Strategic priorities for Texas-headquartered Addus HomeCare Corporation (NASDAQ: ADUS) continue to focus on personal care and home health and less on hospice as the company waits for the dust to settle following its Gentiva personal care acquisition.
Improvements in hospice valuation trends have not come far enough in recent years to make the market a focal point for Addus, according to Executive Vice President and CFO Brian Poff.
“There are hospice opportunities, [but] that tends to be the more expensive of the three segments we operate in from an acquisition perspective,” Poff said in Tuesday’s earnings call. “But if there are good opportunities that are a nice fit, those are things we would also look at.”
Addus offers personal care, hospice and home health. Its roughly 33,000 employees provide hospice, home health and private duty nursing services to about 49,500 patients across 214 locations in 22 states.
The company’s M&A strategy centers on purchasing assets across geographic regions in which it already has an established presence, particularly with its personal care services. Same-store organic growth also has been a large part of Addus’ strategy.
“With acquisitions an important part of our growth strategy, we continue to focus on markets where we can leverage our strong personal care presence and add clinical services so we can offer all three levels of home-based care,” Poff said. “With our size and scale and the support of a strong balance sheet, we are well-positioned to continue executing our acquisition strategy.”
Among its significant recent transactions came last month when Addus agreed to acquire Atlanta-based Gentiva’s personal care business for roughly $350 million. The purchase expanded Addus’ presence across seven states, marking its establishment in new Texas and Missouri markets.
The Gentiva acquisition is currently undergoing standard regulatory review processes, and the deal is projected to complete in the fourth quarter of this year, according to Dirk Allison, chairman and CEO of Addus.
“The Gentiva acquisition fits squarely into our growth strategy to leverage our strong personal care experience to build scale in existing markets as well as enter select new markets where we can immediately establish a significant presence,” Allison said in a statement. “We will also continue to look for accretive operations that provide the opportunity to add complementary clinical services.”
Addus post-transaction will have a leverage ratio of less than 3x, with the ability to further that amount with the influx of revenue resulting from this deal, Allison indicated. Picking up Gentiva’s personal care assets included in the purchase will help fuel future revenue, expansion and staffing efforts, he stated.
The Gentiva purchase is expected to help Addus leverage scale in value-based payment arrangements, allow providers to spread costs over a larger revenue base and provide more meaningful advocacy opportunities for improved staffing conditions in states across its geographic region, according to Allison.
Fueling its acquisition pipeline is more than $173.3 million in dry powder as well as existing lines of credit.
The company saw 10.4% year-over-year revenue growth in Q2, reaching $286.9 million in net service revenue. Addu’s personal care services brought in $212.8 million, representing nearly three-quarters of its revenue and seeing an 8.8% same-store sequential increase. Its home health segment took in a little more than $18 million in the second quarter, a year-over-year rise from roughly $11.5 million.
Addus’ hospice segment, which represents about 19.5% of its business, earned more than $56 million in the second quarter. Hospice revenue per day was up 6.3% from the prior year’s period.
“We are pleased by the steady improvement in our hospice segment this year and anticipate those favorable trends continuing into the second half of 2024,” Allison stated.
The company’s hospice growth was in part due to increases in both patient volume and length of stay.
Addus’ hospice census rose 1.7% year-over-year, while its median length of stay hovered around 29 days in Q2 — a consecutive jump from 27 days in the first quarter.
The dynamic mix of investors and available assets in the hospice space have also influenced the company’s tone, according to Allison. Private equity deal volume in particular has slumped since the pandemic, with more smaller assets coming to the market versus large-scale companies. Rising interest rates have also been dampening interest, he stated.
Addus’ strategic outlook in hospice will continue to pivot around its personal care investments for the time being, Allison indicated.
“From a PE standpoint, it’s really been very slow as far as competition,” Allison said. “Obviously if [interest] rates come down in September, there’ll be a point we’ll come back in. We believe that longer term as long as we stay with our strategy. And as long as we focus in the markets where we have strong personal care coverage, we’ll have a strong presence, regardless of where our competitors are.”
Reimbursement trends are also a consideration in the company’s hospice performance. Addus executives pointed to a potential headwind resulting from the recent 2.9% payment rise in the U.S. Centers for Medicare & Medicaid Services’ (CMS) finalized 2025 rule, up from the 2.6% the agency initially proposed.
“We were pleased to see the announcement of the 2025 final hospice reimbursement rate increase,” Poff said during the earnings call. “Based on the geographic and level of care mix in our hospice business, we expect the impact for our hospice operations to be an overall increase of approximately 3.2%, or $6.8 million in annual revenue.”
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