenant in the years to come.

Adhering to our unique operating model animated by the strength of our core values.

And I am deeply deeply grateful with that I'll ask Brent to provide details of our quarterly results and and he'll take it from there. Thanks Danny.

Our focus over the past several quarters has been to one <unk>.

Ensure that each local team is executing at a high level with fervor towards growth and rigor for cost management.

To focus on core opportunities across both segments and three elevate the core principles of our operating model that have driven historical success in.

In the first quarter and we.

<unk> successfully executed on these key initiatives and we will.

To do so throughout 2022 to propel us with the healthy growth and performance in both segments, we have achieved throughout our history.

We are pleased that our focus on these key endeavors is generating positive results turning first to our home health and Hospice segment performance, we posted solid results. Despite residual COVID-19 related pressures in the first part of the quarter, our home health business continued to experience solid growth.

All fronts with total admissions and Medicare admissions, increasing 11, 9% and 3% respectively in home health revenue, increasing 12, 7% each over the prior year quarter. We also navigated ongoing labor challenges exacerbated by quarantine clinician during the omicron search.

And the early part of the quarter.

Despite these difficulties our local leaders exercise rigorous cost discipline, leveraging best practices inherent in our operating model better resource support on attracting and retaining new talents and robust tools that helps us provide tailored care to our patients.

These efforts led to adjusted EBITDA margin improvement of 110 basis points compared to the fourth quarter of 2021.

Strong marks and other clinical measures.

And our hospice agencies, our local leaders confronted challenges largely related to lingering COVID-19 headwinds impacting referral patterns discharge rates and length of stay our hospice admissions were up 11, 8% over the prior year quarter with average daily census, modestly down three 3%.

We saw this trend began in the fourth quarter last year and continue into the first quarter.

As a higher percentage of our patients began hospice care later in the end of life period, we continued to experience pressure on our average discharge length of stay throughout much of the first quarter.

However, as COVID-19 cases began to fall our ADC improved throughout the quarter. So far in the second quarter. We are seeing incrementally higher hospice average daily census, with ADC in April up one 6% over March on the regulatory front CMS proposed a two 7%.

Hospice payment rate increase of which we have projected at 257% rate increase before sequestration for fiscal year 2023, among other updates reflecting recognition of the importance of this care setting in our health care landscape.

Shifting to our senior living segment, we continue our recovery by taking strong step by taking a strong steps forward in most key metrics. We closed on our transfer of five senior living communities to our partners at enzyme no transaction that we believe benefits all parties involved including the residents and their families.

This gives us a more streamlined portfolio as we head into the remainder of 2022.

Allowing us to continue to generate momentum more quickly in our remaining communities.

We also continue to attract and develop senior living leaders, who are contributing to it.

And we will be instrumental in our turnaround in this segment, we know that exceptional operational results starts with talented local leaders and resource support and as we've been building our leadership strength in this segment, we're beginning to see some of the fruits of that effort seeing.

Senior living segment revenue was $33 4 million increase.

$2 4 million over the prior year quarter, while adjusted EBITDA of $1 6 million represents growth of 800000 over the fourth quarter of 2021, and $1 7 million over the prior year quarter.

A percentage of revenue when excluding the loss on impairment.

While labor challenges linger.

And we saw average wages continue to tick up in the first quarter. It was at a slower pace than we saw for much of 2021, and so far is in line with our expectations.

To aid us as we attract new residents.

Invested in additional sales tools and resources that allow us to expand our marketing outreach better track and follow up with leads and target high ROI leads across multiple channels. These efforts are contributing to solid occupancy growth across our portfolio.

Which is continuing into the second quarter as April same store average occupancy improved 80 basis points over March.

There is tremendous upside remaining.

In our senior living segment, and we're excited about the momentum building in our clusters in markets as our local leaders execute.

Overall, we are pleased with the progress made in the first quarter in a challenging operating environment marked by persistent COVID-19 headwinds and ongoing labor pressures are operators clinicians resources and service Center partners all share a single focus on operational excellence.

Great for their persistence dedication and hard work and.

And I'm confident.

As we continue to perform we can achieve exceptional financial and clinical results with that I've asked John to provide an update on our recent acquisitions.

