PACS Group, Inc.

Greetings and welcome to the Pax Group Q1 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ryan Welch, Director of Corporate Finance. Thank you. You may begin.

Thank you, and good morning, everyone. Thank you for joining us for our conference call. Before we begin the prepared remarks, we would like to remind you that yesterday, Pax Group issued a press release announcing its first quarter 2026 results. An investor presentation was published and is available on the investor relations section of pax.com. I'd also like to remind everyone that during the course of today's conference call, we will discuss certain forward-looking information, including our expectations for 2026 revenue and adjusted EBITDA that is based on our current expectations, assumptions, and beliefs about our business. Any forward-looking statements are subject to risks and uncertainties that can cause our actual results to materially differ from those expressed or implied on today's call. You should carefully consider the risk factors that may affect our future results as described in our annual report on Form 10-K for the year ended December 31, 2025 and our other SEC filings. During this call, we will discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDAR, and net leverage. These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP measure, please refer to the earnings release and the appendix included in the investor presentation, which are both published and available on the investor relations section of the tax group's website. I'll now turn the call over to Jason Murray, Chairman and CEO.

Thanks, Ryan, and thank you all for joining us this morning. We're very pleased to report a strong start to 2026 with continued operational consistency across our platform and measurable progress across the facilities we've integrated over this past several years. Our performance this quarter reflects both the durability of our operating model and the continued execution of our teams across the organization, as well as the strength of the foundation we built throughout 2025. As we enter 2026, our priorities remain consistent, drive performance across our existing portfolio, continue advancing facilities through their integration lifecycle, and allocate capital in a disciplined manner. We are seeing that play out across the platform. As of March 31st, 2026, PACS operates 323 facilities across 17 states with approximately 35,500 total beds. including roughly 32,700 skilled nursing beds and 2,700 assisted living beds. Across this platform, we are caring for approximately 31,900 patients daily. We believe the scale and geographic diversity of our platform combined with the consistency of our operating model position us to deliver reliable performance while continuing to grow thoughtfully over time. In addition, our density within key markets continues to improve, allowing us to leverage local leadership, clinical resources, and referral relationships more effectively as we scale. We believe this localized scale is an important driver of both operational consistency and long-term growth. Our mature facilities continue to operate at high levels of occupancy and clinical consistency, providing a stable base of strong performance. while our ramping facilities are progressing as expected as they adopt PACS clinical systems and operating processes and move toward mature levels of occupancy and skilled mix. We continue to view this progression from new to ramping to mature as a meaningful and embedded source of organic growth within our existing portfolio. We recognize that there has been ongoing discussion around managed care providers potentially reducing admissions into skilled nursing facilities. While we continue to monitor the evolving landscape closely, we have not seen those concerns impact our business and our operating metrics, admission trends, and skilled mix, which includes managed care, remain very strong across the portfolio as evidenced in our first quarter results. More importantly, we believe high-quality operators with strong clinical outcomes, reliable discharge partnerships, and proven patient care capabilities will continue to play an essential role in the post-acute continuum. Our focus on quality and execution positions us well to continue earning the trust of hospitals, payers, patients, and families, regardless of broader market noise. From a clinical perspective, we remain encouraged by the consistency of outcomes across our facilities. As of the end of the first quarter, 222 of our facilities are rated four or five stars under CMS quality measure ratings, up from 207 at the end of 2025. Among our mature facilities, our average CMS quality measure star rating remains 4.4, consistent with the prior quarter and meaningfully above the industry average of 3.6. While these improvements may appear incremental at this level of performance, we believe they reflect continued consistency in clinical execution, patient outcomes, and operational discipline across a large and growing platform. At the center of that performance remains our locally led, centrally supported model. Our facility leaders are empowered to make decisions at the point of care where they can have the greatest impact on patient outcomes, while PAC Services provides the infrastructure, systems, and support necessary to drive consistency, accountability, and compliance across a growing and increasingly complex organization. We believe this structure allows us to deliver both strong and repeatable results, even as we continue to scale the platform. A key component of sustaining this performance is our investment in leadership development. Through our administrator and training program, we continue to build a scalable bench of operators prepared to step into leadership roles across both existing and newly acquired facilities. We currently have 40 AITs in the program, which we believe is an important indicator of our ability to integrate facilities effectively and maintain operational continuity as we grow. Just as importantly, that investment ensures we have the right leadership in place when facilities require focused operational and clinical improvement. Across our portfolio, we continue to see examples of how disciplined leadership supported by operating model can drive meaningful improvement in both clinical and financial performance over relatively short periods of time. To bring that to life, I'd like to highlight one of our facilities in Arizona. This facility was acquired in 2023 and entered our portfolio with significant operational and clinical challenges. Subsequently, the facility was designated as a special focus facility after failing a special focus survey with more than 20 deficiencies, including high severity findings. New administrative and clinical leadership was put in place, supported by additional PACS clinical resources and PACS services, and the team implemented targeted changes across key areas of clinical performance and operational execution. Importantly, this required more than process changes. It required a fundamental shift in culture. The team moved from reacting to deficiencies to owning outcomes. with a clear focus on accountability, consistency, and system-level improvement. The results have been significant. In subsequent surveys, deficiencies were reduced to fewer than five, all within acceptable thresholds under the special focus program requirements. As a result of that progress, the facility has now successfully graduated from the special focus facility program. At the same time, the facility has maintained occupancy above 90% and continues to demonstrate improving financial and clinical performance. We believe this example reflects what our model is designed to do, identify operational opportunities, install strong local leadership supported by PAC services, and drive measurable improvement over time. Stepping back, we believe the performance we are seeing across the platform reflects the continued maturation of a significantly expanded portfolio combined with ongoing investment in our people, systems, and infrastructure. We also believe our positioning within the broader skilled nursing landscape remains compelling. Demographic trends continue to support long-term demand, and the industry remains highly fragmented, which we believe creates opportunities for operators with scale, clinical capability, and disciplined execution. As we look ahead, we remain focused on continuing to drive performance within our existing portfolio, advancing our facilities through the integration lifecycle and allocating capital in a disciplined manner. I'd like to take a moment to briefly address our previously disclosed government investigations. These matters continue to progress through the normal course, and we remain fully cooperative and engaged with the government throughout the process. While we were unable to estimate the timing of resolution at this stage, we are confident in our ability to navigate these matters responsibly and thoughtfully, just as we have navigated other challenges throughout our company's history. Importantly, we believe the work we have done to strengthen our organization, enhance our infrastructure, and reinforce our compliance and reporting processes has positioned the company well for the future. Our focus remains firmly on executing our strategy, supporting our local leaders and caregivers, and continuing to build a stronger, more resilient organization for the long term. Before I turn the call over, I'd like to take a moment to address the leadership transition we announced a few weeks ago. We're excited to welcome Kerry Hendrickson, our new Chief Financial Officer. Kerry brings a strong background in healthcare and many years of experience as a public company CFO. We are confident he will play an important role as we continue to scale the organization. At the same time, I want to recognize and thank Mark Hancock, our co-founder and longtime CFO, who will be retiring from his role. Mark and I started the company in 2013 with a shared vision, which was to build a lasting healthcare organization that delivers high-quality care, supports the people doing the work every day, and create long-term value across the communities we serve. What we built since then is a direct reflection of that vision and of Mark's leadership. From the early days of the company through the growth and scale we see today, Mark has been instrumental in shaping not just the financial foundation of PACS, but the culture, the discipline, and the long-term mindset that define how we operate. On a personal level, I'm incredibly grateful for Mark's partnership that we've had over the years and for the role Mark has played in building PACS into what it is today. With that, I'll turn it over for Mark for a few words.

