The Bottom Line: CFO Nurtures Pennant’s Entrepreneurial Spirit in Covid-19 Battle

The Pennant Group (Nasdaq: PNTG) was already contending with transitional headwinds related to its spinoff from the Ensign Group (Nasdaq: ENSG) when the coronavirus pandemic added further pressures to operations and liquidity.

Compared to other operators, however, the Eagle, Idaho-based provider was able to ride out occupancy declines in the outbreak’s early weeks and reported signs of stabilization in May, which CFO Jenn Freeman attributed to how it views senior living.

“We see senior living as a health care setting,” she told Senior Housing News.

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This perspective of senior living as part of the health care continuum gave Pennant Group advantages in Covid-19 response, Freeman believes. Pennant Group’s blended portfolio includes 65 home health and hospice agencies, and 53 senior housing communities, and Freeman sees synergies between the two segments which helped its operators respond early to the pandemic and keep expenses down while providing top-notch care for its residents, and can be leveraged as the crisis becomes protracted.

She also touted the company’s “local leadership” model, which gives community-level operators extensive say on a range of issues.

This interview has been edited for length and clarity.

Has senior living has gotten more operationally and financially complex over the last few years, and if so, how has that placed new demands on you as a CFO?

Senior living for us has complexities because we view it as a health care setting. As health care moves more toward non-hospital settings and the population of seniors grows, it will become more important as senior living communities are able to meet the health care needs of its residents.

In the Covid-19 crisis, because we see senior living as a health care setting, we actually had clinical staff on board and good processes in place that were already compliant with a lot of the regulations concerning infection control and other types of requirements. We were able to respond and mobilize our teams really quickly. And our local leadership were able to respond in a really great way and then share best practices across the organization as they started to deal with Covid-19.

The complexity in the senior living environment is increased by who is paying for residents’ living expenses. In our case, about 26% of our senior living revenue comes from Medicaid. And it adds additional costs as clinicians join our staff. We expect that kind of complexity to continue, and we will continue to view senior living as a health care setting.

Pennant talks about its “local leadership” model often during earnings calls and reports. How does this model work and how does Pennant support it?

Our communities each have a local leader that is responsible for all aspects of the operations. These leaders are then grouped into clusters, which consists of about four to six local operators. The clusters are the venues for mentoring each other, sharing best practices and promoting operational efficiencies. At the local level, each leader is incentivized [based] on their performance in their own community, and they’re also cross-incentivized at the cluster level. This creates an atmosphere of pure accountability and shared ownership.

[Additionally], the operations are supported by a service center of shared resources and state of the art systems. It’s really in this context of the cluster that leadership begins. It starts from the premise of identifying leaders within our organization who are ready and equipped to be entrepreneurs.

We bring in talented individuals with all kinds of backgrounds. We’ve had MBAs, we’ve had coaches, all different kinds of leaders come into our program, and then they develop their leadership and operational skills. When an opportunity is identified by the cluster — because a cluster leads the initiative to identify acquisition opportunities or when there’s an opening in a different community — then the leader who’s been through the program has the opportunity to become the entrepreneur.

What synergies do you see between Pennant’s senior housing segment and its home health and hospice service lines?

There are significant synergies between the two segments, which we’ve seen progress more as we’ve established ourselves.

We have a footprint where our home health and hospice agencies overlap with all of our senior living markets, so we have the opportunity as people are aging in place and requiring more services to bring our home health and hospice services into the senior living community.

During this crisis, we’ve created workgroups around supplies, staffing, communications, where [synergies] have been identified within each of our operations both on the home health and hospice sides, and the senior living [side].

They’ve come together to discuss the challenges or needs that they have within the pandemic. For example, if a senior living community has a Covid-19 case in their building and their staff has been quarantined because they’ve been exposed and they need staffing to come into the building, then the home health and hospice staff in that area can step in and support the senior living community. We’ve seen a lot of synergy through this crisis and coming together of the entire organization to support each other.

What were your main priorities when you joined Pennant Group?

I came from a health care background. I’ve been in the industry for 15 years and have a passion for it. My priorities were to make sure to take the companies through the spinoff from the Ensign Group, and to cultivate the experience and expertise of our finance team to support the reporting and control requirements of a publicly held company while continuing to be the accounting resources to our field operations.

[My] background helps [me] understand the demands of the environment of being in health care, being regulated, understanding how health care works with the [various] payment models and claims.

What obligations does Pennant have with Ensign and CareTrust as it is establishing itself as a separate company?

We have some agreements with Ensign through a transition services agreement. We lease 30 of our properties from Ensign, and then we have 11 leased from CareTrust. As part of our lease agreements we have lease ratios that we have to comply with, which we’ve done in a very good manner. We [also] have the ability to partner with Ensign and/or CareTrust on any new acquisitions over the next two years. They have the right of first refusal around our acquisitions. We can acquire property ourselves if we so choose if Ensign doesn’t want to partner.

For the most part, we’ve got a great relationship with Ensign and CareTrust that, as they’re acquiring properties, or [have] operations that aren’t going so well, they’re asking us to step in because they know us. They know that we are good partners, that we have a good operating model, they understand who we are and appreciate what we do.

We’re seeing operators with triple net leases able to secure relief through the CARES Act stimulus package. What are the lease structures for the properties Pennant is operating for Ensign Group and CareTrust?

We have triple net, non-cancelable operating leases. So far, we have not pursued [CARES Act relief] for our senior living sites at this point in time. It’s not that we haven’t been affected; we certainly have been in our senior living operations by Covid-19. We haven’t been as affected as [others] and we’ve been able to come together and manage through it.

