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Operator
Thank you for standing by, and welcome to the Pinnock Group second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during that time, please press star 1. I will now hand today's call over to Derek Bunker, Chief Investment Officer. Please go ahead.
Derek Bunker
Thank you, Tamika, and welcome, everyone. Thank you for joining us today. Here with me today, I have Brent Garasoli, our CEO. John Gochner, our president, and Jen Freeman, our CFO. Before we begin, I have a few short housekeeping matters. We filed our earnings press release and SENDQ yesterday. This announcement is available on the IR section of our website at tenantgroup.com. Replay of this call will also be available on our website until 5 p.m. Mountain Time on Friday, September 9, 2022. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, August 9, 2022, and these statements have not been or will be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions, and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied in today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Penn and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, the Penning Group Inc. is a holding company with no direct operating assets, employees, or revenues. Certain of our independent subsidiaries, collectively referred to as the service center, Provide accounting, payroll, HR, IT, legal, risk management, and other services to the other operating subsidiaries through contractual relationships. The words pennant, company, we, our, and us refer to the Penning Group, Inc., and its consolidated subsidiaries. All of our operating subsidiaries in the service center are operated by separate independent companies that have their own management, employees, and assets. References herein to the consolidated company and its assets and activities, as well as the use of the terms we, us, and our, And similar terms used today are not meant to imply nor should it be construed as meaning that the tenant group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the tenant group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and in our 10Q. And with that, I'll turn the call over to Brent Garasoli, our CEO. Brent.
Tamika
Thanks, Derek, and welcome everyone to our second quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results. To begin, I'd like to take a moment and personally thank Danny Walker for his partnership and friendship over the last decade. As was previously announced, Danny stepped aside as CEO on August 1st and continues in the role of chairman. His leadership was instrumental as we built this company from the early days of our history as a fledgling startup, experienced tremendous growth and expansion, and navigated the challenges as a new public company in the midst of a pandemic. Danny's influence will continue to be felt across the organization, and on behalf of the leadership team and all of Tenance, we will forever be grateful. As we enter another chapter in our story, we have a deep bench of seasoned and talented leaders across both segments in the service center that have been critical to our growth since the beginning and are prepared to accelerate our performance. Now, as I step into the CEO role, I want to reiterate our commitment to the core operational and cultural principles that have been instrumental to our success over our decade of history and articulate why we're so excited for the future. Our differentiators are one, our innovative operating model focused on empowering and developing strong local leaders. Two, our disciplined growth strategy. And three, our ability to achieve quality care outcomes in lower cost settings. First, our innovative operating model is the foundation of our success. Our operating model is founded on two tenets fundamental to our approach to healthcare services. One, that healthcare is a local endeavor where providers are most successful when key operational decision-making meets local community needs and occurs close to patients and employees. And two, peer accountability from operational and resource partners is more effective at driving clinical and financial results than traditional hierarchical or top-down accountability structures. Our model is innovative because each independent operation functions under the direction of local clinical and operational leaders, each of whom are empowered to make decisions based on the unique needs of the patients, partners, and communities they serve. We believe that our localized approach to program development and patient care leads prospective patients and referral sources to choose or recommend our operations. This is in contrast to typical models where control and key decision making is centralized at the corporate level. The peer accountability that drives successful financial and clinical outcomes is implemented through our unique cluster model, where every operation is part of a defined cluster, which is a group of geographically proximate operations working together to allow leaders to communicate and provide support and accountability to each other. This creates incentives for leaders to share best practices and real-time data and benchmark clinical and financial performance against their cluster partners. This cluster operating model is the key to success of our future operations. Second, our disciplined investment strategy, much of our historical growth can be attributed to our expertise in opportunistically acquiring strategic operations and transforming them into leaders in clinical quality, staff competency, and financial performance. When evaluating potential home health and hospice acquisitions, we look for small to medium-sized agencies with strong clinical and operational reputations that provide a platform for organic census growth and expense management. We look for senior living communities with a quality physical plan where our operational, sales and marketing, and wellness expertise can drive revenue increases through occupancy growth. additional care capabilities, and rate improvement with disciplined cost management. As we have done throughout our history, we will continue to drive organic growth and acquire additional operations in existing and new markets in a disciplined manner. Acquisitions are part of the DNA of our leaders and our resources, and we're ready to put more capital toward strategic growth. Our emphasis on local leadership and decision-making yields unique, customized solutions and programs that meet local market needs and improve clinical outcomes, which in turn accelerates revenue growth and profitability. In our home health and hospice business, our unique operating model allows us to achieve quality outcomes as measured by many industry and value-based metrics such as hospital readmission rates in a lower-cost setting. As the senior living industry continues to evolve toward more acute care, Our experience as a healthcare provider equips us to offer our residents a better quality of life experience at an affordable cost, thus appealing to a broader population. With our platform of complimentary service offerings, we believe that we are well positioned to take advantage of favorable demographic shifts, as well as industry trends that reward providers offering quality care in lower cost settings. In summary, We are equipped with a proven operating model designed to generate strong clinical and financial results, an investment strategy that creates value over the short and long term, a deep lineup of talented leaders that continues to grow and develop, and relationship-based clinical expertise critical to better patient outcomes and greater volume over time. We believe the combination of these qualities, unique dependence, allow us to acquire an increasing number of operations and generate value over the long term for all of our stakeholders. Over the last several quarters, we have built foundational strength through pandemic and spinoff-related system transitions. We've been building momentum over the course of this year, improving our cash flow and balance sheet, and we are poised to return to a brisk pace of strategic acquisition that will propel our growth over the next several years and beyond. We have our share of challenges to continue to overcome, and we still have significant inherent value to unlock. But we know where we are going, how to get there, and we are excited about the progress we're making toward operational excellence and our ability to generate and deploy cash toward accretive growth in an active M&A landscape. As we mentioned in our press release yesterday, we are affirming our revenue guidance for 2022, modestly narrowing our adjusted EPS guidance and introducing adjusted EBITDA guidance. We expect to provide annual adjusted EBITDA guidance going forward and hope this additional measure is helpful in evaluating our results and obtaining a better picture of our overall operating cash flow. We expected our results this year to ramp up sequentially as we continue to improve operationally. And so far, our performance is consistent with those expectations. We anticipate a similar incremental build over the course of the second half of the year. And with that, I've asked John to provide an update on our operational results.