Thanks, Jason. It's truly been an incredible journey building Pax over the past many years, and I'm very proud of what this team has accomplished. When we first started this company in 2013, our goal was to build a legacy healthcare company that provided a better experience for everyone involved, something with a durable foundational strength that would last far beyond mine or anyone's respective individual involvement. The organization focused on delivering high-quality care, supporting our teams, and making a meaningful difference in the communities that we serve. It's been rewarding to see that vision take shape and continue to grow over that time. What stands out the most to me is the people. The strength of PACS has always come from the individuals across the organization who show up every day focused on doing the right thing for patients and for each other. That's what has allowed this company to scale while maintaining consistency and discipline. I'm confident that PACS is well positioned for continued success. The foundation is strong, the leadership team is in place, and I have full confidence in Kerry as he steps into the CFO role. I'm truly grateful for the opportunity to have been a part of the day-to-day journey and look forward to continuing to work with PACS Board of Directors as Vice Chairman. Strong governance, risk management, financial oversight, and strategy are all critically important to me for creating shareholder value that is sustainable over the long term. With that, I'll turn it over to Kerry.

Thank you, Mark. I appreciate the opportunity to step into this role and build on the strong financial foundation that's been established. One of the things that attracted me to PACS was the strength of the operating platform and the consistency of outstanding execution, and that certainly played out in the first quarter. For the first quarter of 2026, our revenue was $1.42 billion, representing 11% growth year over year. Our net income totaled $80.7 million, an increase of $52.3 million from $28.5 million in the first quarter of last year. Our adjusted EBITDA was $170.4 million, which was an increase of $72.8 million, or 75% over the prior year. And our adjusted EBITDA was $265.9 million, and diluted earnings per share for the quarter was 50 cents up from 17 cents in the prior year, truly outstanding performance in the first quarter. That performance in the first quarter reflects our continued strength across our portfolio, driven by stable occupancy, improving skilled mix, and continued progression across our ramping facilities. Importantly, we saw consistent execution across both our mature and our recently integrated operations. Adjusted EBITDA for the quarter included approximately $16.3 million of net EBITDA benefit from payments that we received under California's Workforce and Quality Incentive Program, or WQIP, which is a direct result of the outstanding performance of our facilities in California. WQIP is a performance-based program focused on quality of care, workforce investment, and health outcomes. Even excluding this WQIP benefit, our adjusted EBITDA increased $57 million year-over-year in the first quarter of the prior year. These payments were not included in our original guidance due to the uncertainty around the timing and the amount. As a reminder, as it currently stands, the WQIP program has been discontinued as of the end of 2025. The payment we received in the first quarter of 2026 was the last payment related to the 2024 program year. We expect two additional payments tied to the 2025 program year, with at least one of those anticipated to be received sometime in 2026, and then the other payment expected in late 26 or early 27. Again, due to the uncertainty in timing and the amount, the W-EQUIP payments received in the first quarter of 26 were not included in original guidance and will continue to treat these future expected payments in the same way, excluding them from guidance. While it remains unclear whether W-EQUIP will be continued to replace, We, along with others in the state of California, are actively advocating for a successor program that aligns reimbursement with quality. You noticed in the release that we included same-store metrics for the first time, which we believe will provide additional insight into the underlying health of the business and will further highlight the consistency of our operating performance. On a same-store basis, which includes 284 skilled nursing facilities and operations since the beginning of 2025, our revenue increased 8% year-over-year in the first quarter. This growth was driven by occupancy improvement from 89.6% to 90.8%, along with gains and skilled mix across both revenue and patient days. Total occupancy for all facilities for the quarter was 90.9%, compared to 89.2% the prior year, and continuing to significantly outpace the industry average of approximately 79%. Our skilled mix increased to 30.5%, which was an improvement of 90 basis points year over year, driven primarily by continued progression within our ramping cohort. Our mature facilities remained highly stable, operating at 94.8% occupancy, with skilled mix at 33%, which continues to reflect the strength and consistency of our longer tenured operations. Our ramping facilities averaged 88.9% occupancy, with skilled mix continuing to improve, reflecting ongoing operational progress as these facilities move toward mature performance levels. Importantly, this cohort now includes facilities across seven new states entered during our 2024 expansion activity, demonstrating our ability to successfully deploy the PACS operating model across a broader and increasingly diverse green geographic footprint. Our new facilities averaged 82.7% occupancy, with skilled mix of 26.5%, reflecting the early stages of integration and stabilization as these facilities continue progressing toward mature performance levels. Importantly, the progression we're seeing across these cohorts reflects internally driven improvement within our existing portfolio rather than reliance on external growth, and we continue to view this as a repeatable driver of performance over time. From a cost perspective, cost of services