SELECT MEDICAL HOLDINGS CORP (SEM)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025 delivered solid top-line growth and an EPS beat: revenue rose 7.2% to $1.363B and EPS from continuing ops increased 21.1% to $0.23, with Adjusted EBITDA at $111.7M; management raised FY25 EPS guidance to $1.14–$1.24 while reaffirming revenue ($5.3–$5.5B) and Adjusted EBITDA ($510–$530M) ranges .
• Versus Wall Street, SEM beat revenue and EPS consensus but modestly missed EBITDA versus the Street’s definition: Q3 revenue $1.363B vs $1.330B*, EPS $0.23 vs $0.155*, EBITDA $111.7M vs $112.7M* (company’s Adjusted EBITDA vs consensus “EBITDA”) .
• Segment performance was mixed: Rehabilitation continued to outperform (revenue +16.2%, AEBITDA +13.0%), Critical Illness Recovery Hospitals improved (AEBITDA +10.5%), while Outpatient Rehabilitation saw margin pressure (AEBITDA -14.6%) on rate/mix headwinds .
• A catalyst for the quarter was favorable CMS timing: deferral of the “20% transmittal” outlier rule (effective Oct 1, 2025) drove a Q3 benefit of approximately $12–$15M to EBITDA; management expects the 2026 headwind to be far smaller than previously feared .
• Capital allocation remains supportive: $0.0625 quarterly dividend declared and buyback authorization extended through year-end 2027; net leverage at 3.4x with $419M undrawn revolver, underpinning flexibility .

What Went Well and What Went Wrong

What Went Well

• Rehabilitation Hospitals: Revenue grew 16.2% to $328.6M, Adjusted EBITDA rose 13.0% to $68.0M, with occupancy improving to 83%; management highlighted strong census and same‑store occupancy gains (86% vs 85%) .
• Critical Illness Recovery Hospitals: Adjusted EBITDA increased 10.5% to $56.1M and revenue per patient day grew 6.6%; occupancy held flat, admissions increased 2.1% .
• Regulatory timing benefit: CMS’s deferral of the 20% transmittal rule produced a Q3 EBITDA uplift of ~$12–$15M and is expected to be far less punitive in 2026 given stabilized labor costs in the affected cost years; “The rule’s deferral resulted in a favorable revenue adjustment recorded this quarter” .

What Went Wrong

• Outpatient Rehabilitation margin compression: Adjusted EBITDA declined to $24.2M (7.4% margin) amid a >3% Medicare rate cut and unfavorable payer/geography mix; net revenue per visit slipped to $100 from $101 despite 5.5% volume growth .
• LTAC reimbursement complexity continues to constrain acuity intake: rising fixed loss thresholds hamper high‑acuity admissions; management noted the threshold now “just under $79,000” after rapid increases, straining ADC and case mix .
• Company AEBITDA came in slightly below Street’s EBITDA consensus, reflecting definitional differences and outpatient pressure; management maintained FY25 AEBITDA guidance rather than raising it despite the Q3 regulatory benefit .

Financial Results

Consolidated Quarterly Results

Estimates vs Actuals (Q3 2025)

Values retrieved from S&P Global.
Note: Company reports Adjusted EBITDA; Street consensus “EBITDA” may reflect different definitions.

Segment Breakdown (Revenue and Adjusted EBITDA)

KPIs

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “CMS announced the deferment of its expanded Medicare outlier reconciliation criteria… The rule’s deferral resulted in a favorable revenue adjustment recorded this quarter.” — Robert Ortenzio, Executive Chairman .
• “On a consolidated basis, revenue grew over 7% to $1.36 billion… Adjusted EBITDA also increased over 7% to $111.7 million… EPS rose over 21% to $0.23.” — Thomas Mullen, CEO .
• “At the end of the quarter, we had $1.8 billion of debt… net leverage of 3.4x… and $419.1 million of availability on our revolving loans.” — Michael Malatesta, CFO .
• “The net impact… was in the $12 million to $15 million range [for Q3 EBITDA].” — Michael Malatesta (on 20% transmittal deferral) .
• “Maintenance [capex]… around $100 to $105 million; the remainder is growth.” — Michael Malatesta .

Q&A Highlights

• Regulatory impact sizing: The 20% transmittal deferral aided Q3 EBITDA by ~$12–$15M; for 2026, management expects the headwind to be roughly a third of what would have occurred had it been implemented in 2025 .
• Outpatient dynamics: Volume +~5% YoY but rate/mix deteriorated; >3% Medicare reduction in 2025 and payer/geography mix pressured margins; management expects a modest Medicare/MA increase in 2026 and productivity/scheduling system improvements to recover profitability .
• Rehab development and startup losses: Approximately $15–$20M annual startup losses are expected to continue; sizing may expand to 80–100 beds where demand supports it; break-even in ~6 months, full maturity ~3 years (85% occupancy) .
• Labor environment: Agency utilization ~15% with rates back to pre‑COVID; FT wage increases under 3% across lines, supporting margin stability .
• Balance sheet and capital allocation: Net leverage at 3.4x; priorities are development capex, dividend, buybacks, and opportunistic debt reduction .

Estimates Context

• Q3 2025 vs Street: SEM beat revenue ($1.363B vs $1.330B*) and EPS ($0.23 vs $0.155*), while Adjusted EBITDA modestly missed Street’s “EBITDA” ($111.7M vs $112.7M*), reflecting definitional differences and outpatient pressure .
• Forward look: Q4 2025 consensus implies revenue ~$1.364B* and EPS ~$0.233*; management reaffirmed FY revenue/AEBITDA guidance and raised EPS guidance, suggesting modest positive estimate revisions to EPS, with AEBITDA held due to outpatient softness .

Values retrieved from S&P Global.

Key Takeaways for Investors

• Rehabilitation strength and regulatory timing benefits offset outpatient headwinds, enabling an EPS beat and FY25 EPS guidance raise to $1.14–$1.24 .
• Expect 2026 regulatory headwinds (20% transmittal) to be materially smaller than initially feared due to stabilized labor in impacted cost years, reducing downside risk to LTAC earnings .
• Outpatient margin recovery hinges on 2026 Medicare/MA increases and productivity initiatives; monitor net revenue per visit and payer/geography mix in Q4 and Q1 to gauge trajectory .
• Development pipeline is a medium‑term growth driver: 395 rehab beds targeted by 1H 2027 across marquee JV partners; anticipate startup loss cadence (~$15–$20M/year) with maturing assets accretive over 2–3 years .
• Capital returns remain intact: dividend sustained, authorization extended to repurchase through 2027; net leverage at 3.4x and ample revolver capacity support ongoing flexibility .
• Near-term trading setup: Positive EPS surprise and guidance raise are supportive; watch outpatient KPIs and any clarity on CMS proposals to calibrate AEBITDA risk/reward into 2026 .
• Estimate implications: Street likely to lift EPS forecasts and keep EBITDA near guidance bounds; valuation sensitivity will hinge on outpatient margin stabilization and regulatory visibility.