Recent acquisitions and joint ventures by The Pennant Group (NASDAQ: PNTG) are fueling bottom-line growth for the Idaho-based senior services provider. The financial boost from acquired home health and hospice agencies helped mitigate COVID-related struggles like rising costs and labor headwinds.
Case in point, the 15 deals the company completed in 2020 collectively grew EBITDA by 51.7% to $1.9 million during the first quarter of 2022, Chief Operating Officer John Gochnour indicated in a first quarter earnings report. These numbers don’t include Pennant’s 11 transactions in 2021.
After staying aggressive on acquisitions for the past two years, the company took a break to integrate its new assets and financially recharge. But Pennant will not remain dormant on M&A during the remaining quarters of 2022, according to Derek Bunker, Pennant’s chief investment officer, executive vice president and secretary.
“Our pipeline is pretty strong, and we feel like the conversations we’ve had with potential sellers have really been positive,” Bunker said in the earnings call. “We’re excited to continue our historical acquisition pace in our home health and hospice segment in particular.”
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 pointed toward two transactions in particular as recent success stories: its March 2020 joint venture with the San Diego-area health system Scripps Health and its purchase of First Call Hospice in June that same year.
The joint venture blended Scripps’ home health business and a local Pennant-affiliated home health agency, which Pennant manages as majority-owner.
The joint venture saw a 15% increase in average daily census during the first quarter and contributed to Pennant’s top- and bottom-line financial results, according to Gochnour.
“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,” Gochnour said. “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.”
The First Call Hospice acquisition is also based in California, in the state’s capital of Sacramento. During its first year under Pennant, the agency‘s average daily census nearly doubled, up to 82 from slightly more than 40 before the transaction.
The First Call asset in that same 12-month period also saw EBITDA rise 113% to $378,000. Pre-acquisition, this was $177,000.
California markets are receiving a lot of attention in the hospice space in recent years. The state’s 2018 utilization rate was 46.1% among Medicare decedents, according to the National Hospice & Palliative Care Organization. This is slightly below that year’s national average of 50.3%.
Demographics in California are favorable to hospice and other post-acute providers. By 2030, the state’s 65-and-older population is expected to reach 9 million, up from about 6 million currently, according to the Public Policy Institute of California. More than 20% of the state’s population will be Medicare eligible by 2027.
The acquisitions, including some deals in its senior living segment, contributed to an $8.2 million revenue gain during Q1, reaching $113.9 million. This represents a 7.8% jump from the prior year’s quarter.
The home health and hospice services segment saw a 7.9% increase to $80.5 million from Q1 2021.
While the company experienced revenue growth, this was slowed by the continuation of COVID-19 headwinds.
For the hospice business, admissions for the first quarter totaled 2,409, up 11.8% from Q1 2021. But patients continue to come onto service later, contributing to a 1.1% decline in Q1 average daily census, compared to the same period the prior year.
“Because 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,” Pennant President Brent Guerisoli said. “However, as COVID-19 cases began to fall, our ADC improved throughout the quarter. So far in the second quarter, we are seeing an incrementally higher hospice average daily census.”
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