totaled $1.07 billion, up 5% year-over-year, which, when compared to the 11.2% revenue growth, reflects significant operating leverage that we're able to achieve on our incremental revenue. Our general and administrative expense was approximately $112 million, which reflects ongoing investment in our infrastructure systems and personnel to support the scale and complexity of the organization as we continue to grow. Total operating expenses increased approximately 5.8% year-over-year, which reflects disciplined cost management, even as we continue to invest in the systems and infrastructure that's required to support a larger, growing, more complex organization. From a capital structure standpoint, we continue to maintain a conservative and flexible balance sheet. During the quarter, we deployed $86.5 million in strategic real estate investments within our operating footprint consistent with our long-term approach to selectively increasing ownership. We ended the quarter with approximately $800 million of available liquidity, including approximately $250 million of cash and net leverage of just 0.1 times. Our strong balance sheet enables us to support organic growth initiatives, selective acquisition opportunities, and to evaluate opportunities to increase real estate ownership within our portfolio where it aligns with long-term value creation. And we'll do this all while maintaining financial discipline. As we noted in our release, our board recently approved a $250 million share repurchase authorization, which provides us with an additional capital allocation tool and the flexibility to repurchase shares opportunistically when conditions warrant. While we remain focused on investing in the business and pursuing discipline acquisition opportunities, This authorization gives us the ability to act when we believe our shares are undervalued. Our current plan is to repurchase shares opportunistically in the open market during permitted trading windows. The timing and magnitude of repurchases, if any, will depend on a range of factors, including our share price, broader capital allocation priorities, requirements under our credit agreement, and overall market conditions. At this time, we do not intend to implement a 10b-5-1 plan, an accelerated share repurchase, or any kind of other similar structure program. That said, the authorization allows us the flexibility to pursue those options if we determine they represent the most effective use of capital. Importantly, the authorization has no fixed expiration date. It is not obligated to us to repurchase any specific amount of common stock and may be modified, suspended, or terminated at the Board's discretion. It's worth noting that if this authorization had been in place during the first quarter, there were periods where we believe it would have been appropriate to deploy capital towards share repurchases. Quickly regarding our previously discussed material weaknesses and internal control over financial reporting, that remediation remains ongoing, but we're actively advancing these efforts and expect to make substantial progress this year. We've made meaningful progress already, including strengthening our leadership team, enhancing our compliance, and implementing additional controls across key areas of business, particularly within our revenue processes. Importantly, our financial statements continue to be prepared in accordance with GAAP, and we believe the results reported this quarter fairly present the financial position and performance of the company. Turning now to our outlook for full year 2026, We are significantly increasing our adjusted EBITDA expectations based on our first quarter outperformance, and we're reaffirming our revenue guidance. We're increasing our adjusted EBITDA guidance to a range of $605 million to $625 million, which is a $50 million increase at all levels of the range relative to our prior guidance. At the midpoint of this range, this represents approximately 22% growth over 2025. The increase in our guidance is driven by stronger than expected performance in the first quarter, including occupancy strength, favorable skilled mixed trends, and consistent execution across both our ramping and mature cohorts. Also, as we noted in the release, we're making refinement to our guidance methodology to not include future acquisitions in our guidance, which we believe will provide greater insight into our expectations related to the underlying performance of the business. Historically, our outlook is included in the assumption for a nominal level of acquisition activity, which contributed to incremental revenue but not incremental EBITDA. Beginning with this quarter and going forward, our guidance, again, will not reflect any contribution from future acquisitions. Our previous guidance included approximately $120 million of revenue related to future acquisitions, so despite moving future acquisitions, removing them from our guidance, we're reaffirming our revenue guidance range of $5.65 billion to $5.75 billion, which implies stronger than expected organic revenue performance across the portfolio relative to our initial expectations entering the year. While we're eliminating future acquisitions from our guidance, I want to emphasize that this modification does not reflect any change in our acquisition strategy or pipeline. We continue to see a robust and active pipeline of opportunities and are actively evaluating a number of potential transactions that align with our strategic and financial criteria. Based on our current visibility, we expect to remain active on the acquisition front and are engaged in discussions on several opportunities that we could potentially close during 2026. As we've done historically, we'll continue to pursue acquisitions selectively and with discipline, focusing on opportunities where we believe we can drive meaningful operational improvement and long-term value creation. Overall, our updated outlook reflects strong performance year-to-date, continued confidence and organic growth across our platform, and a disciplined approach to both capital allocation and external growth opportunities. With that, I'll turn the call back to Jason.