Some implementations cause delays in the ramp in performance at some of our recently acquired agencies.

I'm pleased to report that we are now seeing the material improvement we expected I'd like to share a few examples of how our local leaders have moved the dial in significant ways in their recently acquired agencies.

Yes.

<unk> team in San Diego working closely with their service Center resource partners. The team implemented clinical best practices, improving the agency from a CMS star rating of three at the time of transition to four five in Q1 2022.

At the same time and through the challenges of transitioning to a new EMR and through the pandemic employee satisfaction improved leading to internal referrals and growth in the clinical team.

While we have made tremendous progress we feel like we are only scratching the surface. What we can accomplish in San Diego together with our partners. We are extremely grateful for the trust. They have placed in us as other acute care organizations evaluate their home health and hospice strategy. We believe we are well positioned to partner with them and providing quality care and <unk>.

Proved clinical and financial outcomes.

More recently, we added first call hospice based in Sacramento to our growing California market led by administrator, Adam bone and director of patient care services.

<unk> in first calls first 12 months independent family. This team has exemplified the impact that can have in a new community, Adam and Jesse and their team worked to create a foundation of clinical excellence built on the core values and culture, we share across tenant the results have been remarkable first call has increased its eight.

You see from the mid <unk> at the time of acquisition to 82 as of the date of this call and grew its EBITDA from 177000 and its first quarter post closing to 378000 in Q1 2022, an increase of 113%.

In addition to this Adam Jesse and the team have provided southwest support for their partners in the California market and elsewhere across our home health and hospice portfolio.

Seaport script home health in first call Hospice are just a couple of examples of agencies. We've acquired over the past two years that are generating significant contributions to our financial results. The acquisitions. We acquired in 2020 collectively grew adjusted EBITDA to $1 9 million in the first quarter 2022, a 51, 7% in.

Kris over the prior year quarter, our disciplined growth strategy works and we have the leadership talent best practices key relationships and balance sheet Fortitude to continue this pattern with that I'll turn it over to Derek to provide an update on our recent investment activity Eric.

Thanks, John .

Nick Covid impacted environment, we're sharing kitchen laundry and staff became increasingly costly and complex. We believe that combining the operations of these particular campus settings will allow for care staffing and other strategic refinements to better address the needs of residents and families.

Since the end of the first quarter, we acquired a home health agency in Montana State in which we currently provide hospice services.

Spanning the continuum of care, we can provide we can offer patients and referral sources. In addition, we acquired the real estate underlying our 82 unit assisted living and memory care community in Twin Falls, Idaho, which we will continue to operate.

As we keep the momentum building in our senior living segment and evaluate more opportunities to acquire senior living operations.

Being able to use our balance sheet and competitive cost of capital is just one arrow in our growth quiver we will.

Continue to work closely with key partners like enzyme to the nurse do their new standard bare healthcare REIT.

As well as our landlords and banking partners to help finance the real estate underlying senior living operations that we strategically pursue and acquire.

That are focused on continuing the legacy of sellers, providing an exceptional employee experience and delivering quality clinical care, we regularly engage with owners of high quality businesses, both on and off market and.

And we look forward to partnering with them in bringing their business into the pennant family in the future.

Our organic and strategic investment opportunities are tremendous and we're excited for what we can accomplish on this front in the rest of 'twenty to 'twenty to 'twenty two and beyond.

With that I'll hand, it over to Jen for a review of the financials Jen.

Thank you Derek and good morning, everyone.

Detailed financial results for the three months ended March 31, 2022 are contained in our 10-Q and press release filed yesterday.

And the three months ended March 31, 2022, we reported total GAAP revenue of $113 9 million, an increase of $8 2 million or seven 8% over the prior year quarter.

Diluted earnings per share of <unk> and non-GAAP adjusted earnings per diluted share of 11%.

An increase of four cents or 57, 1% over the fourth quarter 2021 equal to the prior year quarter.

Please note that our non-GAAP adjusted earnings per share results for the three months ended March 31 2022.

<unk> the benefit of the Medicare sequestration holiday as well as the effects of all COVID-19 related expenses and lost revenue.

While difficult to perfectly capture.

Expenses and lost revenue.

