Pennant Group Sits on $9.9M in CARES Act Money; Managing Covid-19 Pressures

As with other publicly traded owners, The Pennant Group (Nasdaq: PNTG) has been under pressure from the coronavirus pandemic since mid-March.

The Eagle, Idaho-based owner is now seeing an uptick in home health census this month, as well as stabilization in its senior housing occupancy, and believes these trends can continue throughout the second quarter, which leadership suggests reflects the core strength of Pennant’s “local leadership” model.

“We believe our operating model and growth strategy enabled us to be successful through changing operating environments — Covid-19 included — in addition to the measures we’ve taken to mitigate revenue impacts and to flex our experience around changes in our revenue. We believe the pandemic presents new opportunities for resilient operators that are responsive to local needs,” CFO Jen Freeman said during the company’s Q1 2020 earnings call on Thursday.

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Pennant is also putting some of the financial tools it can access from the CARES Act stimulus package to use to shore up its liquidity, but is sitting on money that it is unsure what to do with, as federal guidance changes frequently.

Pennant reported first quarter revenues of $91.8 million, an 17.9% increase year-over-year. Pennant’s home health and hospice segment drove performance with $56.8 million in revenue, a 23.1% increase over the previous year.

Senior housing revenues improved 10.4% year over year, to $35.1 million. Pennant also saw a 40 basis point improvement in senior housing occupancy, to 80.2%, and revenue per occupied room (RevPOR) improved 2.7% over Q1 2019.

Managing Covid-related pressures

While the pandemic persists and it is unknown when senior housing communities will be able to ease lockdown restrictions, April and May trends suggest that Pennant has weathered the worst of the storm.

Pennant Group experienced a 2.5% decrease in senior living occupancy from March 11 through May 11, as well as an 8.2% drop in home health census. That was offset somewhat by a 3.1% increase in hospice average daily census, CEO Danny Walker said.

As of May 12, four of Pennant’s senior living communities have experienced Covid-positive cases, with 10 active cases in two different communities, while 49 of its communities have not experienced any positive cases. Furthermore, 11 home health than hospice agencies have admitted, and are currently serving, 34 active positive patients.

Pennant Group’s blended portfolio includes 65 home health and hospice agencies, and 53 senior housing communities. Walker cited response plans at centralized and operator levels as essential to mitigating the impact of the virus across its assets.

The response plan was organized in four general areas: environmental precautions; supplies:, staffing; and communication. The environmental plan identified isolation and infection control best practices from the CDC and other regulators, focusing on sanitation, prevention and population tracking measures designed to reduce the spread of the virus from person to person or from object to person.

“Our commitment to high quality clinical systems in the senior living setting differentiates our operations generally, and especially in the face of an unprecedented health emergency,” Walker said.

On the supply front Pennant, aided by its partners at The Ensign Group (Nasdaq: ENSG) and CareTrust REIT (Nasdaq: CTRE), as well as its own network, pursued personal protective equipment (PPE) and related supplies aggressively and early. Through April, the company spent over $500,000 above its usual cost levels to secure necessary PPE and related supplies.

“Our efforts have positioned us with the PPE necessary to operate for several months at current levels, and with a pipeline to quickly obtain more,” he said.

Pennant has implemented hero pay and other incentives at select communities located in markets where there is a heightened risk of exposure to the virus, and has incurred nearly $1 million in additional labor costs in April. To mitigate this, operators have implemented cost control measures such as flex schedules and furloughs of select non-clinical employees. Additionally Pennant’s board of directors, executive team and other senior leaders throughout the organization have voluntarily reduced their base salaries while the pandemic pressure persists.

“We also see opportunity in the dislocation of employees in other industries and are actively expanding our leadership pipeline. In all of these efforts, our philosophy has been to manage the current demands of the crisis while investing in the future,” Walker said.

Strong financial position

Pennant Group has taken steps to bolster its liquidity in the event of a prolonged outbreak, while maintaining a disciplined growth strategy and moving its acquisition pipeline forward.

The company had $62 million available on its credit revolver as of March 31, $17 million in cash as of May 13, cash generated from operations of $2.1 million during the first quarter, and adjusted net debt to adjusted EBITDAR ratio of 4.85 times at the end of the quarter, Freeman said.

Pennant Group has received various CARES Act stimulus financing relief mechanisms in April and May. Notably, it received $9.9 million in provider relief funds for which it did not apply. This was part of the distribution of the first $30 billion of CARES Act stimulus funds based on 2019 Medicare billings, and were directly related to Pennant’s home health and hospice Medicare billings, COO John Gochnour clarified to Senior Housing News.

“We have not made a decision to accept or return the funds as we are evaluating their terms and conditions. In the meantime, we are holding these funds in a segregated account and carefully tracking lost revenues and expenses related to Covid-19,” Freeman said.

Pennant applied for and received approximately $28 million in advance Medicare payments, of which $19 million went to paying down the outstanding balance on its revolver, to ensure available liquidity during the pandemic and reduce interest charges, Gochnour told SHN.

Other senior housing and long-term care firms have received, and are holding onto, CARES Act relief funding, awaiting guidance, RBC Capital Markets Analyst Frank Morgan wrote in a note to investors.

Finally, the company estimates a positive impact as $2.5 million related to the temporary suspension of a 2% Medicare payment sequestration established by the CARES Act.

As a result, Pennant Group reaffirmed its 2020 guidance. Total revenue is anticipated to be in the range of $376 million to $386 million, the midpoint of which represents an increase of 12.5% over the midpoint of its full-year 2019 revenue.

The company does anticipate some slight delays in acquisition opportunities, but still expects these to push through with extended due diligence, including one deal that is expected to close in the next 30 to 45 days. Acquisition opportunities tied to stimulus funds may also be delayed, due to the fluid nature of the guidance.

“It’s going to delay things a little bit. But we still are seeing opportunities coming our way. And we’re prepared to take advantage of those opportunities and do deals in the current environment,” Walker said.

Analysts responded positively to the earnings and noted that the spinoff of Pennant from Ensign last year continues with minimal hiccups.

“[Occupancy] pressure appears to have bottomed in the first week of May and is showing signs of recovery in both [home health] and senior living … the company appears to be effectively managing Covid-19’s [occupancy and cost headwinds thanks in large part to the agility of its locally focused operating model,” Morgan wrote.
Pennant Group stock ended trading Thursday up over 12%, closing at $19.52 per share.

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