Derek
Thanks, Brett. Our second quarter operational results are consistent with our performance ramp expectations. We are pleased to report solid results in home health and hospice and improving results in our senior living segment. in the face of turbulent economic conditions and lingering COVID flare-ups. Key to our performance in the quarter was our ongoing focus on operational excellence and empowering our local teams with improved systems and support. While there remain labor, inflationary and regulatory headwinds going forward, we are poised to deliver stronger results in the second half of 2022 and anticipate more organic and strategic growth in the near future. In our home health and hospice segment, strong top and bottom line results were led by a 6.3% increase in Medicare home health admissions and a 3.5% increase in hospice admissions each over the prior year quarter. Our home health revenue grew a strong 15.3% over the prior year quarter as we continue to strengthen our relationships with partners across the healthcare communities we serve and our acquisitions from 2021 performed better. Though there is still some softness in our hospice average daily census, momentum is building as we saw ADC grow 2.4% sequentially over the first quarter of 2022. As our average length of stay continues to normalize and our local teams continue strong admissions, we expect our ADC to continue to improve. Throughout the quarter, our leaders exercised rigorous cost discipline in the face of labor, fuel, and other inflation-sensitive cost increases, leading to adjusted EBITDA margin improvement of 140 basis points compared to the first quarter of 2022. Our clinical metrics remain solid, with the majority of our home health agencies achieving a CMS star rating of 4.5 or above. Our real-time acute care hospitalization rate of 12% is notably below the national average of 15.4%. And our hospice quality composite scores continue to trend above industry averages. On the regulatory front, we were encouraged by the release of the hospice final payment update of 3.8%, which came in 110 basis points higher than the proposed rule. We were disappointed with the framework of the Medicare home health proposed rule, which applies a permanent cut of 6.9% to the 30-day base payment rate, offset by a market basket update of 2.9%. CMS's methodology in making permanent cuts related to behavioral adjustment uses incomplete data from a truncated period during a global pandemic and would dramatically reduce reimbursement for home health services during a period of intense inflationary pressure. Together with peers throughout the industry, we look forward to working with CMS and partners in the legislative branch to pursue solutions that work better for beneficiaries and providers. We are encouraged by the bipartisan legislation introduced in the House of Representatives and the Senate that would delay these cuts and provide the opportunity for CMS to conduct a more thorough analysis before drawing conclusions regarding behavioral adjustments. While the proposed rule outlines changes that will create significant difficulty for providers in our industry, Pennant began in and has thrived through periods of uncertainty, much like today, thanks to the scalability of our operating model built on local leadership, our commitment to maintaining a strong and flexible balance sheet and our opportunistic approach to acquisitive growth. We are preparing now for the potential impact should the proposed rule be finalized. And much like the change to reimbursement affected through PDGM several years ago, we are confident we will pull the right levers to continue our growth even in a challenging reimbursement environment. In our senior living segment, we continued our recovery by taking a step forward in many key metrics. In the first half of the year, We completed a series of transactions aimed at streamlining our senior living portfolio, improving the average quality of our physical plants across the segment, and positioning ourselves to accelerate organic growth and get back to modest, acquisitive growth. To that end, we completed the transfer of five senior living communities to affiliates of the Enzyme Group. We acquired the real estate underlying our assisted living community in Twin Falls, Idaho. reducing our liability through the use of cheaper cost of capital, and acquired the operations of Barber Station Assisted Living and Memory Care, a highly strategic Class A assisted living and memory care community in Boise, Idaho. With a favorable long-term triple net lease, close proximity to our service center, and strong home health and hospice partners, we are excited to welcome this community into our portfolio. We will continue to be disciplined as we look to grow, ensuring we maintain momentum in our existing footprint of communities. Senior living segment revenue of $31 million increased $2.9 million, or 10.3%, over the same store prior year quarter, while adjusted EBITDA of $900,000 represented growth of 11.1% over the prior year quarter. Excluding the communities we exited year to date, average occupancy improved 1.9% over the prior year quarter, and revenue per occupied room increased 5.8%, over the prior year quarter, with several rate increases going into effect in July that we believe will positively impact our third quarter REV4. The momentum our senior living leaders are generating is demonstrated by occupancy improving 1.8% over the first quarter 2022, leading the first half 2022 EBITDA that represents a $1.7 million improvement over the second half of 2021. While labor challenges linger and we saw average wages tick up in the second quarter by 0.9%, it was at a slower pace than we saw for much of 2021 and so far is in line with our expectations. To aid us as we efficiently attract new residents, we've invested in additional sales tools and resources that allow us to expand our marketing outreach, better track and follow up with leads, and target high ROI leads across multiple channels. These efforts are contributing to solid occupancy growth across our portfolio. We continue to attract and develop senior living leaders who are contributing to and will be instrumental in our turnaround in the segment. We have more to accomplish with higher cost of services and occupancy several points below pre-pandemic levels. However, we know that achieving exceptional operational results starts with talented local leaders and resources support. And as we've been building our leadership strength in this segment, we're beginning to see the fruits of that key effort. Overall, we are pleased with the progress made in the second quarter in a challenging environment. Our operators, clinicians, resources, and service center partners all share a singular focus on operational excellence. I'm grateful for their persistence, dedication, and hard work, and we are confident as we continue to perform, we can achieve exceptional financial and clinical results. With that, I'll hand it over to Derek to provide an update on our investment activity. Thanks, John.
Derek Bunker
As mentioned, year to date, we transferred the operations of five senior living communities to our partners at Ensign, acquired one real estate asset underlying their senior living operations, and acquired the operations of a senior living community in Boise, Idaho. During the quarter, we also acquired a startup home health agency in Montana, a state in which we currently provide hospice services, expanding the continuum of care we can offer patients and referral sources. The combination of these transactions better position our operations for strength and growth. Our senior living portfolio rationalization provides us a more streamlined platform for which to continue our growth in the segment while improving the overall quality advantage of our portfolio. Our pipeline of potential acquisitions continues to expand with robust opportunity in both segments. We remain focused on evaluating operations that fit our strategic criteria of small to medium-sized operations with strong reputations in their communities, but with significant organic growth potential where our operational expertise can capture that upside for our stakeholders. While we continue to be very disciplined as we look to deploy capital, our cash flow is improving. We are pleased to have a strong balance sheet and we see several dynamics that favor strategic buyers like ourselves that are focused on maintaining the legacy of sellers, providing an exceptional employee experience and delivering quality clinical care. We regularly engage with owners of high quality businesses both on and off market and look forward to partnering with them and bringing their business into the Pennant family in the future. Our organic and strategic investment opportunities are tremendous And we're excited for what we can accomplish on this front in the upcoming several quarters. With that, I'll hand it over to Jen for review of the financials. Jen.
