PACS Group, Inc. (PACS) Q3 2025 Earnings Call Transcript

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Overview

The earnings call highlights a mix of positive and negative elements. Mature facilities show strong occupancy and skilled mix, but new facilities face challenges. Cost of services increased significantly, impacting financial health. The Q&A reveals confidence in growth potential and strategic acquisitions, yet management avoided specifics on EBITDA opportunities, raising concerns. Overall, the sentiment is balanced, with potential for growth but also notable risks and uncertainties.

Key Financial Performance

Revenue (Q3 2025) $1.3 billion, a 31% increase year-over-year. The increase is attributed to sustained operational strength and growth through acquisitions.

Adjusted EBITDAR (Q3 2025) $226.6 million. No year-over-year comparison or reasons for change provided.

Adjusted EBITDA (Q3 2025) $131.5 million. No year-over-year comparison or reasons for change provided.

Net Income (Q3 2025) $52.3 million. No year-over-year comparison or reasons for change provided.

Diluted Earnings Per Share (Q3 2025) $0.32. No year-over-year comparison or reasons for change provided.

Revenue (First 9 months of 2025) $3.9 billion, a 36% increase year-over-year. The increase is attributed to operational and clinical excellence and growth through acquisitions.

Adjusted EBITDAR (First 9 months of 2025) $646.2 million. No year-over-year comparison or reasons for change provided.

Adjusted EBITDA (First 9 months of 2025) $363.0 million. No year-over-year comparison or reasons for change provided.

Net Income (First 9 months of 2025) $131.7 million. No year-over-year comparison or reasons for change provided.

Diluted Earnings Per Share (First 9 months of 2025) $0.80. No year-over-year comparison or reasons for change provided.

Total Facility Occupancy (First 9 months of 2025) 89%, well above the industry average of 79%. Mature facilities achieved 95% occupancy, up from 94% last year, while skilled mix increased from 32% to 34%. The increase is attributed to operational initiatives and leadership development programs.

New Facilities Occupancy (Q3 2025) 81%, compared to 83% in 2024. The slight dip is attributed to the expected transition following large portfolio integrations completed in late 2024.

Cost of Services (2025) Increased by 32% year-over-year. The increase aligns with growth and reflects investments in staffing and quality initiatives.

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Operating Highlights

New Facility Acquisitions: Acquired 7 additional facilities in 2025, adding to the 106 facilities acquired in 2024, including the Prestige portfolio with 53 facilities across 8 states.

Operational Model: Locally led, centrally supported model enabling responsive, community-driven care.

Market Expansion: Expanded geographic footprint to 17 states, with 35,202 total operating beds, including 32,677 skilled nursing beds and 2,525 assisted living beds.

Demographic Trends: Positioned to capitalize on the aging U.S. population, with 20% expected to be aged 65 or older by 2030.

Occupancy Rates: Achieved 89% total occupancy, with mature facilities at 95% and newly acquired facilities at 81%.

Quality Ratings: 68.6% of skilled nursing facilities rated 4 or 5 stars by CMS.

Leadership Development: 261 administrators trained since inception, with 78% retention rate.

Strategic Acquisitions: Focused on disciplined growth and integration of newly acquired facilities.

Real Estate Ownership: Purchased real estate of 5 facilities in 2025, now owning or partially owning 100 facilities.

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Risk or Challenges

Regulatory Compliance: The company faced allegations from a short seller report, leading to an independent investigation by the Audit Committee. This highlights potential risks related to regulatory compliance and governance issues.

Operational Integration: The company acquired 106 facilities in 2024, including 94 in the second half, which presents challenges in integrating such a large volume of acquisitions effectively.

Occupancy Rates in New Facilities: Newly acquired facilities showed a slight dip in occupancy rates (81% in 2025 compared to 83% in 2024), reflecting challenges in stabilizing and ramping up operations in new acquisitions.

Cost of Services: The cost of services increased by 32% year-over-year in 2025, driven by investments in staffing and quality initiatives, which could pressure margins if not managed effectively.

Economic and Market Conditions: The company operates in a growing skilled nursing industry, but economic uncertainties and demographic shifts could impact demand and financial performance.

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Guidance & Outlook

Annual Revenue Guidance for 2025: Expected to be between $5.25 billion and $5.35 billion, representing a 30% increase over 2024 revenue.

Adjusted EBITDA Guidance for 2025: Expected to be between $480 million and $490 million.

Occupancy Trends: Total facility occupancy across the portfolio was 89% for the first 3 quarters of 2025, with mature facilities achieving 95% occupancy. New facilities ended the third quarter at 81% occupancy, reflecting the expected transition following large portfolio integrations in late 2024.

Skilled Mix Improvement: Mature facilities' skilled mix increased from 32% to 34% in 2025. New facilities' skilled mix improved to 25% from 22% last year.

Acquisition Strategy: In 2025, the company completed 7 acquisitions, focusing on strategic add-ons within existing footprints, compared to 106 facility acquisitions in 2024. This reflects a deliberate focus on integrating the large volume of transactions completed in 2024.

Real Estate Ownership: In 2025, the company purchased the underlying real estate of 5 facilities, increasing the total number of wholly or partially owned facilities to 100. The company now owns, has purchase options, or has future rights to almost half of the properties it operates.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you talk about the momentum in the business, particularly regarding occupancy and skilled mix opportunities in new and ramping facilities?

A:The company has strong occupancy and skilled mix in mature facilities, which have been operational for over 37 months. For new and ramping facilities, there is significant opportunity to strengthen teams and deploy appropriate systems to increase skilled mix and occupancy. The company remains confident that these facilities will eventually perform at the level of mature facilities. The COO highlighted the challenge of supporting 106 new facilities added last year, which represent one-third of the portfolio, but sees embedded potential for organic growth.

Q:What are the most impactful changes the company has made relative to controls?

A:The CEO emphasized the development and strengthening of compliance within the organization as the most impactful change. This aligns with the company's mission and supports the locally led, centrally supported model. Additional support mechanisms have been implemented to ensure administrators make good decisions, which has been a key focus over the past year.

Q:What is driving the strong year-to-date cash flow generation, and what is the update on M&A activity?

A:Year-to-date cash flow generation was strong, with $407 million provided by operations in the first nine months and $355.7 million in cash and cash equivalents as of September 30, compared to $157 million at the end of 2024. This included paydown of the line of credit. Regarding M&A, the company acquired 7 facilities in 2024, focusing on strategic acquisitions and ensuring proper integration. Historically, the company averages 20 acquisitions per year and plans to continue disciplined and selective M&A activity.

Q:What is the long-term growth outlook, and is the previous framing of low double-digit growth in revenue and EBITDA still applicable?

A:The company believes the previous growth models are consistent with current performance, excluding the 2024 restatement. While the company exceeded its guidance of 20 facility acquisitions in 2024, it is not prepared to change that guidance. The top-line growth guidance of 30% aligns with previous models.

Q:What is the embedded EBITDA opportunity across new and ramping cohorts and the 100-plus facilities added since last year?

A:The COO explained that new facilities typically have margins of 2%-3%, which increase to 6%-8% as they mature and can reach low double digits or low teens at full maturity. Historical averages remain consistent with these trends.

Q:What are the expectations for Medicaid rate development and assumptions for the Medicaid supplemental program?

A:The company closely evaluates Medicaid programs during acquisitions, targeting states with favorable reimbursement models that reward higher acuity patient care. Growth in states like Oregon, Washington, California, Texas, Kentucky, and Ohio reflects confidence in their Medicaid programs. The company ensures that its model aligns with these programs to capture patient acuity levels and achieve appropriate reimbursement.

Q:How have local market relationships fared during the audit process, and were there any changes to key referral sources or payers?

A:The CEO stated that the locally led, centrally supported model has proven effective during challenging times. Strong census numbers indicate the company remains the provider of choice in its markets, and relationships with referral sources and payers have remained strong.

Q:Are there any changes in the types of M&A targets the company is pursuing post-audit?

A:The company continues to use the same disciplined approach to evaluate M&A opportunities. It remains committed to taking on deep turnaround opportunities and transforming struggling facilities into strong centers of excellence. The investment committee structure ensures disciplined decision-making.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the embedded EBITDA opportunity for the 100-plus facilities added since last year, citing variability in state reimbursement models and difficulty in pinpointing exact figures. Additionally, while Medicaid rate development was discussed, no specific growth rates or assumptions for the Medicaid supplemental program were provided.

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Earnings Word Cloud

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PACS Transcript

PACS Group, Inc. (PACS) Q3 2025 Earnings Call Transcript

Unknown11-19

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