During the trajectory that we were on entering the fourth quarter as 2021, we estimate that the first quarter results were negatively impacted by COVID-19.

Out of $1 million or approximately <unk> <unk> earnings per share.

Lost revenue of at least $3 million and approximately $500000.

Instant ticket.

Specifically identify expenses across both segments.

And and increased wages, including over time compared to the fourth quarter 2021 period.

Additionally, the first quarter included the benefit of about a half a million dollar adjustment in the company as insurance reserves for workers compensation, and general and professional liability to align with incurred wages and claims experience.

Key metrics for the three months ended March 31 2022 included.

The $8 5 million drawn on our revolving line of credit and $3 6 million cash on hand at quarter end.

To your 0.03 times net debt to adjusted EBITDA in 208 times Medicare advanced payment has been paid back at the quarter end.

Nomadic recruitment of the advanced payments began in April 2021 on which we have repaid approximately $27 million through may eight 2022, and we expect to leave.

<unk>.

0.3 million within the payback period.

Cash flow provided from operations of 700.

700000, excluding impact of the automatic recoupment of advance payments.

Our first quarter results are roughly in line with our expectations for a modestly slower start to the year as we anticipated the pandemic to linger into the first quarter.

Our census, and staffing in the other operating challenges will likely persist for the foreseeable future and continue to cause some chop in our near term results. We are confident our leaders across the company are strong and capable of confronting these headwinds and with that I'll hand, it to John to highlight a couple of our local leaders.

Thanks, Jen, it's my pleasure to spotlight a few leaders in our organization, who have achieved remarkable results through operational excellence.

Columbia River home health in Kennewick, Washington, Executive Director, Eric Weiss and clinical director Tracy Repko I have led a clinical and operational transformation that has positioned the agency as a critical piece of the price City health care continuum. The Columbia River story began with the acquisition of the agency out of bankruptcy proceedings in 2018.

This financial progress demonstrates the power of our local leadership team that sets a vision executes on that vision to produce strong clinical and operational results and develop a culture that sets it apart and the community that it serves.

Similarly, our Kenosha senior living in Kenosha, Wisconsin. The first team led by Executive Director Steven St. Louis Director of business development, Kristine Gomez director of operations, Melissa corporate and director of nursing tablets, and Martin set out to transform their community through the consistent application of best practices together they focused on.

From 78, 1% in the first quarter of 2021 to <unk> 99, 3% in the first quarter of 2022, a remarkable increase of 27, 1%. This translated into revenue growth of 38, 9% and EBITDA growth of 96% each in the first quarter over the prior year quarter. These <unk>.

<unk> results are evidence of what's achievable across our senior living segment under the stewardship of the right leaders.

And with that I'll turn it back to Dani.

Thank you John .

We appreciate the time, you've taken and we will now Tonya if you could please instruct the audience on the Q&A procedure.

Certainly as a reminder to ask a question you will need to press star one on your Touchtone telephone to withdraw your question. Please press the pound key.

One moment.

Our first question will come from Ben Hendrix of RBC capital markets. Your line is open.

Hey, guys.

Thank you you noted really strong.

SaaS.

Average occupancy improvement in April in March and then with the example, you just shared.

Like there is strong.

Occupancy growth in your established facilities I was just wondering if you could kind of give us on a consolidated basis kind of how your accident you exited March.

Excuse me and into April and how you expect occupancy to progress over the over the course of the year just in terms of.

Timing.

Okay.

Yes, so I mean, we've talked about it already so we saw.

Pretty sizable response through our occupancy growth.

The first part of the year was a little bit of a struggle, but as we progressed into March and then into April like you. Just mentioned, we saw pretty significant growth I'm haven't Jen <unk>.

Specific numbers.

What we're seeing is as things are opening up as the labor environment is improving as we are building. These stronger team, we're seeing a pretty strong response.

And Thats, where the census growth we anticipate.

As.

If things open up a little bit more that's kind of inconsistent throughout the pandemic as things have opened up we've seen strong occupancy growth and then in addition to that.

I'm just getting the numbers right here.

John you got it yes.

Going into April from March we see that.

Occupancy increasing by 80 basis points.

Okay. Okay that makes sense, thank you and just if.

