The Covid-19 pandemic has taken a toll on The Pennant Group’s (Nasdaq: PNTG) senior living portfolio, but the company’s leaders are confident it can withstand more pressure in the months ahead. And investors seem to agree, given that the company’s share price jumped 40% to land at $36.77 by the time the markets closed Wednesday.
Occupancy for the Eagle, Idaho-based company’s 54 senior living communities dropped 2.2% sequentially to land at 78.5% during the second quarter of 2020, and fell an additional 2% subsequent to the quarter’s end as new coronavirus outbreaks spiked across the country, according to Daniel Walker, Pennant’s CEO. And, the company estimates it has missed out on about $8.1 million in potential revenue since the pandemic began.
However, when excluding buildings acquired in the past year, Pennant’s occupancy rate was 80.7%, representing a gain of 40 basis points in the second quarter of 2020 compared to the second quarter in 2019. Looking ahead, the company’s guidance indicates that senior living occupancy could stay flat through the remainder of the year on the high end, or decline around 2% on the low end.
All of that gives Walker more confidence the company has a long runway with regard to census loss and finances, even as the pandemic is expected to put pressure on senior living operators for the foreseeable future.
“Sitting at, right now, in the high 70s of occupancy, we still have a lot of room, in terms of upside, as things with Covid continue to resolve themselves and our teams continue to put their clinical prowess out for families to see,” Walker said Wednesday on the company’s quarterly earnings call.
Meanwhile, senior living revenue was $34.8 million in the second quarter of 2020, representing a 6.9% gain over the same time last year. That is due to an increase in average monthly revenue per occupied unit (RevPOR), and an additional $1 million of revenue from the addition of three senior living communities in the past year, according to Pennant.
As of Aug. 11, Pennant reported just 13 residents in six communities with active Covid-19 cases.
In addition to private-pay senior living communities, Pennant has significant lines of business in home health and hospice. Thanks largely to the Medicare revenues related to those service lines, the company also received — but then returned — $10 million from the CARES Act’s provider relief fund in the second quarter of 2020, and applied for and received approximately $28 million in advance Medicare payments.
With half a year of experience mitigating the disease under its belt, the company is also now better equipped to adapt its operations as Covid-19 infections ebb and flow in the markets where it has communities, Walker noted.
“As we look at the second half of the year, we fully expect the virus to continue to circulate and affect us,” he said. “But we’re more confident in our ability to make the appropriate adjustments, and keep our staff, residents and families safe and connected.”
Mission Viejo, California-based The Ensign Group (Nasdaq: ENSG) spun Pennant off from its operations last year, and this is the firm’s second full quarter as a publicly traded company. Like its parent company Ensign, Pennant’s approach is based in giving its local community leaders autonomy along with the tools and resources to succeed. While the organizational structure is not as common as others in the senior living industry, it has inspired recent similar moves, such as ALG Senior’s name change and operational transformation earlier this year.
Despite feeling Covid-19 pressure in the second quarter of 2020, Pennant had a “strong quarter,” according to RBC Capital Markets Analyst Frank Morgan.
“In senior living, occupancy has been under pressure as expected, but with the strong momentum and improvement in performance over the last year, the company continued to generate earnings growth from the business,” Morgan wrote in a note to investors. “And despite ongoing occupancy pressures, it expects to continue generating earnings going forward.”
‘Enormous inherent upside’
Putting the pieces together, Walker believes the pandemic confirms the company’s view that senior living is still an important health care delivery setting.
“There is enormous inherent upside in our senior living communities, given our below market entry prices, and our operating model that provides the tools for our local leaders to build significant value over time,” Walker said.
And, the pandemic is also proving the value of having a blended portfolio that combines senior living with 67 home health and hospice agencies. Pennant’s home health and hospice services segment logged $58 million in revenue in the second quarter of 2020, an increase of $7.8 million, or 15.5%, from what it saw in the same period last year. At the same time, the company’s total home health census gained 1.5% when compared to what it reported on March 11, as the pandemic kicked into high gear.
“Our home health volumes experienced a V-shaped pattern that was driven primarily by stay-at-home mandates and the delay of elective procedures,” Walker said.
On the development and acquisitions front, Pennant is continuing to see senior living opportunities. But the company will be choosy about which projects it moves forward with.
Although the pandemic is testing the entire field of senior living companies, Walker believes the company’s senior housing segment is currently experiencing “part of the cyclical nature of health care.” He also compares the current period to roughly a decade ago, when Ensign was starting its home health and hospice business.
“Our platform represents a unique opportunity for our stakeholders to experience similar long-term value creation with an earnings-producing senior living business at a time of significant industry disruption,” Walker said. “Much like Ensign incubated our development during our early-stage growth, Pennant’s true value comes from the dual opportunity of our strong home health and hospice business, and the cultivation of a second growth story in our senior living business.”
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