Pennant
Thank you, Derek. And good morning, everyone. Detailed financial results for the three months and six months ended June 30th, 2022 are contained in our 10Q and press release filed yesterday. Our second quarter results are in line with our expectations for the first half of the year. For the three months ended June 30th of 2022, we reported total GAAP revenue of $116.3 million, an increase of $6 million, or 5.4% over the prior year quarter. GAAP diluted loss per share of 9 cents and non-GAAP adjusted earnings per share of 14 cents, an increase of 3 cents, or 27.3% over the first quarter of 2022. Please note that our non-GAAP adjusted earnings per share results for the three months ended June 30, 2022 include the benefit of a 1% Medicare sequestration holiday, as well as the effects of all COVID-related expenses and lost revenue, We view COVID-19 as endemic and an ongoing operational reality we will continue to navigate through, and so do not adjust our results for its impact on our revenue or expenses. As you'll note in our financials, we recognize a loss on the transfer of the five senior living communities to Ensign in the amount of $6.7 million, which approximates a portion of the eventual CapEx needs estimated at some of those buildings. The benefit of this transaction on our cash flows will be seen in 2023 and beyond as we focus our capital expenditures on our remaining portfolio of communities to enhance their quality and amenities. We are pleased with our sequential improvement in our GAAP cash flow from operations for Q2 of 2022 of $9 million compared to cash used in operations for $0.1 million in Q1 of 2022. As a note, without advanced payments, cash flow from operations would have improved to $10.5 million in Q2 versus $700,000 in Q1. Also, excluding the advance payments and the purchase of Twin Falls Idaho real estate at $2.1 million, free cash flow would have been $7 million in Q2, including $3.5 million of CapEx for improvements in our communities. Other key highlights for the three months ended June 30 2022 include $53.1 million drawn on our revolving line of credit and $3.2 million cash on hand at quarter end, 1.96 times net debt adjusted EBITDA leverage ratio, and completion of the automatic recoupment of $28 million in Medicare advanced payments, which began in April of 2021 and concluded during the second quarter. As mentioned in our press release yesterday, We are affirming our fiscal year 2022 annual revenue guidance between $450 million and $460 million and narrowing our annual adjusted earnings per diluted share to between $0.60 and $0.68. In addition, we are supplementing our guidance with annual adjusted EBITDA, which for the fiscal year 2022, we expect to be between $33.2 million and $35.7 million. We believe this additional financial measure provides a better window into our operational cash flow expectations and results. If we continue to see modest growth over our current census levels in home health and hospice and senior living, incremental margin improvement through operating efficiencies, and the impact of the hospice Medicare rate improvement in Q4, we are confident we can reach the low end of our range. Additional revenue and margin opportunities would allow us to reach the high end. While staffing and inflation and other operating challenges will likely persist for the foreseeable future and continue to create hurdles we have to overcome, we know our leaders across the company are capable of confronting these headwinds and continuing the rampant performance that we've experienced year to date and expect in Q3 and Q4. And with that, I'll hand it to Brent to highlight a couple of our local leaders.
Tamika
Thanks, Jen. It's my pleasure to spotlight a few leaders in our organization that have achieved remarkable results through operational excellence. Kinder Hearts Home Health and Hospice in Abilene, Texas, led by CEO Travis Jones and DCS Lisa Flores, has produced remarkable financial and clinical outcomes while truly going above and beyond to meet the needs of their partners in the local healthcare community. Travis, Lisa, and the KinderHearts team exemplify the unique advantages of our locally driven operating model. Year after year, they produce strong clinical and financial results as they provide critical care to the Abilene community. In recent years, they've expanded their reach to serve patients in adjacent communities, growing organically as they sought to be the provider of choice throughout West Texas. As they identified opportunities to invest and expand strategically, they've acquired agencies in surrounding communities and developed leaders to support growth in multiple adjacent markets. This emphasis on being the provider and employer of choice in their community has helped them achieve top and bottom line success, growing revenue and increasing EBIT by 20% in the second quarter over the first quarter of 2022, and by over 30% over the prior year quarter. The future is bright in West Texas with leaders like Travis, Lisa, and others of kinder hearts. At Las Fuentes Resort Village in Prescott, Arizona, Executive Director Doug Libby and Chief Operating Officer Ray Allen Rogers have led their team to success as they've built a reputation as a preferred community and employer of choice in the Prescott area. Doug and Ray Allen have helped lead the Las Fuentes team to steady top and bottom line financial growth thanks to a culture of caring and dedication to providing life-changing service to residents and employees. While being a top senior living destination for many years and consistently achieving excellent results, Doug and Ray Ellen have continued to build a successful culture, leading to another year of revenue, EBITDA, and occupancy growth. In addition to becoming a premier senior living solution in their local community, these two leaders and the amazing team at Los Fuentes have actively supported their cluster and market partners throughout Arizona, helping build culture and drive results in our senior living communities. Their team exemplifies discipline and shared ownership over the community's results and act as true partners throughout Pennant. We're excited for what the Los Fuentes team has in store in the future. Before we move to Q&A, I want to make sure to recognize and thank all of our incredible clinical partners and frontline workers who provide life-changing service to our patients and residents every day and make us who we are. With that, we'll open it up for questions. Tamika, can you please instruct the audience on a Q&A procedure?
Operator
Yes, sir. If you'd like to ask a question, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Again, if you'd like to ask a question, press star one. We'll pause for just a moment to compile the Q&A roster.
Ben
Your first question is from the line of Scott Fidel for Stevenson.
Scott Fidel
Hi, good morning. This is actually Jordan Bernstein on for Scott. I appreciate the additional color this quarter. on adjusted EBITDA guidance. So thanks for that. And then our first question is, it's like some of the strength in the quarter and home health segment was driven via strength on rate. I was wondering how you guys view the breakdown between rate versus volume in home health in the second half of the year.
Derek
Yeah, thanks, Jordan. I appreciate that question. This is John. In fact, we have really strong home health revenue growth, and it was driven about equally by admits and also by rates. I think there's a couple of things at play there. One is just our clusters continue to work effectively to manage the new reimbursement structure put in place by PDGM. And as we go forward, we expect that that will continue. We're working in the community to identify those patients who need our services, And we'll work hard to identify those who are sometimes in those early periods. Also, we've been very effective at getting patients out of the institutional settings, so out of the hospitals. And that's something that continues to be a focus. And so in the second half of the year, I would expect that that will continue. We'll continue to focus on revenue growth from a volume standpoint. but it'll also be making sure that we manage effectively those rates and that we prepare effectively for the transition in the proposed rule.
Scott Fidel
Appreciate that. And then I guess I have one more question on the modeling side, and I appreciate the color on the general ramp I think you spoke to in the second half, but maybe you can break that down for us a bit more between the third and the fourth quarter.
Pennant
Yeah, so we are seeing a ramp in the third and the fourth quarter consistent with what we've experienced between the first and second quarter. And so we would continue to, we expect to continue to have a modest growth in our census to realize the impact of the hospice final rule in the fourth quarter, which is about 3.6% for us. And then, as well, continued census growth in hospice, as well as continued improvement in both rate and census in our senior living, consistent with what we've seen so far.
Scott Fidel
Appreciate it. And I guess one more question, if I may. You know, would you be able to identify for us and quantify for us any of the labor dynamics ongoing currently, whether on hiring or turnover? Anything quantifiable would be appreciated. Thank you. That's it.
Derek
Yeah, we continue to work within a unique labor environment. And as we've talked about before, I think that really comes back to a market-by-market evaluation. In some of our markets, we're seeing that labor pressure ease. We've seen a significant reduction in turnover, for example, in our senior living business. In other markets, it remains tight. I'll highlight the Pacific Northwest and Northern California where we continue to have opportunities to increase volume that are sort of limited by our ability to recruit enough staff. And so we expect that there will be continued pressure. We see it lessening. And anecdotally, we would say that it's certainly easing in many of our markets. And so our focus for the second half of the year We'll continue to be identifying, recruiting, developing those individuals who can add strength to our teams. But we are seeing a little bit of easing on the labor front.
spk16
Appreciate all the color. Thanks.
Sal
Thank you, Jordan.
Operator
Your next question is from the line of Teo Key for Stasio.
Tal
Thank you. Good morning. Again, thank you for providing just the EBITDA guidance. I wanted to ask about the revenue guidance. It looks like you reaffirmed the $450 to $460 million range. But if we look at the total revenue for the first half, I think you did $230 million revenue. So the reaffirmed revenue guidance seems to suggest very little growth on the top line, other than the senior housing operation reactivity. you know, is there something else I'm missing here? And how should we interpret that small increase?
Pennant
No, Tal, the main impact for the second half of the year is the transfer of those communities out of the revenue. And so we are looking at our revenue and expecting it to continue to grow. We're reaffirming and we're expecting that we would be towards the upper end of our guidance on revenue. So we wanted to just take an approach where we're evaluating the transfer of that revenue out of that number and taking that into consideration.
Tal
Okay, got you. Sounds like it's more a matter of being conservative.
Pennant
Yeah, the other thing to note is the impact of the sequestration and the third and fourth that we will experience. So we're taking that all into account.
Tal
Got you. That's helpful. And the second question is, the new agencies have done really well over the past two quarters, and I think that bucket contributed to most of the growth number we saw. I'm curious if you could quantify for us how much additional upside you can expect from that pool of assets, either in terms of volume or margin upside?
Derek
Yeah, Tal, it's absolutely right. We saw really strong growth in our new store assets, and those are those that were acquired in 2021 and through the year in 2022. We still have a significant number of – we still have significant opportunity within that portfolio of assets. There's a lot of upside. We've seen several of them just take off and experience the type of growth that's consistent with our – our tradition, kind of what Brent spoke to earlier and what Derek described in his piece of the call. Others have continued to take a little bit longer to turn, as we've described in prior earnings calls. In some situations, they're in markets where the labor environment has been more competitive. And so we see significant continued upside opportunity. But we have had several of those. I'll use the example of our home health down in Tucson, Arizona, and our hospice that we highlighted last quarter. in Sacramento, California, each of whom have been dynamic contributors to our operating results. They have effectively met the need or the gap in the local community healthcare ecosystem that they're part of, and they've grown rapidly and become a provider of choice in those communities. So the good news is there's plenty of continued upside in that set of acquisitions that we did in 20 and 21. as well as the small acquisition we did in the first part of 2022. Got you.
Tal
And my last question is really on the investment outlook. You mentioned that your pipeline contains both home health and hospitals, but it sounds like the tone is more bullish than some of your peers. How does that propose you really change the conversation in terms of negotiation with potential sellers and Do you think you will accelerate the growth after kind of the final group came out, or do you think there are already deals that you can close before that?
Tamika
Yeah, it's a good question, Sal. You know, we've seen this in the past. Anytime there's change in reimbursement, it does impact valuations, and we take that into account in our discussions and our valuations with any of the partners and the potential acquisition targets. I would anticipate that it will have an impact. There will be a lot more, I think you'll see a lot more activity on the home health side. And, you know, one of the things that we highlighted, and I want to emphasize here, is when we got started in early 2010, there was a lot of uncertainty around reimbursement, and we saw a pretty significant decline in our rates. And that really opened up for us to be able to step in and have aggressive growth for several years. And so we're sort of anticipating a similar type of trend. And so I think from that perspective, we see that as a positive thing, but we continue to just utilize our tools and evaluate each operation based on the projected expectations of the impact of the proposed rule.
Sal
Got you. That's it for me. Thank you.
Operator
As a reminder, to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Ben Hendricks with RBC Capital Market.
Ben Hendricks
Hey, thanks, guys.
spk09
I was wondering if you could give us a little more detail on the ADC growth you saw sequentially in the hospice from the first quarter. Are there any key drivers you can call out there, like the mix of referral sources or earlier referrals? or the impact of improving occupancy and senior living and skilled nursing overall. Any commentary would be helpful. Thanks.
Derek
Thanks, Ben. This is John. We have seen that sequential growth and you've highlighted one of the key factors. We see just like our occupancy has improved in our senior living business, we're seeing that with a lot of our referral partners. We saw throughout the course of the last two years a significant decline in our facility census. We've always been a strong in-home provider, but there's great opportunities with those facility patients to identify earlier on in their disease prognosis when they need hospice care. And so what that does is it's just contributed to a length of stay that's kind of been varied from its normal course over the last couple years. What we're excited about is we're seeing occupancy return to normalized levels with some of our partners, and that's resulting in increased referral flow from those facility partners. And so we expect that we're going to continue to see some positive things related to the normalization of length of stay, related to the percent of our referrals and the percent of our patients that are housed in those senior living and skilled nursing communities. communities and facilities. And so we're very excited about what that represents. It's still a challenging environment. There's still a number of people, when you think about the number of people who have passed away during the global pandemic that ordinarily would have received hospice services, there still is a significant decline. But as occupancy returns to normal in our partners, our community partners, and as we're able to set ourselves apart as the provider of choice, And we're seeing that in different markets across the country where we've been able to really push that forward and drive admissions, like I described in Sacramento. But in the Bay Area is another example. There's a lot of places that are beginning to trust us more and more. On the ADC side, there's also been a couple of markets who have been more specifically impacted during the pandemic. And one of the nice things about that sequential growth is we're starting to see some stabilization and growth in some of those markets. And so it certainly gives us a sense of momentum for the future.
Ben
It's good color. Thank you very much.
Sal
Thanks, Ben.
Ben
At this time, there are no further questions.
spk06
Okay. Well, thank you, Mika, and thank you, everyone, for joining us today.
Tamika
We hope you have a great day.
Pennant
Thank you.
Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you. Thank you. Thank you. Thank you.
spk10
Thank you.