Thanks, Kerry. As you can see, we're very pleased with the start of the year, and we continue to remain focused on executing against our priorities. So with that, operator, I believe we're ready for questions.

Thank you. If you would like to ask a question, press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question comes from Raj Kumar with Stevens. Please state your question.

Hey, good morning. Congrats, Mark, on the retirement, and congrats, Kerry, on the new role. Maybe just focusing on some of the reimbursement dynamics. Appreciate the color on the California Quality Incentive Program. I know there's another state with Ohio where the state Medicaid department is going through some of the recalculations there. Maybe just any updates on that from that quality incentive program. And then I guess as you think about the rest of this year, any kind of moving budgets across your state of operation on the rate front, any color there would be helpful.

Thanks, Raj. This is Josh. I'll take that one there. Yeah, you noted Ohio has a quality incentive program. And initial indications across the portfolio that we have, both the stuff that we have had in Ohio for a long time, as well as our new acquisitions that we acquired in the past little bit, all have performed incredibly well across that quality program. And so there's been a number of discussions about that. Initially, we believe there's substantive opportunity for us to be paid out in those quality programs, and we're actively having conversations with the state about when that payment is going to take place. Similar to other quality programs like we mentioned in California, we do not provide any guidance because we're not certain when those payments or the exact quantity of those will come. But just generally across the landscape, when it comes to quality, we always try to encourage and as we evaluate deals that we're looking into, we love states that have a component that of reimbursement related to quality. We see ourselves as a high-quality provider, and wherever those opportunities exist, we feel that we do incredibly well, much like we've proven in California, Ohio, as you mentioned, Texas, other states that have quality components. The race in general, as we look at reimbursement, we've been very active and maybe more active than we ever have in having substantive conversations with legislature and state and federal governments to continue to emphasize how important the post-acute continuum is and having quality providers in the space appropriately reimbursed for the higher levels of acuity that have been flowing downstream from the acute providers. We've actually had a lot of success in this, and that's why you see across our reimbursement a lot of stability and, in many instances, improved reimbursement that recognizes the growing need for post-acute services. We're also seeing that, interestingly enough, in the managed care organizations. We've had a number of meaningful conversations and rate renegotiations, new contracts that all emphasize both quality of care but also recognition that there needs to be appropriate reimbursement for the higher level of acuity that we're starting to see in skilled nursing. And so there's a recognition across our sector that post-acute provides an incredibly valuable service, and if done well, can really save the overall environment. And that's why I believe, from a cost perspective, and that's why I believe they continue to emphasize the need to have funds flow to our environment.

