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 first quarter 2026 results and 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 Wiegel. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including without limitations 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 over to Mr. Thomas Mullen. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Select Medical's earnings call for the first quarter of 2026. I'd like to begin today's call with a brief update on our previously announced Take Private transaction. On March 2nd, we announced that Select Medical entered into an agreement to be acquired by a consortium led by our Executive Chairman, Robert Ortenzio, together with Martin Jackson and Welsh Carson Anderson and Stowe. Under the terms of the agreement, unaffiliated shareholders will receive $16.50 per share in cash. The transaction was unanimously approved by the disinterested members of the Board of Directors, and we expect it to close in mid-2026, subject to regulatory approvals, shareholder approval, and other customary closing conditions. As part of the regulatory review process, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act expired on April 27, satisfying one of these conditions. Upon closing, Select Medical will become a privately held company. In connection with and contingent upon the completion of the transaction, our senior secured credit facilities will provide for an additional $1 billion of term loan borrowings, varying interest at a rate equal to SOFR plus 3%. With that update, I'll now turn to our development activity, where we continue to focus on expanding our inpatient rehabilitation business. So far this year, we've added 166 beds across three newly opened inpatient rehabilitation hospitals, including our fifth hospital with Baylor Scott & White in Temple, Texas, a new hospital with Cox Health in Ozark, Missouri, and the fourth hospital in our Banner Health Joint Venture in Tucson, Arizona. Across the remainder of 2026 and into 2027, we expect to add 275 more beds. 209 will be in IRF and 66 in critical illness through a combination of new hospitals, acute rehab units, neurotransitional units, and expansions. Later this year, we plan to open a 60-bed hospital with Atlanticare in southern New Jersey during the third quarter, along with two acute rehab units in Florida and two neurotransitional units scheduled for the second and third quarters of this year. Early in 2027, we were expanding one of our Banner rehabilitation hospitals by another 20 beds. Later in the year, during the third quarter, we plan to open a 76-bed inpatient rehabilitation hospital in Jersey City and an acute rehab unit in Richmond, Virginia. Importantly, these projects represent only a portion of what's ahead of us as we continue to advance a broader development pipeline to support our long-term growth strategy. Before turning to our financial results, I'll briefly touch on capital allocation. Our Board of Directors approved a cash dividend of 6.25 cents per share payable on May 28 to stockholders of record as of May 14. Turning now to our consolidated financial results, all three of our operating divisions delivered revenue growth versus the prior year period, with total revenue increasing by 5% overall. Adjusted EBITDA declined 6.5% to $141.6 million compared to $151.4 million in the prior year period. Earnings per common share was $0.35 compared to $0.44 in the prior year. When adjusted for the private transaction costs, earnings per common share was $0.36 for the quarter. Now turning to our segment performance, beginning with the inpatient rehab hospital division, Revenue increased more than 14% year-over-year to approximately $351.9 million, while adjusted EBITDA increased 15% to $81.1 million. Revenue per patient day increased nearly 3%, and average daily census grew 12%. Occupancy increased to 83% from 82% in the prior year period, while same-store occupancy increased to 87% from 83%. Adjusted EBITDA margin increased slightly to 23% compared to 22.9% last year. On the regulatory front in April, CMS issued the proposed rule for inpatient rehabilitation facilities for fiscal year 2027. If finalized as proposed, we would expect an increase of approximately 2.6% in the standard federal payment rate. The final rule is expected in late July or early August of this year following the public comment period. In the Critical Illness Recovery Hospital Division, revenue increased to $638.8 million from $637 million in the prior year period. Adjusted EBITDA declined 15% to $73.4 million from $86.6 million in the prior year quarter, resulting in an adjusted EBITDA margin of 11.5% compared to 13.6% last year. Revenue per patient day increased by more than 2% and admissions increased 1%. CMS also issued the proposed rule for long-term acute care hospitals for fiscal year 2027. If finalized as proposed, we would expect an increase of 2.66% in the standard federal payment rate, and the high-cost outlier threshold will remain steady at $78,936. As with the inpatient rehab proposed rule, the final rule is expected in late July or early August following the public comment period. Finally, our outpatient rehabilitation division delivered revenue growth of more than 4%, reaching $321.3 million compared to $307.3 million in the prior year quarter. This is driven by over 4% growth in patient visits. Net revenue per visit was consistent with the prior year at $102. Adjusted EBITDA was $22 million compared to $24.3 million last year, resulting in an adjusted EBITDA margin of 6.8% compared to 7.9%. That concludes my remarks. I will now turn the call over to Mike Malatesta to provide 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 $1.9 billion of total debt outstanding and $25.7 million of cash on the balance sheet. Our debt at quarter end included $1.04 billion in term loans, $125 million in revolving loans, $550 million of 6.25% senior notes through 2032, and $165 million of other miscellaneous debt. We ended the quarter with that leverage of $3.75 under our senior secured credit agreement and $443.5 million of availability on our revolving loans. Our toned loan carries an interest rate of SOFR plus 200 basis points and matures on December 3, 2031. Interest expense for the quarter was $28.3 million compared to $29.1 million in the same quarter last year. For the quarter, cash flow from operating activities was $37.9 million. Our days sales outstanding, or DSO, was 60 days at March 31, 2026 compared to 60 days at March 31, 2025 and 57 days at December 31, 2025. Investing activities used $56.7 million primarily driven by $58.9 million of expenditures for purchases of property and equipment. Financing activities provided $18 million, which included $25 million in net borrowings under a revolving credit facility. This was partially offset by $8.8 million in net distributions to non-controlling interest, $7.8 million in dividend payments, and $2.6 million in term loan repayments. We are maintaining our four-year 2026 guidance. We continue to expect revenue to range between $5.6 billion and $5.8 billion and adjusted EBITDA between $520 million and $540 million. Fully diluted earnings per common share is expected to be in the range of $122 to $132. Lastly, capital expenditures are expected to range between $200 million and $220 million. This concludes our prepared remarks. We will now turn the call back to the operator to open the line for questions.