Pennant Group’s Acquisition Strategy to Fuel Long-Term Hospice Growth

The Pennant Group’s  (NASDAQ: PNTG) acquisition strategy is fueling growth in both the near- and long-term for the company’s home health and hospice segment. Pennant has been very active in the M&A market during the past two years, with additional transactions waiting in its pipeline. 

Pennant, which owns and operates hospice provider Cornerstone Healthcare, was spun off in 2019 from The Ensign Group (NASDAQ: ENSG). Pennant retained Ensign’s hospice, home health and senior living operations. The company in February increased its revolving line of credit by $75 million to a total $150 million, pledging to apply those resources to buying new operations.

While the costs of purchasing these companies are reflected on Pennant’s financial statements, the acquisitions position the organization well for volume growth in coming years.

“With roughly two dozen acquisitions or startups on-boarded over the past 18 months, our operating margins naturally compressed as we invest resources in ensuring these agencies have the clinical and cultural foundation to generate significant long-term returns,” Pennant CEO Danny Walker said in an earnings call. “These operations add to the compelling organic upside that exists across our home health and hospice segment.”

The Pennant Group’s recent deals include the purchase of Sacramento, Calif.-based First Call Hospice. Pennant completed several transactions during the second half of 2020. Last October brought the acquisition of Harmony Hospice in Las Vegas, which had been affiliated with two other hospices that Pennant had purchased: Prime Hospice, located near Phoenix, and Harmony Hospice of Arizona. Financial terms of these deals were undisclosed.

In July last year, Pennant also acquired hospice and home health assets of Signature Health Care at Home for an undisclosed sum, each with multiple locations throughout southeastern Idaho and northern Utah. Pennant also completed a number of home health acquisitions.

The company last November announced the launch of two start-ups, one in Washington state and one in California.

“While this record number of transactions contributed to some choppiness to our quarterly results, they also provide compelling long-term growth opportunities across virtually every market in which we operate,” Walker said. “As we methodically continue to integrate these new Pennant-affiliated agencies and build the cultural, clinical and financial foundation for sustained success. We are well positioned to produce strong results in the second half of the year and into 2022.”

Among acquisition targets, Pennant seeks smaller, financially stable operations that need more resources or capital to support their expansion. Many of the companies operate with single-digit margins at the time they are acquired, but start to see increases within the first three years, according to Walker. These growth trends often continue for as long as a decade. 

Pennant operates 65 home health and hospice agencies, 51 senior living operations, and mobile diagnostics and lab operations located across 14 states, with 23 of the senior living assets subject to leases with third-party landlords, as well as mobile diagnostic services and clinical laboratory operations. Pennant also manages 28 senior living communities pursuant to new, long-term triple-net leases with Ensign subsidiaries.

The company’s Home Health and Hospice Services segment revenue reached $78.1 million in the second quarter of 2021, up $20.1 million or 34.7% from the prior year’s period. Pennant’s hospice business brought in $36.8 million in Q2, up from $32.6 million in the second quarter of 2020.

“These acquisitions have strong reputations in their local communities and represent key growth opportunities for these markets. Our acquisition and transition processes are ultimately led by the field leaders within an impacted market with support of partners and resources,” Chief Investment Officer Derek Bunker said. “This process can be a drag on results as field leaders temporarily direct some resources from existing to newly acquired operations. It’s important to emphasize that each agency we acquire multiplies our short- and long-term growth opportunities.”