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Good day, and thank you for standing by. Welcome to The Pennant Group First Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Derek Bunker..

Welcome, everyone, and thank you for joining us today. Here with me today, I have Daniel Walker, our CEO; Brent Guerisoli, our President; Jennifer Freeman, our CFO; and John Gochnour, our COO. 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.nngroup.com. A replay of this call will also be available on our website until 5:00 p.m. Mountain Time on Friday, June 3, 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 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 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, 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 available in our 10-Q.

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

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 step forward the results this quarter represent. Although the quarter was still negatively impacted by the Omicron variant and 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 lingering headwinds and inflationary pressures remain 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, for the tremendous work to 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.

While I'm 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 of Pennant 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 born of experience. A bright future lies ahead, and the results of this quarter attribute 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'm deeply, deeply grateful. With that, I'll ask Brent to provide details of our quarterly results, and he'll take it from there..

Our focus over the past several quarters has been to; one, ensure that each local team is executing at a high level with fervor towards growth and rigor for cost management; two, 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 continue to do so throughout 2022 to propel us with a healthy growth and performance in both segments we've 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 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, and home health revenue increasing 12.7% each over the prior year quarter.

We also navigated ongoing labor challenges exacerbated by quarantine clinicians during the Omicron search in the early part of the quarter.

Despite these difficulties, our local leaders exercised rigorous cost discipline, leveraging best practices inherent in our operating model, better resource support on attracting and retaining new talent, and robust tools that help 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. Our clinical results kept par with our growth, with our average CMS star rating at 4.4 stars compared to a national average of 3.5 stars.

Our average re-hospitalization rate at 14.5% compared to the national average of 15.4%, and strong marks in 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 3.3%. We saw this trend begin in the fourth quarter of last year and continued into the first quarter, as a 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 1.6% over March.

On the regulatory front, CMS proposed a 2.7% hospice payment rate increase, of which we have projected a 2.57% 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 a strong step forward in most key metrics. We closed on our transfer of 5 senior living communities to our partners at Ensign 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. We also continue to attract and develop senior living leaders who are contributing to and will be instrumental in our turnaround in the 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 key 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 $800,000 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 point increase in revenue per occupied room, and a decrease of 80 basis points in our cost of services as a percentage of revenue when excluding the loss on impairment.

While labor challenges lingered 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.

Through ADAS, as we attract new residents, we've invested in additional sales force 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 and markets as our local leaders execute. Overall, we are pleased with the progress made in the first quarter in a challenging operating environment mired 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. I'm grateful for their persistence, dedication, and hard work, 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..

During our past few earnings calls, we've 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 2 years, through pandemic surgeons, a heavy volume of our acquisitions, and some lingering spin-off-related system implementations, caused 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. 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 Nels Lund, Timothy Johnson, and Tina 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 3 at the time of transition to 4.5 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.

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 Scripps 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 in providing quality care and improved clinical and financial outcomes.

More recently, we added First Call Hospice based in Sacramento to our growing California market, led by administrator, Adam Bohn and Director of Patient Care Services, Jesse Allande. In First Call’s first 12 months in the Pennant family, this team has exemplified the impact that Pennant 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 tenets. The results have been remarkable.

First Call has increased its ADC from the mid-40s at the time of acquisition to 82 as of the date of this call and grew its EBITDA from $177,000 in its first quarter post-closing to $378,000 in Q1 2022, an increase of 113%.

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

Seaport Scripps Home Health and First Call Hospice are just a couple of examples of agencies we've acquired over the past 2 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 of 2022, a 51.7% increase 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..

Thanks, John. As Brent mentioned, during the quarter, we closed our transaction with the partners at Ensign to transfer to them 5 senior living communities, all of which share a campus setting with Ensign affiliated skilled nursing operations.

In a 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, a state in which we currently provide hospice services, expanding the continuum of care 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.

Attacking our revolver to fund this small transaction, we improved our financing costs, and 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 Ensign through their new standard Bear health care 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 favor strategic buyers like ourselves 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 we look forward to partnering with them and 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 2022 and beyond.

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

Detailed financial results for the 3 months ended March 31, 2022, are contained in our 10-Q and press release filed yesterday. For the 3 months ended March 31, 2022, we reported a total GAAP revenue of $113.9 million, an increase of $8.2 million or 7.8% over the prior year quarter.

GAAP diluted earnings per share of $0.03 and non-GAAP adjusted earnings per diluted share of $0.11, an increase of $0.04 or 57.1% over the fourth quarter 2021 and equal to the prior year quarter.

Please note that our non-GAAP adjusted earnings per share results for the 3 months ended March 31, 2022, include the benefit of the Medicare sequestration holiday as well as the effects of all COVID-related expenses and lost revenue.

While difficult to perfectly capture all such expenses and lost revenue, considering the trajectory that we were on entering the fourth quarter of 2021, we estimate that the first quarter results were negatively impacted by COVID-19 in the amount of $1 million or approximately $0.03 earnings per share, lost revenue of at least $3 million, and approximately $500,000, and specifically identified expenses across both segments and increased wages, including overtime compared to the fourth quarter 2021 period.