Operator
Thank you for standing by and welcome to the Pinnock Group second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during that time, please press star one. I will now hand today's call over to Derek Bunker, Chief Investment Officer. Please go ahead.
Derek Bunker
Thank you, Tamika, and welcome, everyone. Thank you for joining us today. Here with me today, I have Brent Garasoli, our CEO, John Gochner, our president, and Jen Freeman, our CFO. Before we begin, I have a few short housekeeping matters. We filed our earnings press release and SENDQ yesterday. This announcement is available on the IR section of our website at tenantgroup.com. Replay of this call will also be available on our website until 5 p.m. Mountain Time on Friday, September 9, 2022. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, August 9, 2022, and these statements have not been or will be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions, and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied in today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Penning Group and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, the Penning Group Inc. is a holding company with no direct operating assets, employees, or revenues. Certain of our independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, HR, IT, legal, risk management, and other services to the other operating subsidiaries through contractual relationships. The words pennant, company, we, our, and us refer to the Penn and Group, Inc., and its consolidated subsidiaries. All of our operating subsidiaries in the Service Center are operated by separate independent companies that have their own management, employees, and assets. References herein to the consolidated company and its assets and activities, as well as the use of the terms we, us, and our, and similar terms used today are not meant to imply nor should it be construed as meaning that the tenant group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the tenant group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A Gap to Non-Gap Reconciliation is available in yesterday's press release and in our 10Q. And with that, I'll turn the call over to Brent Garasoli, our CEO. Brent.
Tamika
Thanks, Derek, and welcome everyone to our second quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results. To begin, I'd like to take a moment and personally thank Danny Walker for his partnership and friendship over the last decade. As was previously announced, Danny stepped aside as CEO on August 1st and continues in the role of chairman. His leadership was instrumental as we built this company from the early days of our history as a fledgling startup, experienced tremendous growth and expansion, and navigated the challenges as a new public company in the midst of a pandemic. Danny's influence will continue to be felt across the organization, and on behalf of the leadership team and all of Tenance, we will forever be grateful. As we enter another chapter in our story, we have a deep bench of seasoned and talented leaders across both segments in the service center that have been critical to our growth since the beginning and are prepared to accelerate our performance. Now, as I step into the CEO role, I want to reiterate our commitment to the core operational and cultural principles that have been instrumental to our success over our decade of history and articulate why we're so excited for the future. Our differentiators are one, our innovative operating model focused on empowering and developing strong local leaders. Two, our disciplined growth strategy. And three, our ability to achieve quality care outcomes in lower cost settings. First, our innovative operating model is the foundation of our success. Our operating model is founded on two tenets fundamental to our approach to healthcare services. One, that healthcare is a local endeavor where providers are most successful when key operational decision-making meets local community needs and occurs close to patients and employees. And two, peer accountability from operational and resource partners is more effective at driving clinical and financial results than traditional hierarchical or top-down accountability structures. Our model is innovative because each independent operation functions under the direction of local clinical and operational leaders, each of whom are empowered to make decisions based on the unique needs of the patients, partners, and communities they serve. We believe that our localized approach to program development and patient care leads prospective patients and referral sources to choose or recommend our operations. This is in contrast to typical models where control and key decision making is centralized at the corporate level. The peer accountability that drives successful financial and clinical outcomes is implemented through our unique cluster model, where every operation is part of a defined cluster, which is a group of geographically proximate operations working together to allow leaders to communicate and provide support and accountability to each other. This creates incentives for leaders to share best practices and real-time data and benchmark clinical and financial performance against their cluster partners. This cluster operating model is the key to success of our future operations. Second, our disciplined investment strategy, much of our historical growth can be attributed to our expertise in opportunistically acquiring strategic operations and transforming them into leaders in clinical quality, staff competency, and financial performance. When evaluating potential home health and hospice acquisitions, we look for small to medium-sized agencies with strong clinical and operational reputations that provide a platform for organic census growth and expense management. We look for senior living communities with a quality physical plan where our operational, sales and marketing, and wellness expertise can drive revenue increases through occupancy growth. additional care capabilities, and rate improvement with disciplined cost management. As we have done throughout our history, we will continue to drive organic growth and acquire additional operations in existing and new markets in a disciplined manner. Acquisitions are part of the DNA of our leaders and our resources, and we're ready to put more capital toward strategic growth. Our emphasis on local leadership and decision-making yields unique, customized solutions and programs that meet local market needs and improve clinical outcomes, which in turn accelerates revenue growth and profitability. In our home health and hospice business, our unique operating model allows us to achieve quality outcomes as measured by many industry and value-based metrics such as hospital readmission rates in a lower-cost setting. As the senior living industry continues to evolve toward more acute care, Our experience as a healthcare provider equips us to offer our residents a better quality of life experience at an affordable cost, thus appealing to a broader population. With our platform of complimentary service offerings, we believe that we are well positioned to take advantage of favorable demographic shifts as well as industry trends that reward providers offering quality care in lower cost settings. In summary, We are equipped with a proven operating model designed to generate strong clinical and financial results, an investment strategy that creates value over the short and long term, a deep lineup of talented leaders that continues to grow and develop, and relationship-based clinical expertise critical to better patient outcomes and greater volume over time. We believe the combination of these qualities, unique dependence, allow us to acquire an increasing number of operations and generate value over the long term for all of our stakeholders. Over the last several quarters, we have built foundational strength through pandemic and spinoff-related system transitions. We've been building momentum over the course of this year, improving our cash flow and balance sheet, and we are poised to return to a brisk pace of strategic acquisition that will propel our growth over the next several years and beyond. We have our share of challenges to continue to overcome, and we still have significant inherent value to unlock. But we know where we are going, how to get there, and we are excited about the progress we're making toward operational excellence and our ability to generate and deploy cash toward accretive growth in an active M&A landscape. As we mentioned in our press release yesterday, we are affirming our revenue guidance for 2022, modestly narrowing our adjusted EPS guidance and introducing adjusted EBITDA guidance. We expect to provide annual adjusted EBITDA guidance going forward and hope this additional measure is helpful in evaluating our results and obtaining a better picture of our overall operating cash flow. We expected our results this year to ramp up sequentially as we continue to improve operationally. And so far, our performance is consistent with those expectations. We anticipate a similar incremental build over the course of the second half of the year. And with that, I've asked John to provide an update on our operational results.
