Select Medical Holdings Corporation (SEM) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

Despite strong financial metrics and expansion plans, the lack of raised guidance due to outpatient segment softness and unchanged EBITDA guidance offset positive impacts. The Q&A revealed pressures from Medicare rates and payer mix shifts, which may concern investors. The market cap suggests moderate stock price movement. Thus, a neutral rating is appropriate.

Key Financial Performance

Consolidated Revenue Revenue grew over 7% to $1.36 billion compared to $1.27 billion in the prior year. The increase was driven by growth across various segments.

Adjusted EBITDA Adjusted EBITDA increased over 7% to $111.7 million, up from $103.9 million. This reflects improved operational performance.

Earnings Per Common Share Earnings per common share from continuing operations rose over 21% to $0.23 compared to $0.19 per share in the same quarter last year. The increase was due to higher revenue and operational efficiencies.

Inpatient Rehab Hospital Revenue Revenue increased 16% year-over-year to $328.6 million. The growth was driven by a 5% increase in revenue per patient day and an 11% rise in the average daily census.

Inpatient Rehab Hospital Adjusted EBITDA Adjusted EBITDA was up 13% to $68 million. However, the adjusted EBITDA margin declined slightly to 20.7% from 21.3%.

Outpatient Rehab Revenue Revenue increased 4% to $325.4 million, driven by over 5% growth in patient visits. However, net revenue per visit decreased to $100 from $101 due to a reduction in Medicare reimbursement and an unfavorable shift in payer mix.

Outpatient Rehab Adjusted EBITDA Adjusted EBITDA decreased over 14% to $24.2 million, with margin declining from 9.1% to 7.4%. This was due to lower net revenue per visit and increased costs.

Critical Illness Recovery Hospital Revenue Revenue increased over 4% to $609.9 million. The growth was supported by a 2.1% increase in admissions.

Critical Illness Recovery Hospital Adjusted EBITDA Adjusted EBITDA rose over 10% to $56.1 million, up from $50.8 million in the same quarter last year. The adjusted EBITDA margin increased to 9.2% from 8.7%.

Debt Outstanding At the end of the quarter, the company had $1.8 billion of debt outstanding, including $1.04 billion in term loans, $150 million in revolving loans, and $550 million in senior notes.

Cash Flow from Operating Activities Cash flow from operating activities was $175.3 million, reflecting strong operational cash generation.

Days Sales Outstanding (DSO) DSO from continuing operations was 56 days at September 30, 2025, compared to 60 days at September 30, 2024, indicating improved collections.

You have reached the limit Upgrade to access full content

Get started

Operating Highlights

Acquisition of a 30-bed critical illness recovery hospital: Acquired a 30-bed critical illness recovery hospital in Memphis, Tennessee.

Expansion of outpatient portfolio: Grew outpatient portfolio by 3 clinics.

New rehabilitation hospital openings: Opened a 32-bed rehabilitation hospital in partnership with Cleveland Clinic.

Future rehabilitation hospital openings: Plans to open a 45-bed rehabilitation hospital in Temple, Texas, a 32-bed acute rehab unit in Orlando, Florida, and add 10 beds to an existing rehab hospital in Virginia by year-end.

Revenue growth: Revenue grew over 7% to $1.36 billion compared to $1.27 billion in the prior year.

Earnings per share: Earnings per common share from continuing operations rose over 21% to $0.23 compared to $0.19 per share in the same quarter last year.

Inpatient rehab hospital division performance: Revenue increased 16% year-over-year to $328.6 million, adjusted EBITDA up 13% to $68 million, and occupancy improved to 83%.

Outpatient rehab division performance: Revenue increased 4% to $325.4 million, but adjusted EBITDA decreased over 14% to $24.2 million due to reduced Medicare reimbursement and unfavorable payer mix.

Critical illness recovery hospital division performance: Revenue increased over 4% to $609.9 million, adjusted EBITDA rose over 10% to $56.1 million, and admissions increased by 2.1%.

Future rehabilitation hospital projects: Plans to open multiple new inpatient rehab hospitals in 2026 and 2027, including partnerships with Banner Health, Cox Health, and AtlantiCare.

Shareholder value initiatives: Board approved a cash dividend of $0.0625 per share and continues to evaluate share repurchase and cash dividend opportunities.

You have reached the limit Upgrade to access full content

Get started

Risk or Challenges

Regulatory Changes: The CMS deferment of the 20% transmittal rule to October 2025 provides temporary relief, but the rule's eventual implementation could still impact revenue and hospital operations. Further reforms are needed to support treatment of high-acuity patients.

Outpatient Rehab Division: Net revenue per visit decreased due to reduced Medicare reimbursement and an unfavorable shift in payer mix, leading to a 14% decline in adjusted EBITDA and a margin drop from 9.1% to 7.4%.

Debt Levels: The company has $1.8 billion in debt, including $1.04 billion in term loans and $550 million in senior notes, which could pose financial risks if cash flow or revenue projections are not met.