Additionally, the first quarter includes the benefit of about $0.5 million adjustment in the company's insurance reserve for workers' compensation and general and professional liability to align with incurred wages and claims experience.

Key metrics for the 3 months ended March 31, 2022, include $58.5 million drawn on our revolving line of credit and $3.6 million cash on hand at quarter end, 2.03x net debt to adjusted EBITDA, and 2.08x if Medicare advanced payments have been paid back as of the quarter end.

Automatic recruitment of the advanced payments began in April 2021, on which we have repaid approximately $27 million through May 8, 2022, and we expect to repay the remaining $0.3 million within the payback period. Cash flows provided from operations of $700,000 excluding the impact of the automatic recruitment of advanced 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 the annual adjusted earnings per diluted share of between $0.60 and $0.72.

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.

While census, 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..

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

At Columbia River Home Health in Kennewick, Washington, Executive Director, Eric Wise; and Clinical Director, Traci Repko, have led a clinical and operational transformation that has positioned the agency as a critical piece in the Tri-City health care continuum.

The Columbia River story began with the acquisition of the agency auto 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 a vision to become the strongest clinical team in the community.

The agencies published CMS star rating of 4.5 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.

This financial progress demonstrates the power of a 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 in the community that it serves.

Similarly, at Kenosha Senior Living in Kenosha, Wisconsin, the first team led by Executive Director, Steven St. Louis; Director of Business Development, Christine Gomez; Director of Operations, Melissa Koerber; and Director of Nursing, Tabitha 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, instill the culture centered on our core values of accountability and ownership, and made strategic investments in 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 this team drive occupancy from 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 90.6%, each in the first quarter over the prior year quarter.

These incredible 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 Danny..

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

[Operator Instructions] Our first question will come from Ben Hendrix of RBC Capital Markets..

You noted really strong average occupancy improvement in April and March, and then with the example you just shared, it looks like there's strong occupancy growth in your established facilities.

I'm just wondering if you could kind of give us on a consolidated basis, how you exited March into April and how you expect occupancy to progress over the course of the year just in terms of timing?.

We talked about it already. So, we saw a pretty sizable response to our occupancy growth. I mean 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 having Jen look at 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 teams, we're seeing a pretty strong response and that's where the census grows.

We anticipate as 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..

So going into April from March, we see the occupancy increasing by 80 basis points..

If I could, just one more. You mentioned the acquisition of real estate underlying the Twin Falls, Idaho facility.

Can you kind of give us just an overview of your real estate ownership strategy and how you weigh that against leasing either from Standard Bear or any other third-party landlords?.

For us, it's just another lever we can pull in our growth strategy. We'll continue to pursue operations we feel like has a lot of organic upside, that we can provide a lot of value to our stakeholders. As you know, sometimes in those senior living acquisition opportunities, real estate is part of that transaction.

Using our own balance sheet is one tool that we have, and we may continue to grow that over time in a healthy way, and we'll continue to work closely with our partners at Ensign through their REIT 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 had strong leadership and strong clusters in our senior living in those markets, and we wanted to pursue it, that we had different levers we can pull to finance an acquisition there, and so balance sheet is just one of those.

Over time, we expect that we can add to our real estate portfolio, but 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..

Our next question comes from Scott Fidel of Stephens Inc..

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 what you anticipate as the M&A run rate for the rest of the year?.

We feel really good about where we stand today, both in terms of the 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 our balance sheet and the acquisition landscape, where 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.

As we kind of look out, it's always difficult to forecast what 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 acquisition pace in our home health and hospice segment, in particular, where we have strength, and so while we don't have any quotas or targets for how we deploy that capital, we feel really good, and we're really optimistic about continuing to grow there..

To go off that, you 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 continue to be…there hasn't been a dramatic seismic shift there, what we're seeing.

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 it eye, not just on valuation, but all the other intangibles that are important to a seller when they're considering their objectives.

And so, 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 in maybe some bigger deals or elsewhere in the landscape, but we continue to see a lot in what we call pretty fair valuation as sellers consider both our offer as well as their other priorities..

I guess just shifting gears to COVID and the strategy and approach to COVID in the remainder of the year, it doesn't seem like you're calling out a specific amount, but you're remaining conservative in terms of guidance.

Can you speak to that conservatism a bit?.

I think, Jordan, as you think about the remainder of the year, COVID is still an unknown. There's 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 have seen consistently throughout the last 2 years, the operations, the communities where we have strength in our leadership, the COVID impact it's been less.

And so certainly, there's an impact, but people want to join a team where there's a strong culture, where there's a strong vision and a strong direction, and so 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 of the challenges related to COVID.

But we're confident, as we continue to follow that, because of investing in local leaders that will have positive returns. Nobody can predict exactly what's going to happen, but our history has shown that where we have strong leadership, we find success..

[Operator Instructions] I am showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect..