Pennant Focuses on Recent Additions During ‘Uncharacteristically Quiet’ M&A Season

Like its industry peers, The Pennant Group Inc. (Nasdaq: PNTG) has had to navigate COVID-19-related business disruptions as well as other headwinds, some of which even prompted the company to start looking under its own hood for answers.

Now, operating with the view that COVID and many of its impacts have become endemic, the company has a stronger sense of what’s in store for 2022.

“Throughout 2021, we provided guidance based on the operating landscape at the time,” Danny Walker, CEO of Pennant, said during a Q4 earnings call Tuesday. “We assumed that we wouldn’t have further impacts from COVID-19 surges, which consistently changed throughout the prior year. In our 2022 guidance, we have used the lessons we’ve learned from 2021, … and we are grateful to look into 2022 with greater stability and predictability in our operating results.”

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Eagle, Idaho-based Pennant’s network includes 88 home health and hospice agencies, plus 54 senior living communities. The company has locations throughout 14 states overall.

Similar to its Q3 earnings call, Walker was candid about the factors that contributed to Pennant’s performance falling short of expectations, while still noting that the company achieved double-digit top- and bottom-line growth. Among those factors are the inherent demands in spinning off from The Ensign Group (Nasdaq: ENSG), administrative requirements and regulatory hurdles.

“Ultimately, our 2021 results fell short of our high expectations we established for ourselves,” he said, emphasizing that Pennant has reviewed its local offices and retrenched around “core opportunities” across its business segments to turn things around.

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In order to return to healthy growth patterns, Pennant has taken key steps to “limit distractions,” Walker added. This includes restructuring the company’s mobile physician services and home care agencies to optimize payer mix and better contain expenses.

Dealmaking updates

During the call, Pennant’s leadership also touched on the company’s “uncharacteristically quiet” M&A season in Q4.

While acquiring community-driven agencies with strong ties to their specific markets has become a calling card for Pennant, it did not close any deals in Q4. Instead, the company focused on the ongoing transition of the 11 home health, hospice and home care agencies added earlier in 2021, as well as 15 added in 2020.

“As these agencies continue to mature, we are confident they have the potential to grow in ways much like the agencies we’ve acquired for most of our history — many of which still average 20% or more growth, year after year, with payback for investment many times over,” Derek Bunker, Pennant’s chief investment officer, said during the call. “The development of certain recently acquired agencies has been slower than we expected, as we work to identify the right leaders for each operation and support them as they build culture and established rigor around best practices.”

Bunker noted that Pennant’s pipeline of potential deals remains robust as the company continues to source quality home health and hospice opportunities.

Overall, Pennant brought in $439.7 million in total revenue for full-year 2021, a 12.5% increase over the prior year.

“Our full-year and fourth-quarter results were negatively impacted by COVID 19 in the amount of $10 million and $2 million, respectively, in lost revenue, and $5.4 million and $2 million respectively in expenses — 90% of which are increased in wage rates and overtime, over the prior comparable periods,” Jennifer L. Freeman, Pennant’s CFO, said during the call.

In total, revenue for Q4 was $111.8 million, a 3.5% increase over the prior year’s fourth quarter.

For the full year, home health and hospice revenue checked in at $309.6 million, a 22% increase over the prior year.

Home health and hospice revenue checked in at $77.9 million for Q4, a 4.5% increase over the same period in 2020.

“Even as our hospice admissions and average daily census were down from the third quarter, we saw solid growth in our total home health admissions, which rose 9% over the prior year’s quarter,” Pennant President Brent Guerisoli said.

Analysts have also noted that hospice’s decline was a contributing factor in the segment’s overall performance.

“The 4Q earnings shortfall was primarily driven by margin pressure in the core [home health and hospice] segment.” Scott Fidel, managing director of Stephens, wrote in an analyst note. “The [home health and hospice] segment results were specifically adversely impacted by a decline in Hospice ADC.”

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