If I can just one more you mentioned the acquisition of real estate underlying the Idaho, the twin falls Idaho.

Yes.

Facility can you kind of give us just an overview of where real estate ownership strategy and kind of how you weigh that against.

Anything from either standard bear or any other third party.

<unk>.

Landlords. Thanks.

Yeah sure. Thanks, Ben this is Derrick.

For us it's just another lever we can pull in our growth strategy. We will continue to pursue operation that we still have a lot of organic upside that we can provide a lot of value to our stakeholders.

As you know some sometimes in those senior living acquisition opportunities real estate as part of that transaction.

Using our own balance sheet is one tool that we have and we may.

Continue to grow that over time.

Healthy way and we'll continue to work closely with like I said, our partners that and science is there read through our other landlords and through our banking partners to finance those so what we wanted to do is ensure that if we felt like there was a transaction, where we have strong leadership and strong clusters in our senior living.

And those markets and we wanted to pursue it that we had.

Different levers, we can pull to finance an acquisition.

There and so our balance sheet is just one of those over time, we expect that we will continue that we can add to our real estate portfolio.

But it's we're not going to do that to the exclusion of working closely with our existing partners with whom we expect to grow those relationships overtime as well.

Thank you.

And our next question comes from Scott Fidel of Stephens incorporated your line is open.

Good morning, Joe.

Bernstein, all Prescott by Dol and congrats on the quarter I'd like to drill down a little bit and continue the conversation on the M&A strategy as a follow up on the previous conversation.

Just wondering whether what you anticipate the M&A run rate for the rest of the year.

Sure Good question.

We feel really good about where we stand today.

Both in terms of.

Performance of our recent acquisitions, which for US we want to take care of what we've recently acquired before we continue to deploy capital.

As well as the our balance sheet and and the acquisition landscape. We're our pipeline is pretty strong.

And we feel like the conversations we've had with sellers with potential sellers have really been positive.

And picking up and as we kind of look out it's always difficult to forecast.

Those conversations will look like over the next 12 months, but we see signs that it will continue to be strong and so we're excited to continue our.

Historical kind of acquisition pace.

In our home health and hospice segment in particular, where we have strength.

And so while we don't have any quotas are targets for how we deploy that capital we feel really good we're really optimistic about continuing.

To grow there.

Okay.

Very good. Thank you and then I guess to go off that you would say conversations with sellers are positive I guess my follow up there would be how are private valuations progressing have you seen a step down in price given public market retractions.

Valuations have continued to be there hasnt been a dramatic CS mix shift there.

What we're saying and we know them.

A lot of our deals have been built upon strong relationships with those sellers and not uncommon to be off market.

Where we can really see eye to eye and not just on valuation, but all the other intangibles that are important to a seller when they are considering their objectives and so as we've as we've stayed disciplined there we've still been able to find a lot of opportunity in valuations that we see as fair going forward.

So there might be some softness and maybe some bigger deals or elsewhere in the landscape, but we continue to see a lot and what we would call pretty fair valuation.

<unk> consider both our offer as well as their other priorities.

Yes.

Very good and then one last one if I may I guess, just shifting gears to COVID-19 and the strategy and approach to Covid and the remainder of the year. It doesn't seem like you are calling out a specific amount.

But you are remaining conservative in terms of guidance.

You speak to that conservatism a bit.

I think Jordan as you think about the remainder of the year Covid is it is still an unknown theres still a lot of uncertainty that exists we see the variant in the northeast increasing in the number of cases, there and we want to recognize that for all we can control.

So that if things do change in the environment.

We're prepared for that change and we're able to operate through it successfully.

Covid impact has been.

It's been less and so certainly there is an impact but.

People want to join a team where theres, a strong culture, where theres, a strong vision and a strong direction.

The challenges related to Covid, but we're confident as we continue to follow that thesis of investing in local leaders that will have positive returns and nobody can predict exactly whats going to happen.

Our history has shown that where we have leadership we find success.

Alright, Thanks, I appreciate all the color.

Okay.

Karla.

Okay.

Ladies and gentlemen, if you would like to ask a question. Please press Star then one.

To withdraw your question. Please press the pound key.

I'm showing no further questions. This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Pennant Group Inc Earnings Call

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