Great. And then maybe as a follow-up, just kind of thinking about the remainder of the year, I think California is, you know, for health care staffing, I think the minimum wage is expected to boost. Clearly no direct, you know, impact to SNFs because of the non-funded component of that. But I guess anything to kind of consider as you kind of think about your workforce and, you know, as, you know, kind of pricing increases for the general, you know, population pool, How should we kind of be thinking about that from a cost perspective as you try to be more competitive with the kind of hospitals or health systems across some of your markets in California?

The labor trends in our space are incredibly positive as well, not only for our company individually, but across the industry. Post-acute care, we're starting to see people come back to the space. We're starting to see us become a very viable option. for both the tenured nurses as well as new nurses who are looking to begin a career in the space. And so we've seen significant improvement. We're seeing a number of job applicants that are coming in to apply for jobs and opportunities with us. And California is an area where we've seen those numbers certainly increase. And so as we look at the labor environment, we're incredibly encouraged by what we're seeing. We measure kind of premium labor, agency usage, And we've seen those numbers remain consistent over the last couple quarters and down significantly from end of 2024, 25, and certainly, you know, decreasing over time from where we were post-COVID. We also have incredible relationships, particularly, as you mentioned, California, with labor unions. SEIU is a big one there. We've been able to reach out and have very meaningful conversations with them. about how we can work together to position ourselves and our sector as we move forward into the future. And so the labor environment seems great, and in California we're very optimistic.

Thank you. Your next question comes from Benjamin Rossi with J.P. Morgan. Please state your question.

Hi, all. Thanks for taking my questions here. Just regarding your 2026 outlook, as we think about your revised guidance for the year, you mentioned 120 million of M&A revenue that is no longer expected for the remainder of the year. Could you walk us through some of your embedded assumptions across rates, occupancy, and your three cohorts for 2026 and how you're thinking about those trends as the year progresses? And then across pricing, what are you assuming for those Medicaid supplemental programs and those two potential remaining payments from those quality programs like the one in California.

Thanks. Yeah. You know, as you look at just kind of the KPIs that we've reported on, we continue to see growth, particularly we highlighted the ramping cohort. And as we look at kind of this first quarter, as we're giving initial guidance, you know, we're always doing the best that we can to look at visibility across how those cohorts, particularly new and ramping, are performing. And we just saw increased occupancy, skilled mix, reimbursement rates, which highlights their ability to take a more clinically acute patient and be reimbursed appropriately for those. And so that's why you haven't seen any adjustments to the revenue guidance, because revenue came out in Q1 incredibly strong, and we would anticipate continuing to see the strength across those KPIs. As it relates to the quality incentives, this is something that becomes very difficult to estimate. And that is the reason that we leave it out. Even on some of the California numbers, those fluctuate almost all the way until the end, until the official payments and cash is received. And we've seen similar trends across other quality incentive payments. And that's why it's difficult. As I mentioned, the Ohio ones, the remaining California, two additional payments. to anticipate exactly what those numbers are and when the cash will come in. And so as soon as we receive those numbers, as soon as we can possibly report on those, and as soon as we get visibility into what those may look like, if there's more clarity on it than there has been historically, we'll make sure to report that and update our guidance.

Ben, just to be clear, this is Kerry, by the way. How you doing, Ben? Those payments are not included in our guidance. As an example, the payment we received in the first quarter of this year, we really would have expected to have that payment made to us in December of last year, but it didn't come, so it came in the first quarter of this year. It's just unpredictable when those things will come, and that's why we don't include it in there, because we may include it in the guidance, and then it not happen until the beginning of next year, so we just leave it out, and we'll report on it when we receive it.

Understood. Appreciate that additional context there. I suppose as a follow-up on Purdue and Trends, Seems like you had good growth during 1Q for managed care and Medicaid rates. I guess if Medicaid is mostly from these quality payments in California coming through, can you help me understand the growth in your managed care PPD rates? And then when you think about the 1Q growth there, any breakdown of how that growth is attributed to rate increases, acuity mix, and maybe additive billing services?