As disruptions stemming from the pandemic continue, how is Pennant working through these challenges?

At the very beginning of March, we began to coordinate directly with our field operations and communities in acquiring supplies, and focused on supporting all of our communities in this crisis. We have kept very close tabs on everything that has been happening within our organization.

As shelter-in-place [orders] started to occur and regulations would come out on on senior living, we would synthesize that material in our resource center with the expertise that we have, make sure that our communities were informed, work with them to understand what that meant, create procedures and work directly on helping them to implement and share. The local leaders would share with each other their best practices, what they found and what’s happening in each of their states, and what they needed to make sure that they were [in compliance].

I can share an example: There was an email that came across my desk where one of the leaders of a community was commending another saying, “I really appreciated that checklist that you shared about the things that we need to make sure that we go through as somebody enters the building.” That [eventually] became a standardized checklist across the organization. That’s the beauty of the [local leadership model] — their innovation and ingenuity in this environment to share what they were doing with each other.

How concerned are you about full-year expenses if this outbreak is protracted?

You have some factors at play where, on the PPE side right now, our local leaders have taken the initiative to procure PPE. We’ve partnered with Ensign and CareTrust on bulk purchase orders so that we can keep the cost down on a per-unit basis. If there’s a resurgence in Covid-19, you could see those costs [get] dressed up.

The key here is that we have had a lot of learning the last few months and come together as an organization to put best practices in place to share how to navigate through this crisis: what to do with our residents; what to do in the communities. We’ve managed that really well. On our home health and hospice side, we’re actually admitting Covid-19 patients and treating them.

We feel like we’re well prepared for, as [CEO Danny Walker says], the next inning. We feel like this is the first inning. It remains to be seen how it affects the entire health care industry, if there is a resurgence that’s on a greater scale than the current [wave]. But I do believe that because of the things that we’ve done through these last two months and the way that we’ve come together as an organization, that we’re more prepared for the next round if it occurs, and we hope that it goes on as everyone else does.

How is Pennant’s access to capital at the moment?

We’ve been in contact with our lenders and have had great conversations with them.

At the beginning of March, when there were several publicly held companies that were pulling their lines of credit down, we had a conversation right away with our partners and talked through the availability of liquidity and cash and how we would navigate through this as a partner with them. We feel like we’re in a good spot. We have the available funds that we need in the current context. Again, assuming there isn’t a crippling resurgence across the nation, we feel like we’re in a good spot to be able to navigate through the next six months and have the cash on hand that we need.

We, as a company, are committed to generating positive operating cash flow. And this is an understanding across our organization. We are also committed to a strong balance sheet. We’re very disciplined and thoughtful concerning the use of our cash, and look at it in the sense of opportunity and the preparation of our local leadership. We look at the biggest opportunity to make good use of our capital and evaluate the investment opportunity, whether it be with capital expenditures or acquisitions. We’ve taken a hard look at our capital expenditures and we focus on those things that are emergent and necessary. We feel like we’re in a good position for the maintenance upkeep of our buildings and we need to meet the requirements that we have.

In regards to liquidity, we are excited about where we’re set as far as where our funds are, what our dry powder is, so that we can act on attractive opportunities that come to us and that fit within our framework.

Does Pennant Group see opportunities to acquire new communities at a pricing discount during the outbreak?

We are thinking about growth the way we have approached [it] throughout our history. We’ve been really disciplined about the dollars that we invest, and those dollars are invested and orchestrated by our local leaders. The funding that we invest is based upon the performance of those leaders in that community and the returns on investment.

We look at the biggest opportunity to make good use of our capital. We don’t always do acquisitions that are necessarily accretive in the year of purchase. We do expect that they would perform beyond that first year. We’re typically paying under market already for underperforming assets that we feel like we can grow and develop to provide organic growth in the years to come.

We have still seen opportunity in the market. We have deals that come across our desk, sometimes five or six a week. It’s all based upon that local leadership and the preparation of that. We’re still poised to grow and take advantage of good opportunities.

You noted that 26% of Pennant’s senior living revenues come from Medicaid billing. Are you exploring entering the Medicare Advantage space?

We would welcome the opportunity. We already operate in the Medicare Advantage space and have really good relationships with the payers in our home health and hospice market. Our senior living markets overlap with our home health and hospice market.

For us, it would be an opportunity to provide a combined offering to our payer partners within our footprint. We already have the systems and the processes in place to take on Medicare Advantage and we would love that to happen. There are lots of opportunities in that area, and our focus on that senior living as a health care setting dovetails with Medicare Advantage.

How do you define a healthy margin in this business and ensure that you’re striking the right mission/margin balance?

We don’t really look at mission and margin as a zero-sum game that sacrifices one at the expense of the other. It is our operating model that drives the margin through our mission. We have a margin that we believe all of our operations should achieve, and we don’t set that margin — the operators set that margin. We strive to achieve a healthy margin to allow us to continue to grow [and] provide life-changing services to more people.

Did you ever envision yourself in the senior living industry back at the start of your career?

I never imagined myself in senior living at the start of my career. I’m not sure I thought of myself in the role of a CFO to take the company public, either.

When I started in health care, I was actually working for Molina Healthcare [of Washington] and was on the implementation of the Sarbanes Oxley project. It was the combination of the mission and understanding how they provided services to the most vulnerable population and improve patient care and outcomes. When I started that project, I [saw] how the management of health care could change people’s lives and really impact our communities [across] our country.

I believe that Pennant is the same way. We are committed to life-changing service. When the opportunity presented itself and I met the leaders in the organization and saw how much they were committed to their mission, I felt that the business focus and mission aligned with my personal passion to be in health care that serves most of our population.

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