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.