Yeah, this is Josh again. We've seen managed care census increase, number of admissions increase, particularly in Q1 of this year, compared to really any quarter of 2025. And so not only from a volume perspective, but again, us actually sitting down with a number of managed care plans and having very meaningful conversations about appropriate reimbursement in those contracts. We've renegotiated hundreds of contracts successfully And what that points to for us as a provider, not only is the strength of our operating model, the quality of care that we provide, which is certainly something that managed care organizations look for, the high density number of beds that we have, which allow those managed care payers access. They are willing to appropriately reimburse if we as a provider not only provide excellent outcomes, but are willing to improve our clinical capabilities. and invest in our people, our physical plants to ensure that, you know, their members can get excellent care. And so, you know, all of those trends point to us being able to increase managed care census and with the individual patients that come in, increase our reimbursement because we do truly represent the lowest cost setting of institutional care that can be provided. We've talked a lot about how important the post-acute continuum is, and we believe we're doing a really good job at this point educating the hospital system, the payers, particularly managed care, about how important we are as a provider if we're going to do it on a high-quality basis. And so I think you can continue to expect to see increased managed care, not only from a census perspective, but also continued strength in our reimbursement numbers.

Great. And if I could just squeeze one more in here for Mark, just specific to you as you close your time in PAX here in an executive capacity, obviously you leave a unique legacy with the company. Can you reflect on your journey to this point and describe your thoughts on next steps as you hand over the reins to Kerry and the broader team here?

Thanks. Yeah. Yeah. Thanks for that, Ben. Look, I mean, From day one, Jason and I, I mean, we really went about trying to build a platform and a system that could support these locally-led facilities, meaning, you know, we tried to take as much of the clerical administrative burden off the plates of our local teams so that they could focus on what they do best, which is delivering care. And we built that kind of service center in a way that truly does support that broader mission of delivering care at the very highest level and providing a better experience for everyone involved, you know, the patients, their families, our staff, providing an environment where, you know, they can, they're not dreading driving into work. They're actually going to an environment, you know, that they feel the love and the healing and caring that happens there. And so, you know, we've, intentionally built systems and processes and technologies around that in a sector that, you know, we like to say isn't historically known for sophistication and technology. We've invested heavily to the tunes of hundreds of millions of dollars over the years in those systems and technologies to take out some of the the noise and inefficiencies and really streamline that process of delivering care. So, you know, this is a very high touch model. The level of acuity that our clinicians take care of is impressive. It truly is an extension of the hospital. And you see that manifested in the occupancy, in the demand for the services, the acuity to the skilled mix. And that's really where we see trends of moving in this post-acute space and continuing to move. We like to say that we've been talking for years about this kind of silver wave, the silver tsunami, and that it's here. It's not only at our doorstep, but we're well into it now. And so we feel like we're well positioned from just an organization, from a level of talent through our AIT program that we've infused in this sector that's not you know, again, historically known for the type of dynamic leaders and leadership teams and interdisciplinary teams that can support that effort. And so I'm just, you know, confident in what's in place. I'm confident in the executive team and the leadership teams, both, you know, at the PAC services level, but certainly at the local level. We saw that demonstrated over the last year in 2025, which was where the model was challenged, and we welcomed that challenge. That was our intent when we went public, was we welcomed the scrutiny. We welcomed the challenge of the model, and we've proven that it works, and that despite the headwinds and the challenges, the company not only continued to perform, but really thrived. And, you know, we feel like we're just, again, beginning to, we've just scratched the surface on what this mission and what this model can do. Right now we represent, you know, about 2% of the market. And so, again, I'm confident that we have the people, the systems, the processes, the platform in place to continue this legacy. This truly is our life's work. And so, you know, Jason and I are very, very proud of that. And, you know, I have full confidence in Jason and the team to continue to lead that. I look forward to continuing to focus on, you know, all those elements from a board perspective in governance and strategy and truly delivering, you know, outpaced results to our shareholders. So, yeah, thanks for that question, Ben.

Yeah, of course. Thanks for the additional color. Congrats on the retirement and congrats, Kerry, on the new role.

Thank you.

Your next question comes from Ben Hendrix with RBC Capital Markets. State your question, please.

Great. Thank you very much. I'll echo congrats to both Mark and Kerry. I was wondering if we could also just dig in a little bit deeper on some of the managed care commentary. I was looking at your ramping facility results. Clearly a lot of growth and mix of nursing patient days. It looks like that might have been slightly offset by a little bit lower skilled rate. Just wanted to see kind of what you're seeing from a contracting perspective there. Is that purely just a function of the new regions coming into the bucket, or is there a dynamic there where you're being left some room for quality incentive payments? Just wanted to see kind of what the contracting environment is with those newly ramping facilities. Thanks.

Thanks, Ben. You know, we look at managed care, particularly as we take over new facilities. We've talked about how generally when we're taking on stuff to our portfolio, it has been distressed and is struggling. They're usually not identified in the communities that they're serving as a place that, you know, managed care organizations, other payers, hospital systems can truly rely on to provide great care. And so when we come in and deploy our model, it takes time to change that reputation and build the confidence in all of those parties to ensure that they can rely upon us as a provider. And so when we talk about ramping specifically, that usually is about the timeframe that we start to see meaningful conversations and contracts and potential renegotiation of contracts. When we've been able to prove out over the course of 18 or so months that we're a different facility than we were when PACS entered in. And so those conversations are happening all along the way. Fortunately, with the reputation that we have nationally, I think it gives us an opportunity to have a seat at the table sooner than most. But as we work through those contract negotiations, as people start to see the actual quality that we're delivering, there's a desire at that point to actually leverage the platform that we have, the density, the number of beds that we have to have contracts. And so it's no surprise to us that as we're moving through that ramping phase, we're starting to see the actual initiation or the renegotiation and the increased volume of in patient days and admissions for managed care providers as well as other high-acuity skilled patients are flowing through the model. And so, you know, that is something that we will continue to see. We hope that it happens as soon as possible. Some deals come where we're able to, just based on need, get managed care contracts sooner. But as we move, and you'll see it consistently, from new ramping to mature, not only does census increase, but so does a managed care's willingness to reimburse us more. And we prove out the ability to continue to take higher acuity patients to do it well. The clinical capabilities as they move from ramping to mature usually even increase, and the comfort level of these teams to take a higher acuity patient And so as those facilities mature, it should be no surprise it isn't to us that we see increased numbers, both in admissions, skilled mix, reimbursement rate, as those facilities move from ramping to mature. And so I think that's something, as you look at your own models, as we look at ours, we expect to continue to see those trends that are positive, and we're grateful that managed care organizations and others in the communities that we serve are starting to realize the value that we provide.

Thanks for that color. And then, Kerry, just maybe if you can provide maybe some broad observations that you're considering with regard to the capital strategy. I mean, clearly you've talked about the buyback plan there and optionality you've embedded, but maybe early thoughts on the pace of overall M&A and then if there may be a dividend in the future. Thanks.

Bringing up the dividend question for me already, huh? No, really, Pax has a great capital allocation kind of program in place. Certainly, we did include the share repurchase authorization this time because I think that's a great kind of good hygiene tool to have in place. And when we see opportunities to take advantage of that in the market, if there are opportunities, you know, then we're going to do that. And it provides us the ability to act. You know, the company has a $600 million line of credit. We only had $45 million drawn on it at the end of the first quarter. We have $250 million in cash. So we have plenty of availability for M&A, lots of liquidity. But we are seeing a good pace of M&A, the things we're looking at. And, yes, the ones and twos here and there, like the tuck-ins that we've historically done, but we're also seeing some larger portfolios and things that could provide some actual, you know, usually the ones, one and two kind of acquisitions we've They don't have EBITDA initially, and we grow that EBITDA as they ramp. But some of the larger opportunities would have more immediate impact, and so we're looking at some of those. But I think we have a capital structure that is sufficient to do that, but there may be another opportunity to, you know, potentially increase that capacity. So we'll see as we go forward and look at those kind of opportunities. We're kind of – It depends on the pace of M&A, so I think that's what you'll see for us, just looking at the pace of M&A, where that comes, what we need to do from a capital structure. The important thing is we have a lot of M&A opportunity. We want to be able to support that. We can support it. The company has great relationships with the banks that service us, so we're in a really good position. Hope that helps.

Thank you very much.

Your next question comes from AJ Rice with UBS. Please state your question.

Thanks. Hi, everybody. Maybe first off, you mentioned the management pipeline you have put in place, and obviously that's an important part of your growth strategy. I think you mentioned in the prepared remarks you had about 40 administrators in training at this point. I wondered over time, is that sort of a steady state type of number? Is that significantly higher than the last year or two? And do you see that number increasing over time?

Yeah, this is something we're incredibly proud of. And it's been a strategy that we've talked about a number of times on this call. It's been a part of our strategy really since inception of the company is investing in a different level of talent that our sector has ever seen. And I believe that the 40 that we reported on that we have currently is the highest number we've actually reported on in these calls. And a lot of that is because we are seeing a healthy amount of flow through the M&A pipelines. And so we're preparing for that growth. We believe that kind of foundational to our success has been deploying our leadership model. And that requires a certain level of leader to hold the administrator position. And as the company grows, we promote from within. We have kind of some moving pieces that require us to have backfill of highly talented people to enter the organization. And we want to ensure that that there is never a limiting factor of human capital and quality talent to be able to deploy in these opportunities. And so as we see the M&A pipeline increase, as we see substantive deals that we're looking at currently that we expect to make movement on over the course of the next couple months, we want to be sure that our leadership and level of talent match that.

