After ‘Sobering’ Quarter, Pennant Conducting Internal Review to Identify Possible Missteps

The Pennant Group Inc. (Nasdaq: PNTG) has fallen short of its own goals. At the top of the company’s earnings call Tuesday, Pennant CEO Danny Walker called its Q3 2021 performance “sobering” in relation to its high expectations.

Eagle, Idaho-based Pennant’s network includes 87 home health and hospice agencies, plus 54 senior living communities. The company has locations throughout 14 states overall.

During Tuesday’s call, Walker detailed the numerous headwinds Pennant has been up against.

Advertisement

“In general, the demands of completing the spinoff successfully, the high volume of home health and hospice acquisitions, the leadership overhaul of our senior living segment and the investment of time and resources in early-stage new business ventures — all when coupled with the unique pressures of the COVID-19 pandemic — have diluted our effectiveness at operating to our standards,” he said.

In particular, Pennant’s operating environment in Q3 was impacted by a rise in COVID-19 cases in several of the company’s key markets, as well as ongoing labor pressures.

“When we see a spike in COVID-19 cases, as we saw in the latter half of the third quarter, it temporarily impacts our ability to admit [new patients],” Walker said. “And increases our cost of services, as more and more staff enter quarantine protocol.”

Advertisement

Another COVID-19 related impact: the company saw its Q3 total home health admissions decline 5.7% from last quarter, partly due to the delay in elective procedures in markets such as Arizona, Idaho, Utah and the Dallas-Fort Worth metroplex.

Walker noted that roughly 80% of the decline seen in Pennant’s total home health admissions can be attributed to agencies acquired over the past 24 months.

Now, Pennant is reviewing the company in order to identify any missteps that have taken place over the past two years. The company is also taking steps to return to the healthy growth rate Pennant has achieved in the past, according to Walker.

“We are taking immediate actions to No. 1, ensure that each local team is executing at a high level without distractions,” he said. “No. 2, retrench around the core opportunities across both segments, and, No. 3, reinforce the core principles of our operating model that have led to our historical success. We believe that these efforts will yield significant results in the short term and ensure long-term health.”

However, Pennant has slowly begun to see some improvement on the home health side of the business. Toward the end of Q3, the company saw an 8.7% increase in total admissions in October over September.

“The bedrock of our confidence in our continued growth and long-term health is our relentless focus on providing exceptional clinical care to our patients and residents,” Walker said. “We continue to achieve high marks in several quality scores across our home health and hospice segment.”

It’s this emphasis on quality clinical care that Pennant’s leaders believe will serve as an advantage when the Home Health Value-Based Purchasing (HHVBP) Model is expanded nationwide.

“Since 2018, 12 of our agencies have participated in [HHVBP] in Washington, Arizona and Iowa, and we achieved net positive revenue adjustments each year,” Walker said. “Just as we have successfully prepared for and navigated the implementation of [the Patient-Driven Groupings Model] and prior reimbursement program changes, we look forward to the opportunity presented by the nationwide [HHVBP] model.”

Broadly, Pennant’s Q3 performance assessment lines up with what some analysts are seeing.

“Overall, it has been a challenging year for Pennant in 2021 relative to the optimistic initial financial targets that the company outlined for 2021, as reflected in the sharp pressure on the stock price,” Scott Fidel, managing director of Stephens, told Home Health Care News in an email. “Clearly, the industry-level dynamics have also gotten more difficult as 2021 has progressed, particularly in Q3 as the Delta surge seemed to hit the industry much harder than the prior COVID waves, given the tougher, broader labor-market conditions.”

Still, Fidel pointed to the company’s willingness to take accountability as a positive sign going forward.

“By identifying the specific areas where Pennant fell short on execution, they can now make the necessary operational adjustments to accelerate growth and margin performance in 2022 and return to its more favorable long-term trajectory,” he said.

Aside from opening up about Pennant’s turnaround efforts, the leadership team also touched on the company’s acquisition-and-investment activity, and the resulting challenges, during the call.

In Q3, the company announced the acquisition of Amarillo, Texas-based provider Open Heart Hospice. This brought Pennant’s total number of new operations since the beginning of 2020 up to 27.

“Complexities of the current environment, including elective procedure delays in markets in which we’ve acquired new agencies, stretched many teams that are new to our operating model, contributing to the delays in our expected performance ramp,” Derek Bunker, Pennant’s chief investment officer, said during the call. “Much of this pressure appears temporary and we remain confident in the underlying fundamentals of our acquisitions.”

Bunker also emphasized the importance of making sure new teams joining Pennant after the completion of an acquisition successfully transition into the company’s operating model.

In general, this falls in line with Pennant’s strategy of purchasing community-driven agencies with strong ties to their specific markets and leaders that plan to stay on board post-sale.

“One of the things that is uniquely strong about our business model is that our leaders at the local operational level control the entire profit and loss statement, just like a mom-and-pop operator would,” Walker previously told HHCN. “Our emphasis is on that local leadership-driven model, then coupling that with the resources, flexibility and sophistication of a large corporate operator.”

Pennant brought in $111.9 million in total Q3 2021 revenue, a 13.7% increase over the same period in 2020. Home health and hospice revenue checked in at $79 million, a 22.7% increase over Q3 2020.

Companies featured in this article: