Select Medical Holdings Corporation

Good morning, and thank you for joining us today for Select Medical Holdings Corporation's earnings conference call to discuss the fourth quarter and full year 2025 results in the company's business outlook. Presenting today are the company's chief executive officer, Thomas Mullen, and the company's executive vice president and chief financial officer, Michael Malatesta. Also on the conference line is the company's senior vice president, controller, and chief accounting officer, Christopher Weigel. Manson will give you an overview of the quarter and then open the call for your questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events for the future financial performance of the company, including without limitation statements regarding operating results, growth opportunities, and other statements that refer to select medical plans, expectations, strategies, intentions, and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference call over to Mr. Thomas Mullen.

Thank you, operator, and good morning, everyone. Welcome to Select Medical's fourth quarter 2025 earnings call. I'd like to begin our call by taking a moment to address the Take Private proposal that was recently submitted by our executive chairman. On November 24th, we received a non-binding indication of interest to acquire all outstanding shares of Select Medical. A special committee of the board of directors is in the process of carefully reviewing and evaluating the proposal. This process is ongoing and the special committee will determine the appropriate next steps based on what it believes is in the best interests of the company and all of our stockholders. With that update, let me now transition to our development activity where we continue to focus on the expansion of our inpatient rehabilitation business. In the fourth quarter, we added 150 beds through a combination of hospital openings and acquisitions. These include a new 32-bed hospital with the Cleveland Clinic, a 32-bed acute rehab unit in Orlando, Florida, a 10-bed expansion at our rehab hospital with Riverside Health in Virginia, and finally, the acquisition of a 76-bed rehabilitation hospital in partnership with Vibra Healthcare in Southern Kentucky. For the full year 2025, we added 212 rehab beds. 202 beds from three new hospitals, three acute rehab units, and one neurotransitional unit, with the remaining 10 beds coming from an expansion at an existing facility. We also added 10 beds during the fourth quarter in Savannah, Georgia, in our Critical Illness Recovery Hospital Division through the acquisition of a hospital in that market. Across 2026 and 2027, we expect to add 399 beds which includes the 166 beds we've added so far this year. In January, we opened our fifth rehabilitation hospital with Baylor Scott & White Health in Temple, Texas, operating 45 beds, and a 63-bed hospital with Cox Health in Ozark, Missouri. Earlier this month, a 58-bed hospital with Banner Health in Tucson, Arizona, the fourth within the joint venture. Some upcoming projects include a 60-bed hospital with AtlantaCare in southern New Jersey, which we expect to open in the fourth quarter of 2026, as well as two acute rehab units in Florida and two neurotransitional units scheduled to open throughout quarter two and quarter three of 2026. In quarter one, 2027, we expect to open a 76-bed rehab hospital in Jersey City and plan to expand one of our Banner rehabilitation hospitals by 20 beds. Beyond these projects, additional opportunities are progressing through various stages of development and positioning us for long-term growth. Before we move into our financial performance, I'd like to provide a brief update on capital allocation. Our board of directors approved a cash dividend of 6.25 cents per share payable on March 12th, 2026 to stockholders of record as of March 2nd, 2026. Now shifting to our consolidated financial performance, all three divisions exceeded prior year revenue in the fourth quarter with total revenue growing more than 6% year over year. Adjusted EBITDA declined 10% to $104.7 million from $116 million in the prior year. A contributing factor to the decline in adjusted EBITDA was an increase in health insurance expense year over year, driven by elevated health-related costs, including higher cost claimants, increased utilization of medical and pharmacy benefits, and cost escalation. Earnings per common share from continuing operations was $0.16, versus a diluted loss per common share of $0.19 per share in the prior year. Adjusted earnings per common share from continuing operations was $0.16 compared to $0.18 last year. As a reminder, adjusted EPS in the prior year period excluded costs associated with the separation of Concentra, including accelerated stock-based compensation expense and a loss on early retirement of debt. For the full year, revenue grew more than 5%. Adjusted EBITDA was $493.2 million with a 9% margin compared to $510.4 million and a 9.8% margin in 2024. Earnings per common share from continuing operations was $1.16, up from $0.51 last year. Adjusted earnings per share from continuing operations was $1.16, compared to 94 cents in the prior year. Now turning to our segment performance, beginning with the inpatient rehab hospital division, revenue increased over 15% year over year to 339.2 million and adjusted EBITDA rose 11% to 69.2 million. Revenue per patient day increased over 6% and our average daily census grew nearly 10%. Occupancy improved to 82% from 81%, with same-store occupancy rising to 86% from 85%. Our adjusted EBITDA margin was 20.4% compared to 21.2% in the prior year. In our critical illness recovery hospital division, revenue increased nearly 5% to $629.7 million, while adjusted EBITDA grew 5% to $66.4 million, from $63.1 million in the prior year. Our adjusted EBITDA margin was consistent with the prior year at 10.5%. Our occupancy rate also remained steady at 67% with our admissions rising by 3%. Finally, in our outpatient rehab division, revenue increased to $324.6 million from $319.6 million in the prior year. This was driven by nearly 5% growth in patient visits. Net revenue per visit declined to $98 from $102 compared to the same quarter last year, and is reflective of a reduction in Medicare reimbursement, an unfavorable shift in payer mix, and an increase in variable discounts. Adjusted EBITDA was 11.2 million compared to 26.6 million last year, with margin declining to 3.4%. This decrease is primarily due to lower net revenue per visit and, as noted earlier, higher health insurance expense. That concludes my remarks. I will now turn the call over to Mike Malatesta for additional financial details before we open up the call for questions.

Thank you, Tom, and hello, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding and $26.5 million of cash on the balance sheet. Our debt at quarter end includes $1.04 billion in term loans, $100 million in revolving loans, $550 million in 6.25% senior notes due 2032, and $155 million of other miscellaneous debt. We ended the quarter with net leverage of $3.67 under our senior secured credit agreement and $469.1 million of availability on our revolving loans. Our term loan carries an interest rate of SOFR plus 200 basis points, and matures on December 3rd, 2031. Interest expense for the quarter was $28.9 million compared to $28.6 million in the same quarter last year. For the quarter, cash flow from operating activities was $64.3 million. Our days sales outstanding, or DSO from continuing operations, was 57 days at December 31st, 2025 compared to 58 days at December 31st, 2024 and 56 days at September 30, 2025. Investing activities use $66.9 million, which includes $59.1 million used for purchases of property and equipment, and $9.1 million in acquisition and investment activity. Financing activities use $31 million, including $50 million in net repayments on a revolving line of credit, $38.1 million in net distributions to non-controlling interests, $7.8 million in dividends, and $2.6 million in term loan repayments. We also received $51.3 million of net proceeds from other debt issuances during the quarter. We are issuing our business outlook for 2026 and expect revenue to be in the range of $5.6 billion to $5.8 billion. Adjusted EBITDA is expected to be in the range of $520 million to $540 million, and fully diluted earnings per common share is expected to fall in the range of $1.22 to $1.32. Lastly, capital expenditures are expected to be in the range of $200 million to $220 million. This concludes our prepared remarks. At this time, we'd like to turn the call back to the operator to open the line for questions.

Thank you. If you'd like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to move yourself in the queue, please press star one again. Our first question comes from Ben Hendricks with RBC Capital Markets. Your line is open.

Great. Thank you very much. I was wondering if we could parse through some of the income statement items, you know, particularly the higher health costs that you saw, just the total amount of that, and then just kind of the impact on the OP rehab community. business in particular, looking at 3.4% margin and the weakness you saw. I just want to kind of parse that out between the variable discount, the Medicare rate, mixed pressure, and the health costs. Thanks.

Hi, Ben. It's Mike. In regards to health insurance expense, for the outpatient division, the impact was approximately $5 million for the quarter. The impact for variable discount was approximately... So both added together is around 11 million. And the remainder of the delta is related to, as we noted, a shift in payer mix and softness in some markets.

Thank you. And as we think about the guidance going forward, can you kind of talk about the puts and takes and how you're thinking about forecasting? Do we have this mixed pressure continuing in the outlook? And then kind of what are your base assumptions for some of the other segments? Thanks.