Okay, that's interesting. Maybe talking about uses of capital, I know in the prepared remarks you talked about continuing to evaluate opportunities to increase real estate ownership. Are there boluses of properties that are coming up where you have the option to take on ownership that are within your portfolio? Maybe give us some sense about how you're thinking about that relative to other uses of capital and and what the pipeline might look like there.

Yeah, AJ, Mark here. So, yeah, we have a number of purchase options that are coming due, including eight immediate that we have the option to exercise on potentially in this year. So, and, you know, real estate, does require a lot of capital relative to kind of some of the lease deals that we can walk into and just take on the working capital in those types of scenarios. So certainly as we look at our cost of capital, as we look at some of these more chunkier acquisitions that we've alluded to, we're weighing that balance of deploying capital in real estate versus some of the lease acquisitions. But certainly, like we've all shared on this call, the pipeline is strong. And we're in a fortunate position from a balance sheet perspective to be able to deploy capital. And we've shared over the years that you know, so much of the value in the real estate is driven by the success of the operation. So as we increase that EBITDA and those cash flows from the operation, just from a cap rate perspective, um, it, it truly, um, multiplies, uh, the value of the real estate. That's where we see a lot of the potential in exercising these options, which, you know, we, we generally, um, try to negotiate options on a fixed price basis. So as we've created value and improved operations, we're very often in the money on exercising those options. And so most of these that are coming due are kind of fall into that category.

Okay. Thanks a lot.

Thank you. And we have time for one last question that comes from Clark Murphy with Truist. Please state your question.

Hey, good morning, guys. Congrats on the quarter. Just wanted to come back for a minute and spend some time on quality. You had a pretty meaningful uptick in the number of facilities rated four or five stars from the end of 2025. I think it was up around 500 basis points or so. And nearly all of that increase was in the number of five-star facilities. So can you just kind of help us understand the delta there and I'm assuming that mostly reflects continued center maturation, but just any additional color there. And if there's anything that you guys are doing from a clinical or operational standpoint, that's kind of helping drive those gains. Thanks.

Yeah, you've got it, Clark. Thanks. And this is Jason. I'll take that question. So I think you're right in your assumption that it does represent the continued maturation of our facilities in the new ramping and mature buckets. And there's a reason why we've attached timelines to those new and ramping mature cohorts. It's because it does take time. in order for us to improve the clinical performance and get it to a point where it's a PAX expectation. And I think that that is exactly what we've seen this last quarter is seeing a continued maturation of these facilities clinically that are in that mature cohort and seeing the administrator and the interdisciplinary team take ownership of the clinical processes within the facility and the clinical outcomes as well, and then really being able to effect change over that three-year period. At the end of three years, the expectation is that we do have our facilities you know, up close to five stars. And, you know, and I think that's exactly what we're seeing here is, you know, as the facility matures, we're seeing, you know, better and more, you know, robust clinical performance with our teams. And we're getting the right people in place. And we're providing them with all the tools that they need in order to continue to perform at a high level. And so, you know, again, that's a metric that we're incredibly proud of. You know, we lead with that. The care is the beginning and the end of everything that we do. And it is the – it's what really creates the virtuous cycle of our success is the care. And so we're – there's no – I don't think it's by accident that we run higher occupancy across our portfolio because the quality metrics are there. And when the quality is there, you know, occupancy tends to follow, as does, you know, the financial performance of the facility as well. So that will be a strategy that we continue to deploy and something that we're continuously trying to improve. We're never good enough. Even if we're at five stars, there's areas that we can improve in, and that's all part of our kind of scorecard system and dashboard system that we use for our clinicians and our teams. in order to continually improve.

Got it. That's helpful. And then just one more for me. You know, really strong cash flow quarter, especially relative to the EBITDA beat. So just kind of curious if there was anything, you know, kind of timing related in the cash flows and how your expectations have changed at all potentially for the year on the cash flow front. Thanks.

Yeah, thanks for that question, Clark. So there is one item, if you look at our cash from operating activities, I noted we had $236 million of cash in the first quarter that we generated for operating activities. That was a little bit of a pull through from the fourth quarter. At the end of the fourth quarter, we prepaid an acquisition we were making in Alaska. And so that was about $50 million. And we prepaid it in December. So it helps us in our cash from operating activities in the first quarter. But if you look down in financing activities, it comes out there, the $50 million stuff. So it's kind of an offset there. So I'd say, but still, even without the $50 million, $186 million of cash generated from operating activities in the first quarter is really strong. And You know, it is even a little bit higher than our EBITDA contribution, which is great. And I think you can expect us to be in that level of position for much of the year. It's a good place to be.

Thank you. I'll now hand the floor over to Jason Murray for closing remarks.

Yeah, thank you, Operator. And, again, thanks to everyone for joining us today. We're incredibly excited for the quarter that we've had and for the upcoming year. And we hope you all have a nice rest of your day.

Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.