Select Medical Holdings Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Regulatory Update: CMS deferred the 20% transmittal rule, resulting in a favorable revenue adjustment this quarter; continued advocacy for Medicare policy to support high-acuity patients in long-term acute care hospitals.
• Development: Acquired a 30-bed critical illness recovery hospital in Memphis and grew outpatient portfolio by 3 clinics. Plan to add 395 inpatient rehab beds by H1 2027, including new openings and strategic additions like a 45-bed rehab hospital in Temple, Texas, and partnerships with various health systems.
• Shareholder Value: Board approved $0.0625 per share cash dividend payable November 25, 2025, reflecting commitment to enhancing shareholder value.

Segment Performance

• Inpatient Rehab Hospital Division: Revenue grew 16% year-over-year to $328.6 million, adjusted EBITDA up 13% to $68 million. Revenue per patient day increased nearly 5%, average daily census rose 11%, occupancy improved to 83% (same-store 86%), adjusted EBITDA margin declined slightly to 20.7% from 21.3%.
• Outpatient Rehab Division: Revenue increased 4% to $325.4 million, driven by over 5% growth in patient visits. Net revenue per visit decreased to $100 from $101, adjusted EBITDA decreased over 14% to $24.2 million, margin declined to 7.4% from 9.1%.
• Critical Illness Recovery Hospital Division: Revenue grew over 4% to $609.9 million, adjusted EBITDA rose over 10% to $56.1 million, margin increased to 9.2% from 8.7%. Occupancy remained steady at 65%, admissions up 2.1%.

Guidance

• Reaffirmed 2025 revenue range $5.3 billion to $5.5 billion and adjusted EBITDA range $510 million to $530 million. Increased EPS guidance to $1.14 to $1.24. Capital expenditures expected to be $180 million to $200 million.
• Impact of 20% transmittal delay: Q3 net revenue and EBITDA impact $12 million to $15 million; year impact negligible for Q4 due to labor cost stabilization.

Risks

• CMS policy changes affecting Medicare outlier payments and high-cost outlier thresholds, impacting LTAC business.
• Challenges with payer mix and Medicare reimbursement in outpatient segment, leading to margin pressure.

Question and Answer

Q: Ben Hendrix asked about the ongoing impact of the high-cost outlier, admission volume, occupancy, mitigation tactics, and development in Washington.

A: Tom Mullin discussed the negative impact of the fixed loss threshold on LTAC business and mitigation via inpatient rehab hospitals; Robert Ortenzio mentioned better channels in D.C. and ongoing advocacy.

Q: Justin Bowers inquired about LTAC trends, CapEx maintenance.

A: Michael Malatesta spoke about maintenance CapEx range; Thomas Mullin discussed LTAC trends and rehab development.

Q: Ann Hynes asked about the revenue benefit from the 20% transmittal delay, EBITDA impact, year impact, outpatient softness.

A: Michael Malatesta said Q3 net impact $12M-$15M; noted outpatient softness due to payer mix and Medicare headwinds.

Q: Joanna Gajuk asked about 20% transmittal headwind, outpatient payer mix, rehab development break-even.

A: Michael Malatesta discussed reduced headwind in 2026, outpatient payer mix issues, and rehab hospital break-even in ~6 months.

Q: A.J. Rice asked about rehab development costs, labor trends, leverage.

A: Michael Malatesta spoke about stable agency utilization and rates; Robert Ortenzio noted comfortable 3.4x leverage and opportunistic capital allocation.

Q: Justin Bowers followed up on MA rates, EBITDA drag, outpatient margins.

A: Michael Malatesta discussed MA rates linked to Medicare fee schedule, EBITDA drag from Medicare cuts, and focus on productivity to improve outpatient margins.