I think we're very, very confident and pleased with the performance of our inpatient rehab division. As Tom commented earlier, we have a very robust pipeline, so we're set up well for 2026. Outpatient, we did, you know, we're cautiously optimistic on outpatient for improvement. We believe that the $11 million that we just alluded to were truly one-timers. And then for Critical illness, you know, the fourth quarter, you know, we basically were kind of right in plan or maybe even a little better than we expected. And for critical illness, you know, again, I would say cautiously optimistic for next year. But, again, there's always just with all the puts and takes in that division, it is, you know, a little more subject to variability.

Thank you, Peter.

Thank you. Our next question comes from Justin Bowers with DB. Your line is open.

Hi, good morning. Appreciate the update on the special committee and was curious if you're able to expand upon that maybe around some of the other potential strategic alternatives and then any timing goalposts to the extent that you can.

Hey, Justin. Again, it's Mike. We're really not able to really comment on the process that's taking place right now, other than what we commented on at the beginning of the call.

Okay, understood. And then just, you know, there's been some weather in the first quarter, like, you know, across the country. Is that, you know, presuming that the guide does incorporate that, but is there any call-outs there in any of the segments and then any differences in, like, days this year, 1Q versus 1Q25 of last year that we should consider?

So, Justin, there really wasn't a large impact or any impact at all of material on our inpatient divisions for critical illness and inpatient rehab. There was an impact, though, for outpatient. And again, some of that you're able to recover through the course of the quarter, but there was an impact in some areas and states related to the weather that we experienced in the beginning of 2026.

Okay. Thank you, Mike.

Thank you. Our next question comes from Anne Hines with Mizuho. Your line is open.

Thanks. Just a little bit more detail on the outpatient issues. Why would the health insurance only impact the outpatient division? I'm assuming you're self-funded for your entire company. Is it just the population, I'm just kind of confused why it would impact just that division. And can we just have a little bit more detail on what you mean by the six million available discounts? You're taking higher managed care discounts than you assumed in guidance?

Hi, Anne. In regards to health insurance, that impacted the entire company, but it struck out a little bit more in outpatient just because of the size of outpatient. thought we had in some certain areas. So overall, it was approximately a $15 million impact in the fourth quarter for all select medical that we didn't anticipate coming into the fourth quarter. In regards to variable discount, that is related to some of our older receivables that we made the decision to write off after we thought all collection efforts were exhausted. And we're talking older receivables. I would say they're falling over the two-year period of receivables. I don't know if that answers your question or if you have a follow-up.

Yeah. And then you mentioned some softness in some markets. Is that due to competitive issues? Are they big markets? Any more detail you can provide on that, that would be great, just because the miss-on outpatient was much bigger than obviously people thought.

Yeah, I mean, there are some certain markets that, you know, we're evaluating. We're going to put a focus on in 2026 that, you know, we're investigating whether the live is a little softer than we anticipated. Tom, I don't know if you want to kind of add any color to that.

I think that we're looking at rate in some of these markets. And then some of the markets where we're having some challenges right now revolve around staffing. And we're really focusing in on the recruitment of therapists in those markets. And that's some of the softness that we're experiencing currently that we expect to overcome in the coming months.

Great. And just directionally, your EBITDA guidance, can you just provide detail from a segment level? Like can outpatient, I'm sure the weakness in the second half has the anniversary in early 2026. Can you expect that segment to rebound to growth? And then any additional detail you can give on expectations for growth for critical illness and inpatient rehab, that'd be helpful.

Yeah, so, and we historically have not provided guidance at the segment level, but some color that I could add is for critical illness, we were, I would say, kind of, again, cautiously optimistic, but it's, I would say, somewhat in line with where we performed our projection for 2025, kind of kept it relatively flat. For inpatient rehab, that's where we, again, as we experienced over the last few years, that's where we're seeing the majority of our growth. And for outpatient, we do expect it to improve and grow year over year. But what we saw in Q3 and Q4, the last half of the year, we did kind of taper those expectations within our guidance.

Okay, thank you.

Thank you. Our next question comes from Joanna Gudzik with Bank of America. Your line is open.