Derek
Thanks, Brett. Our second quarter operational results are consistent with our performance ramp expectations. We are pleased to report solid results in home health and hospice and improving results in our senior living segment. in the face of turbulent economic conditions and lingering COVID flare-ups. Key to our performance in the quarter was our ongoing focus on operational excellence and empowering our local teams with improved systems and support. While there remain labor, inflationary and regulatory headwinds going forward, we are poised to deliver stronger results in the second half of 2022 and anticipate more organic and strategic growth in the near future. In our home health and hospice segment, strong top and bottom line results were led by a 6.3% increase in Medicare home health admissions and a 3.5% increase in hospice admissions each over the prior year quarter. Our home health revenue grew a strong 15.3% over the prior year quarter as we continued to strengthen our relationships with partners across the healthcare communities we serve and our acquisitions from 2021 performed better. Though there is still some softness in our hospice average daily census, momentum is building as we saw ADC grow 2.4% sequentially over the first quarter of 2022. As our average length of stay continues to normalize and our local teams continue strong admissions, we expect our ADC to continue to improve. Throughout the quarter, our leaders exercised rigorous cost discipline in the face of labor, fuel, and other inflation-sensitive cost increases, leading to adjusted EBITDA margin improvement of 140 basis points compared to the first quarter of 2022. Our clinical metrics remain solid with the majority of our home health agencies achieving a CMS star rating of 4.5 or above. Our real-time acute care hospitalization rate of 12% is notably below the national average of 15.4%. And our hospice quality composite scores continue to trend above industry averages. On the regulatory front, we were encouraged by the release of the hospice final payment update of 3.8%, which came in 110 basis points higher than the proposed rule. We were disappointed with the framework of the Medicare home health proposed rule, which applies a permanent cut of 6.9% to the 30-day base payment rate, offset by a market basket update of 2.9%. CMS's methodology in making permanent cuts related to behavioral adjustment uses incomplete data from a truncated period during a global pandemic and would dramatically reduce reimbursement for home health services during a period of intense inflationary pressure. Together with peers throughout the industry, we look forward to working with CMS and partners in the legislative branch to pursue solutions that work better for beneficiaries and providers. We are encouraged by the bipartisan legislation introduced in the House of Representatives and the Senate that would delay these cuts and provide the opportunity for CMS to conduct a more thorough analysis before drawing conclusions regarding behavioral adjustments. While the proposed rule outlines changes that will create significant difficulty for providers in our industry, Pennant began in and has thrived through periods of uncertainty, much like today, thanks to the scalability of our operating model built on local leadership, our commitment to maintaining a strong and flexible balance sheet and our opportunistic approach to acquisitive growth. We are preparing now for the potential impact should the proposed rule be finalized. And much like the change to reimbursement affected through PDGM several years ago, we are confident we will pull the right levers to continue our growth even in a challenging reimbursement environment. In our senior living segment, we continued our recovery by taking a step forward in many key metrics. In the first half of the year, we completed a series of transactions aimed at streamlining our senior living portfolio, improving the average quality of our physical plants across the segment and positioning ourselves to accelerate organic growth and get back to modest, acquisitive growth. To that end, we completed the transfer of five senior living communities to affiliates of the Enzyme Group. We acquired the real estate underlying our assisted living community in Twin Falls, Idaho. reducing our liability through the use of cheaper cost of capital, and acquired the operations of Barber Station Assisted Living and Memory Care, a highly strategic Class A assisted living and memory care community in Boise, Idaho. With a favorable long-term triple net lease, close proximity to our service center, and strong home health and hospice partners, we are excited to welcome this community into our portfolio. We will continue to be disciplined as we look to grow, ensuring we maintain momentum in our existing footprint of communities. Senior living segment revenue of $31 million increased $2.9 million, or 10.3%, over the same store prior year quarter, while adjusted EBITDA of $900,000 represented growth of 11.1% over the prior year quarter. Excluding the communities we exited year to date, average occupancy improved 1.9% over the prior year quarter, and revenue per occupied room increased 5.8%, over the prior year quarter, with several rate increases going into effect in July that we believe will positively impact our third quarter REV4. The momentum our senior living leaders are generating is demonstrated by occupancy improving 1.8% over the first quarter 2022, leading to first half 2022 EBITDA that represents a $1.7 million improvement over the second half of 2021. While labor challenges linger and we saw average wages tick up in the second quarter by 0.9%, it was at a slower pace than we saw for much of 2021 and so far is in line with our expectations. To aid us as we efficiently attract new residents, we've invested in additional sales tools and resources that allow us to expand our marketing outreach, better track and follow up with leads, and target high ROI leads across multiple channels. These efforts are contributing to solid occupancy growth across our portfolio. We continue to attract and develop senior living leaders who are contributing to and will be instrumental in our turnaround in the segment. We have more to accomplish with higher cost of services and occupancy several points below pre-pandemic levels. However, we know that achieving exceptional operational results starts with talented local leaders and resources support. And as we've been building our leadership strength in this segment, we're beginning to see the fruits of that key effort. Overall, we are pleased with the progress made in the second quarter in a challenging environment. Our operators, clinicians, resources, and service center partners all share a singular focus on operational excellence. I'm grateful for their persistence, dedication, and hard work, and we are confident as we continue to perform, we can achieve exceptional financial and clinical results. With that, I'll hand it over to Derek to provide an update on our investment activity. Thanks, John.
Derek Bunker
As mentioned, year to date, we transferred the operations of five senior living communities to our partners at Ensign, acquired one real estate asset underlying our senior living operations, and acquired the operations of a senior living community in Boise, Idaho. During the quarter, we also acquired a startup home health agency in Montana, a state in which we currently provide hospice services, expanding the continuum of care we can offer patients and referral sources. The combination of these transactions better position our operations for strength and growth. Our senior living portfolio rationalization provides us a more streamlined platform for which to continue our growth in the segment while improving the overall quality advantage of our portfolio. Our pipeline of potential acquisitions continues to expand with robust opportunity in both segments. We remain focused on evaluating operations that fit our strategic criteria of small to medium-sized operations with strong reputations in their communities, but with significant organic growth potential, where our operational expertise can capture that upside for our stakeholders. While we continue to be very disciplined as we look to deploy capital, our cash flow is improving. We are pleased to have a strong balance sheet and we see several dynamics that favor strategic buyers like ourselves that are focused on maintaining the legacy of sellers, providing an exceptional employee experience and delivering quality clinical care. We regularly engage with owners of high quality businesses both on and off market and look forward to partnering with them and bringing their business into the Pennant family in the future. Our organic and strategic investment opportunities are tremendous And we're excited for what we can accomplish on this front in the upcoming several quarters. With that, I'll hand it over to Jen for review of the financials. Jen.