Capital Expenditures: Significant capital expenditures of $180 million to $200 million are planned, which could strain financial resources if revenue growth does not align with expectations.

You have reached the limit Upgrade to access full content

Get started

Guidance & Outlook

Future development efforts: Focused on inpatient rehabilitation segment. Between now and the first half of 2027, the company expects to add 395 inpatient rehabilitation beds through new openings and strategic bed additions. Specific projects include a 45-bed rehabilitation hospital in Temple, Texas, a 32-bed acute rehab unit in Orlando, Florida, and a 76-bed rehab hospital in Jersey City, New Jersey under the Kessler brand. Additional projects include partnerships with Banner Health, Cox Health, and AtlantiCare for new facilities in 2026.

Pipeline and strategic investments: The company’s pipeline remains active with additional opportunities under various stages of development. Focus remains on strategic investments to drive sustainable growth and long-term shareholder value.

Capital allocation: The Board of Directors approved a cash dividend of $0.0625 per share, payable on November 25, 2025. The company continues to evaluate opportunities for share repurchase and cash dividends to enhance shareholder value.

Revenue and adjusted EBITDA outlook for 2025: Reaffirmed revenue expectations in the range of $5.3 billion to $5.5 billion and adjusted EBITDA in the range of $510 million to $530 million.

Earnings per share (EPS) guidance: Increased estimate for EPS to be in the range of $1.14 to $1.24 for 2025.

Capital expenditures: Expected to be in the range of $180 million to $200 million for 2025, excluding capital expenditures subsequently contributed to non-consolidating joint ventures.

You have reached the limit Upgrade to access full content

Get started

Shareholder Return Plan

Cash Dividend: The Board of Directors approved a cash dividend of $0.0625 per share, payable on November 25, 2025, to stockholders of record as of November 12, 2025.

Share Repurchase: The company continues to evaluate opportunities to increase the return on capital to shareholders through share repurchase.

You have reached the limit Upgrade to access full content

Get started

Key Q&A

Q:What is the ongoing impact of the high-cost outlier on admission volume and occupancy, and what mitigation tactics are being employed?

A:The high-cost outlier and the fixed loss threshold, which has increased significantly over the last 4 years to just under $79,000, negatively impact LTAC business by limiting the ability to accommodate acutely ill patients. Mitigation tactics include utilizing inpatient rehab hospitals in shared markets to transfer patients, reducing patient length of stay by 1.5 days year-over-year, and focusing on increasing admissions despite a slight decrease in ADC.

Q:Has there been any discussion with CMS or in D.C. about raising the targeted amount of payments or the 8% threshold for outlier patients?

A:There are no specific discussions about raising the 8% threshold. The reimbursement system is complex, and the company is proposing various options to policymakers to help the struggling industry. Relief could come from multiple levers, but it is unclear which options regulators might prioritize.

Q:What is the breakdown of CapEx for maintenance versus growth this year?

A:The total CapEx for the year is projected at $180 million to $200 million, with $100 million to $105 million allocated for maintenance and the remainder for growth.

Q:What was the revenue and EBITDA impact of the 20% transmittal rule delay in the quarter?

A:The net impact of the 20% transmittal rule delay was $12 million to $15 million for EBITDA in the quarter.

Q:Why was guidance not raised despite the positive impact of the 20% transmittal rule delay?

A:Guidance was not raised due to softness in the outpatient segment, despite raising EPS guidance. The company chose to maintain EBITDA guidance.

Q:What was the impact of the 20% transmittal rule delay on guidance for the total year?

A:The impact on guidance for the total year was negligible, with a de minimis impact for Q4 due to more labor periods for comparison.

Q:What type of softness is being seen in the outpatient segment, and what is driving it?

A:The outpatient segment saw a 5% increase in volume but faced pressure on rates, particularly from Medicare, which has been a headwind for several years. There was also a deterioration in payer mix, including geographic and managed care commercial payer mix.

Q:What are the high-level headwinds and tailwinds for 2026?

A:Headwinds include the reinstatement of the 20% transmittal rule, though its impact will be less significant. Tailwinds include a modest Medicare rate increase for outpatient rehab and significant development in inpatient rehab hospitals, including converting LTAC beds to ARUs in markets with rehab demand.

Q:How long does it take for a development hospital to break even and reach peak margin profile?

A:It takes approximately 6 months to break even and around 3 years to reach peak margin profile at 85% occupancy.

Q:What is the expected impact of the 20% transmittal rule delay on 2026?

A:The impact is expected to be much smaller in 2026, approximately one-third of what it would have been if implemented in 2025.

Q:Is there any indication whether CMS would propose increasing the outlier threshold to $90,000 again?

A:There is no indication or discussion from CMS about future proposals, as these are kept confidential until released.

Q:What is causing the payer mix shift in the outpatient rehab segment, and is it expected to persist?

A:The payer mix shift is due to an increase in Medicare and Medicare Advantage patients and geographic variations in managed care commercial payers. It is not expected to persist, as Medicare rate increases and system investments are expected to mitigate the issue.