Hi, good morning. So a couple of follow-ups. Maybe first on the outpatient rehab segment commentary. So I appreciate quantifying the... the cost and discounts or this receivable, I guess, right off. And then payer mix. So last quarter you talk about it. So I just want to check what are the same issues or different issues that pop up because it's, you know, I guess the pricing sounds like it was impacted by the discounts, but I was just trying to assess like the payer mix situation or the headwind because you still call it out.

Hi, so... Joanne, I guess on the variable discount, I didn't understand your first part of the question. Can you repeat that?

So I was just asking about the payer mix issues. Because on the third quarter call, when you called it out, you kind of said you think this is temporary in nature. And I guess with fourth quarter now, you're saying that there's obviously the bigger issue around the costs and discounts. But the payer mix is also mentioned there. So I just want to check whether... Is it the same payer mix issues you had in third quarter or is it something new?

So we've seen within the outpatient division in the fourth quarter, we did have an uptick on our managed Medicare population. So that caused some headwinds. And that's something that we've been dealing with throughout this fiscal year. Workers' comp was slightly down when I compare year over year. And so, you know, with a company our size, too, it's not sometimes just within the classifications. It also sometimes can be the mix within the mix within certain payers within a market, within managed care commercial. And with our volume, those dollars can add up easily. So, again, what we saw was just, you know, a deterioration, a slight deterioration in our payer mix, which impact our net rep revisit. I'd say that's probably about a dollar of the impact, a variable discount. was approximately $2 of the impact on the year-over-year vet rep per visit.

And Joanna, it's Tom. I would add that going into 2026 with the regulatory changes that we have on the horizon from January forward, we're seeing a 2% increase on Medicare for the first time in many years. So we're going to see somewhat of a rate increase as a result of the regulatory change on Medicare and Medicare Advantage for 2026.

Yeah, that was actually a second question. So I know you don't give specific guidance by segment for the year, because my question was around, yeah, like the Medicare rate increase in 26, how much I guess it's going to help, and should we assume the margins will, you know, improve? It was 7% for the full year, but I guess second half of the year was much worse. So just trying to figure out how to think about just directionally the progression and margin in that segment.

You should expect the margins to improve year-over-year in the outpatient division.

Okay. And if I may, on the consolidated numbers, when we look at the fourth quarter, I guess the EBITDA of 105 is about, call it, you know, almost $30 million below what was implied by your original guidance at the midpoint. So you quantify a couple of these things. So 15, I guess, is the number for the cost. And there's the discount in the outpatient. But there's still something missing. So I assume that's got to be the payer mix. Anything else to call out? Sounds like the critical illness was in line. And maybe the IRFs were better. So I wonder what else was, I guess, a part of the shortfall.

And Joanne, I think we're probably a little off of what you said the midpoint of our guidance was heading into the fourth quarter. I think our midpoint heading in was probably 520. So we're right around 25. I mean, it's still a significant miss, but 15 million of its health insurance right off the bat. We did have some timing issues with inpatient rehab. We were expecting inpatient to even do that much better year over year. But again, these are just timing issues of when certain of our development activities have taken place. So in the long run, we're still very bullish on the inpatient rehab division. And then just again, on top of the health insurance and maybe a few million dollars in inpatient rehab, but we thought we needed to exceed it a little bit more. It was just, again, the softest we had in the outpatient division in the fourth quarter.

Thank you. That was my other follow-up on the IRF segment. So the margins, they're declining over here in a quarter of a quarter. So it sounds like there's some timing issue. So maybe also you can help us quantify some of the startup losses in this segment, and how should we think about that for 26? Thank you.

So the margin, the same store margin, was still in excess of 23%, Joanne. So We still feel very comfortable. So the deterioration in the margin down to, you know, it's a little, we're still a little north of 20% is related to startup losses. So again, these are just timing issues, nothing with the long-term viability of that segment.

All right. Thank you so much.

Thank you. And our next question comes from AJ Rice with UBS. Your line is open.

Thanks, everyone. Just a couple questions. One thing that's created a little bit of volatility in the LTAC business over the last few years has been the high-cost outlier threshold movement. I know it's still early in the year, but are you seeing anything there that gives you pause that maybe it's going to be more or less impactful the year-to-year change than you thought?

Year over year, AJ, this is Tom. We're seeing the high-cost outlier threshold only increase by $1,888 in total, so it's pretty flat with the prior year. So we're not going to expect any major shifts like we saw this past year. We're doing a nice job of moving patients into our inpatient rehab hospitals timely in our shared markets, and that's starting to help us. drive down some of that high-cost outlier percentages so that we have less high-cost outliers as a proportionate share of all of our LTCH patients. So I don't think that we're going to see any major headwinds as it relates to high-cost outlier this year. And we'll be looking for the proposed rule early summer to see what to expect for October 1st of 2026 forward.

Right. Okay. There's certainly been... Some questions, mainly around the IRFs, but broadly I'll ask it. On this CMS team demo, what are you guys' thoughts on that and how that might impact your business, if at all?

We have a small proportion of our rehab hospitals where we're with partner systems that will be impacted by the team implementation. The only area that we're really seeing that may have somewhat of a minor impact on us is spinal fusion surgeries, so some of the spinal cord patients that we treat. We've been talking to our partners about this new initiative and the bundling, and we think that it's going to be a minor adjustment in those markets at best.

Okay. And then my last question on the... Share repurchase, there wasn't much done in the fourth quarter when we think about 2026. Any comments on capital deployment? Any changes in priority? Any thoughts on share repurchases for 2026? I know you've got the review, so maybe that puts everything on hold, but I just wondered what your thoughts were about share repurchases.

AJ, your last comment when you said we're under the review or evaluate the process. So you're correct. That puts everything on hold. All right.

And then on capital, does it make any changes on CapEx and thoughts around that?

No. I mean, right now it's business as usual as we're running our business. Again, I think we've been very open that our primary focus is growing our inpatient rehab division.

Yes, I think you'll see us. You'll see more on the inpatient rehab hospital space, some new rehab units, as well as our neurotransitional centers continuing to grow over the course of this year.

It doesn't jump off the page to me, but we are sort of asking this for almost all the provider companies. Any applications for AI that you find particularly useful that you're focused on?

Yeah, we're evaluating employing AI. I mean, one thing that we're evaluating is our back end, some of our back end processes in our billing office where we think there's opportunity. I'll let Tom speak a little more because we're evaluating across all lines.

We are looking at it to help with our outpatient collections, and we have engaged a group who's piloting that process. initiative with us, as well as we're looking at the possibility of some clinical initiatives around virtual sitters and potentially telemetry monitoring in the future in the AI space.

Interesting. Okay, thanks a lot.

Thank you. Our next question comes from Bill Sutherland with Benchmark StoneX. Your line is open.

Oh, thank you. Actually, AJ took care of most of my questions. I'm thinking the only labor question we didn't, I think, really address was in critical illness, which I know you focused on a lot in the past couple of years. Is that settling in kind of like a good mix? And any, seeing all the union activity, in the health systems on the acute care side. Any issues there for you guys going forward?

In regards to the labor bill, again, we're very pleasantly surprised where the agency rate has settled into post the difficulties we experienced with agency costs in 2022, really the fourth quarter of 21 through the early part of 2023. So that's kind of come into line, and we're really focused on settling more on an allocation of 70% full-time, 15% PRN, and 15% agency. And it's really hovered right around that percentage of 15%. So I think it's just continued improvement. We've kind of reached kind of where I think we're at. We're a little improvement year over year on our margin for SW&B. So I don't know if you have anything to add to that.

Our labor margin is running just above 56%, and that's in line with where we were projecting to be and want to be. And then as far as labor union activity, there's always some systems that are dealing with labor union activity. We have not in the past year had any significant threats that we've had to deal with, and there's nothing on the horizon right now for us in any of our locations.

That's good to hear. Tom, did you address the startup expense for IRF? Will it be in line this year and not impact margins?

Yeah, it's going to be relatively consistent year over year. There's a little timing, but for total spend, I'd expect in that around $15 million a little south and $15 million of losses for 2026. Okay.

Okay.

Which is in line with this year, yeah.

Yeah, yeah. Great. Thanks.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Tom Mullen for closing remarks.

Thank you, Operator. We have no further comments. We'll look forward to updating the group next quarter.

Thank you for your participation. This does include the program. You may now disconnect. Everyone, have a great day.