Pennant
Thank you, Derek. And good morning, everyone. Detailed financial results for the three months and six months ended June 30th, 2022 are contained in our 10Q and press release filed yesterday. Our second quarter results are in line with our expectations for the first half of the year. For the three months ended June 30th of 2022, we reported total GAAP revenue of $116.3 million, an increase of $6 million, or 5.4% over the prior year quarter. GAAP diluted loss per share of 9 cents and non-GAAP adjusted earnings per share of 14 cents, an increase of 3 cents, or 27.3% over the first quarter 2022. Please note that our non-GAAP adjusted earnings per share results for the three months ended June 30, 2022 include the benefit of a 1% Medicare sequestration holiday, as well as the effects of all COVID-related expenses and lost revenue, We view COVID-19 as endemic and an ongoing operational reality we will continue to navigate through, and so do not adjust our results for its impact on our revenue or expenses. As you'll note in our financials, we recognize a loss on the transfer of the five senior living communities to Ensign in the amount of $6.7 million, which approximates a portion of the eventual CapEx needs estimated at some of those buildings. The benefit of this transaction on our cash flows will be seen in 2023 and beyond as we focus our capital expenditures on our remaining portfolio of communities to enhance their quality and amenities. We are pleased with our sequential improvement in our GAAP cash flow from operations for Q2 of 2022 of $9 million compared to cash used in operations for $0.1 million in Q1 of 2022. As a note, without advanced payments, cash flow from operations would have improved to $10.5 million in Q2 versus $700,000 in Q1. Also, excluding the advance payments and the purchase of Twin Falls, Idaho real estate at $2.1 million, free cash flow would have been $7 million in Q2, including $3.5 million of CapEx for improvements in our communities. Other key highlights for the three months ended June 30 2022 include $53.1 million drawn on our revolving line of credit and $3.2 million cash on hand at quarter end, 1.96 times net debt adjusted EBITDA leverage ratio, and completion of the automatic recoupment of $28 million in Medicare advanced payments, which began in April of 2021 and concluded during the second quarter. As mentioned in our press release yesterday, We are affirming our fiscal year 2022 annual revenue guidance between $450 million and $460 million and narrowing our annual adjusted earnings per diluted share to between $0.60 and $0.68. In addition, we are supplementing our guidance with annual adjusted EBITDA, which for the fiscal year 2022, we expect to be between $33.2 million and $35.7 million. We believe this additional financial measure provides a better window into our operational cash flow expectations and results. If we continue to see modest growth over our current census levels in home health and hospice and senior living, incremental margin improvement through operating efficiencies, and the impact of the hospice Medicare rate improvement in Q4, we are confident we can reach the low end of our range. additional revenue and margin opportunities would allow us to reach the high end. While staffing and inflation and other operating challenges will likely persist for the foreseeable future and continue to create hurdles we have to overcome, we know our leaders across the company are capable of confronting these headwinds and continuing the ramp in performance that we've experienced here to date and expect in Q3 and Q4. And with that, I'll hand it to Brent to highlight a couple of our local leaders.
Tamika
Thanks, Jen. It's my pleasure to spotlight a few leaders in our organization that have achieved remarkable results through operational excellence. Kinder Hearts Home Health and Hospice in Abilene, Texas, led by CEO Travis Jones and DCS Lisa Flores, has produced remarkable financial and clinical outcomes while truly going above and beyond to meet the needs of their partners in the local healthcare community. Travis, Lisa, and the KinderHearts team exemplify the unique advantages of our locally driven operating model. Year after year, they produce strong clinical and financial results as they provide critical care to the Abilene community. In recent years, they've expanded their reach to serve patients in adjacent communities, growing organically as they sought to be the provider of choice throughout West Texas. As they identified opportunities to invest and expand strategically, they've acquired agencies in surrounding communities and developed leaders to support growth in multiple adjacent markets. This emphasis on being the provider and employer of choice in their community has helped them achieve top and bottom line success, growing revenue and increasing EBIT by 20% in the second quarter over the first quarter of 2022, and by over 30% over the prior year quarter. The future is bright in West Texas with leaders like Travis, Lisa, and others of kinder hearts. At Las Fuentes Resort Village in Prescott, Arizona, Executive Director Doug Libby and Chief Operating Officer Ray Allen Rogers have led their team to success as they've built a reputation as a preferred community and employer of choice in the Prescott area. Doug and Ray Allen have helped lead the Las Fuentes team to steady top and bottom line financial growth thanks to a culture of caring and dedication to providing life-changing service to residents and employees. While being a top senior living destination for many years and consistently achieving excellent results, Doug and Ray Allen have continued to build a successful culture, leading to another year of revenue, EBITDA, and occupancy growth. In addition to becoming a premier senior living solution in their local community, these two leaders and the amazing team at Los Fuentes have actively supported their cluster and market partners throughout Arizona, helping build culture and drive results in our senior living communities. Their team exemplifies discipline and shared ownership over the community's results and act as true partners throughout Pennant. We're excited for what the Los Fuentes team has in store in the future. Before we move to Q&A, I want to make sure to recognize and thank all of our incredible clinical partners and frontline workers who provide life-changing service to our patients and residents every day and make us who we are. With that, we'll open it up for questions. Tamika, can you please instruct the audience on a Q&A procedure?
Operator
Yes, sir. If you'd like to ask a question, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Again, if you'd like to ask a question, press star one. We'll pause for just a moment to compile the Q&A roster.
Ben
Your first question is from the line of Scott Fidel for Stevenson.
Scott Fidel
Hi, good morning. This is actually Jordan Bernstein on for Scott. I appreciate the additional color this quarter. on adjusted EBITDA guidance. So thanks for that. And then our first question is, some of the strength in the quarter and home health segment was driven via strength on rate. I was wondering how you guys view the breakdown between rate versus volume in home health in the second half of the year.
Derek
Yeah, thanks, Jordan. I appreciate that question. This is John. In fact, we have really strong home health revenue growth, and it was driven about equally by admits and also by rates. I think there's a couple of things at play there. One is just our clusters continue to work effectively to manage the new reimbursement structure put in place by PDGM. And as we go forward, we expect that that will continue. We're working in the community to identify those patients who need our services. And we'll work hard to identify those who are sometimes in those early periods. Also, we've been very effective at getting patients out of the institutional settings, so out of the hospitals. And that's something that continues to be a focus. And so in the second half of the year, I would expect that that will continue. We'll continue to focus on revenue growth from a volume standpoint. but it'll also be making sure that we manage effectively those rates and that we prepare effectively for the transition in the proposed rule.
Scott Fidel
Appreciate that. And then I guess I have one more question on the modeling side, and I appreciate the color on the general ramp I think you spoke to in the second half, but maybe you can break that down for us a bit more between the third and the fourth quarter.
Pennant
Yeah, so we are seeing a ramp in the third and the fourth quarter consistent with what we've experienced between the first and second quarter. And so we would continue to, we expect to continue to have a modest growth in our census to realize the impact of the hospice final rule in the fourth quarter, which is about 3.6% for us. And then, as well, continued census growth in hospice, as well as continued improvement in both rate and census in our senior living, consistent with what we've seen so far.