Q:What is the estimated Medicare rate update for rehab therapy codes in 2026?

A:The estimated Medicare rate update for rehab therapy codes is around 1.8% to 1.75% for 2026.

Q:How did the critical illness hospitals and inpatient rehab segments perform compared to expectations?

A:Critical illness hospitals saw increased occupancy, admissions, and revenue compared to the prior year, with normal seasonal trends. Inpatient rehab exceeded expectations for the year.

Q:What are the start-up costs for rehab IRF development, and is there any change in the sizing of development locations?

A:Start-up losses are projected at $15 million to $20 million per annum, consistent with previous years. The company typically builds 60-bed rehab hospitals but is considering 80 to 100-bed hospitals in markets with higher demand.

Q:What is the current state of the labor environment, and how is it expected to trend?

A:The labor environment is stable, with agency utilization at 15% and rates back to pre-COVID levels. Full-time equivalent cost increases are under 3%, and this stability is expected to continue into 2026.

Q:What is the company's leverage position, and how does it impact capital allocation priorities?

A:The company’s leverage is at 3.4x, a stable and comfortable level. Capital allocation priorities include development CapEx, dividends, stock buybacks, and opportunistic debt reduction.

Q:What percentage of Medicare Advantage rates are linked to the Medicare fee schedule, and what has been the impact of Medicare cuts on EBITDA?

A:Approximately 80% of Medicare Advantage rates are linked to the Medicare fee schedule. Over the last 5 years, Medicare cuts have resulted in an estimated $65 million impact on EBITDA.

Q:What steps are being taken to improve margins in the outpatient rehab segment?

A:The company is focusing on productivity improvements and system investments, such as a scheduling module, to enhance efficiency and improve margins.

Q:Review of Unclear Management Responses

A:Management avoided giving a direct answer to whether CMS would propose increasing the outlier threshold to $90,000 again, citing confidentiality and lack of transparency in CMS's proposal process.

You have reached the limit Upgrade to access full content

Get started

Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SEM Transcript

Select Medical Holdings Corporation (SEM) Q3 2025 Earnings Call Transcript

Unknown10-31

Select Medical Holdings Corporation (SEM) Q2 2025 Earnings Call Transcript

Unknown8-1

The earnings call presents a mixed picture: strong revenue growth in some divisions, but challenges in critical illness recovery. The reaffirmed guidance and strategic focus on joint ventures are positive. However, regulatory issues and unclear management responses about critical illness impact cast doubts. The stock repurchase is a positive sign, but the debt level and margin declines in some areas are concerning. Given the market cap and mixed signals, a neutral stock price reaction is expected.

Select Medical Holdings Corporation (SEM) Q1 2025 Earnings Call Transcript

Unknown5-3

The earnings call revealed mixed financial performance with a decline in EBITDA and concerns over regulatory risks, particularly affecting LTAC. Despite positive growth in the Inpatient Rehab division and shareholder returns through dividends and stock repurchases, the company's high debt level and regulatory uncertainties pose significant risks. The Q&A highlighted management's unclear responses regarding mitigation strategies for regulatory impacts, adding to the negative sentiment. Given these factors and the market cap, a negative stock price movement is anticipated over the next two weeks.

Select Medical Holdings Corporation (NYSE:SEM) Q4 2024 Earnings Call Transcript

Unknown2-22

The earnings call presents a mixed outlook. Financial performance shows growth in revenue and EBITDA, but there are concerns with debt levels, declining margins in the inpatient rehab division, and operational challenges. The Q&A section highlights uncertainties, particularly around startup costs and margin impacts. Positive factors include revenue growth and optimistic guidance for new facilities, but high debt and lack of share repurchase are negative. Given the market cap, these mixed signals likely lead to a neutral stock price movement.

SEM Report

SELECT MEDICAL HOLDINGS CORP 10-K

10-K

2025-02-20

SELECT MEDICAL HOLDINGS CORP 10-Q

10-Q

2024-08-01

SELECT MEDICAL HOLDINGS CORP 10-Q

10-Q

2024-05-02

SELECT MEDICAL HOLDINGS CORP 10-K

10-K

2024-02-22

Frequently Asked Questions

Where does this earnings call transcript come from?

All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.

How soon is the transcript available after the earnings call ends?

Full verbatim transcripts are typically published within 4–12 hours after the call ends. Same-day availability is guaranteed for all S&P 500 and most mid-cap companies.

Is the transcript edited or altered in any way?

No material content is ever changed or summarized in the “Full Transcript” section. We only correct obvious spoken typos (e.g., “um”, “ah”, repeated 10 times”, or clear misspoken ticker symbols) and add speaker names/titles for readability. Every substantive sentence remains 100% as spoken.

Why do some answers appear as “Unclear” or “Inaudible”?

When audio quality is poor or multiple speakers talk over each other, we mark the section instead of guessing. This ensures complete accuracy rather than introducing potential errors.

Who creates the AI Summary and Key Q&A highlights shown above the transcript?

They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.