Scott Fidel
Appreciate it. And I guess one more question, if I may. You know, would you be able to identify for us and quantify for us any of the labor dynamics ongoing currently, whether on hiring or turnover? Anything quantifiable would be appreciated. Thank you. That's it.
Derek
Yeah, we continue to work within a unique labor environment. And as we've talked about before, I think that really comes back to a market-by-market evaluation. In some of our markets, we're seeing that labor pressure ease. We've seen a significant reduction in turnover, for example, in our senior living business. In other markets, it remains tight. I'll highlight the Pacific Northwest and Northern California where we continue to have opportunities to increase volume that are sort of limited by our ability to recruit enough staff. And so we expect that there will be continued pressure. We see it lessening. And anecdotally, we would say that it's certainly easing in many of our markets. And so our focus for the second half of the year We'll continue to be identifying, recruiting, developing those individuals who can add strength to our teams. But we are seeing a little bit of easing on the labor front.
spk16
Appreciate all the color. Thanks.
Sal
Thank you, Jordan.
Operator
Your next question is from the line of Teo Key for Stasio.
Tal
Thank you. Good morning. Again, thank you for providing just the EBITDA guidance. I wanted to ask about the revenue guidance. It looks like you reaffirmed the $450 to $460 million range. But if we look at the total revenue for the first half, I think you did $230 million revenue. So the reaffirmed revenue guidance seems to suggest very little growth on the top line. Other than the senior housing operation, is there something else I'm missing here? And how should we interpret that small increase?
Pennant
No, Tal, the main impact for the second half of the year is the transfer of those communities out of the revenue. And so we are looking at our revenue and expecting it to continue to grow. We're reaffirming and we're expecting that we would be towards the upper end of our guidance on revenue. So we wanted to just take an approach where we're evaluating the transfer of that revenue out of that number and taking that into consideration.
Tal
Okay, got you. Sounds like it's more a matter of being conservative.
Pennant
Yeah, the other thing to note is the impact of the sequestration and the third and fourth courses that we will experience. So we're taking that all into account.
Tal
Got you. That's helpful. And the second question is, the new agencies have done really well over the past two quarters, and I think that bucket contributed to most of the growth number we saw. I'm curious if you could quantify for us how much additional upside you can expect from that pool of assets, either in terms of volume or margin upside?
Derek
Yeah, Tal, it's absolutely right. We saw really strong growth in our new store assets, and those are those that were acquired in 2021 and through the year in 2022. We still have a significant number of – we still have significant opportunity within that portfolio of assets. There's a lot of upside. We've seen several of them just take off and experience the type of growth that's consistent with our – our tradition, kind of what Brent spoke to earlier and what Derek described in his piece of the call. Others have continued to take a little bit longer to turn, as we've described in prior earnings calls. In some situations, they're in markets where the labor environment has been more competitive. And so we see significant continued upside opportunity. But we have had several of those. I'll use the example of our home health down in Tucson, Arizona, and our hospice that we highlighted last quarter. in Sacramento, California, each of whom have been dynamic contributors to our operating results. They have effectively met the need or the gap in the local community healthcare ecosystem that they're part of, and they've grown rapidly and become a provider of choice in those communities. So the good news is there's plenty of continued upside in that set of acquisitions that we did in 20 and 21. as well as the small acquisition we did in the first part of 2022. Got you.
Tal
And my last question is really on the investment outlook. You know, you mentioned that your pipeline contains both home health and hospitals, but it sounds like the tone is more bullish than some of your peers. You know, how does that propose you really change the conversation in terms of negotiation with potential sellers and investors? Do you think you will accelerate the growth after kind of the final group came out, or do you think there are already deals that you can close before that?
Tamika
Yeah, it's a good question, Sal. You know, I mean, we've seen this in the past. Anytime there's change in reimbursement, it does impact valuations, and we take that into account in our discussions and our valuations with any of the partners and the potential acquisition targets. I would anticipate that it will have an impact. There will be a lot more, I think you'll see a lot more activity on the home health side. And, you know, one of the things that we highlighted and I want to emphasize here is when we got started in the early 2010s, there was a lot of uncertainty around reimbursement and we saw a pretty significant decline in our rates. And that really opened up for us to be able to step in and have aggressive growth for several years. And so we're sort of anticipating a similar type of trend. And so I think from that perspective, we see that as a positive thing, but we continue to just utilize our tools and evaluate each operation based on the projected expectations of the impact of the proposed rule.
Sal
Got you. That's it for me. Thank you.
Operator
As a reminder, to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Ben Hendricks with RBC Capital Market.
Ben Hendricks
Hey, thanks, guys. I was wondering if you could give us a little more detail on the ADC growth you saw sequentially in the hospice from the first quarter.
spk09
Are there any key drivers you can call out there, like the mix of referral sources or earlier referrals? or the impact of improving occupancy and senior living and skilled nursing overall. Any commentary would be helpful. Thanks.
Derek
Thanks, Ben. This is John. We have seen that sequential growth and you've highlighted one of the key factors. We see just like our occupancy has improved in our senior living business, we're seeing that with a lot of our referral partners. We saw throughout the course of the last two years a significant decline in our facility census. We've always been a strong in-home provider, but there's great opportunities with those facility patients to identify earlier on in their disease prognosis when they need hospice care. And so what that does is it's just contributed to a length of stay that's kind of been varied from its normal course over the last couple years. What we're excited about is we're seeing occupancy return to normalized levels with some of our partners, and that's resulting in increased referral flow from those facility partners. And so we expect that we're going to continue to see some positive things related to the normalization of length of stay, related to the percent of our referrals and the percent of our patients that are housed in those senior living and skilled nursing communities. communities and facilities. And so we're very excited about what that represents. It's still a challenging environment. There's still a number of people, when you think about the number of people who have passed away during the global pandemic that ordinarily would have received hospice services, there still is a significant decline. But as occupancy returns to normal in our partners, our community partners, and as we're able to set ourselves apart as the provider of choice, And we're seeing that in different markets across the country where we've been able to really push that forward and drive admissions like I described in Sacramento. But in the Bay Area is another example. There's a lot of places that are beginning to trust us more and more. On the ADC side, there's also been a couple of markets who have been more specifically impacted during the pandemic. And one of the nice things about that sequential growth is we're starting to see some stabilization and growth in some of those markets. And so it certainly gives us a sense of momentum for the future.
Ben
Good color. Thank you very much.
Sal
Thanks, Ben.
Ben
At this time, there are no further questions.
spk06
Okay.
Tamika
Well, thank you, Mika, and thank you, everyone, for joining us today. We hope you have a great day.
Pennant
Thank you.
Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines.
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