Select Medical Q1 Earnings Call Highlights

Key Points

• Select Medical agreed to be taken private for $16.50 per share by a consortium led by Robert Ortenzio, with closing expected in mid-2026 and contingent financing that would add a $1 billion term loan at SOFR+3%.
• Q1 showed revenue growth but margin pressure: total revenue rose 5% year-over-year while adjusted EBITDA fell 6.5% to $141.6 million and EPS declined to $0.35; the board approved a $0.0625 per-share cash dividend.
• Management is emphasizing inpatient rehab expansion—adding 166 beds YTD and planning 275 more beds through 2027—while maintaining 2026 guidance of $5.6–5.8 billion revenue and $520–540 million adjusted EBITDA despite ending the quarter with $1.9 billion of total debt.

Select Medical NYSE: SEM reported first-quarter 2026 results that showed revenue growth across all three operating divisions, while consolidated profitability declined year over year. Management also provided an update on the company’s previously announced take-private agreement and outlined ongoing inpatient rehabilitation development projects.

Take-private transaction update

Chief Executive Officer Thomas Mullin opened the call by revisiting the company’s March 2 announcement that Select Medical entered into an agreement to be acquired by a consortium led by Executive Chairman Robert Ortenzio, together with Martin Jackson and Welsh, Carson, Anderson & Stowe. Under the terms discussed on the call, unaffiliated shareholders would receive $16.50 per share in cash.

Mullin said the transaction was unanimously approved by the disinterested members of the board and is expected to close in mid-2026, subject to regulatory approvals, shareholder approval, and other customary conditions. He added that the Hart-Scott-Rodino waiting period expired on April 27, satisfying one of the closing conditions.

In connection with and contingent upon completion of the transaction, Mullin said the company’s senior secured credit facilities would provide for an additional $1 billion of term loan borrowings at SOFR plus 3%.

Development pipeline emphasizes inpatient rehabilitation

Mullin said the company continues to focus development activity on expanding its inpatient rehabilitation business. Year to date, Select Medical added 166 beds across three newly opened inpatient rehabilitation hospitals, including:

• A fifth hospital with Baylor Scott & White in Temple, Texas
• A new hospital with CoxHealth in Ozark, Missouri
• The fourth hospital in the Banner Health joint venture in Tucson, Arizona

Looking ahead across the remainder of 2026 and into 2027, Mullin said the company expects to add 275 more beds, consisting of 209 in inpatient rehabilitation facilities (IRF) and 66 in critical illness, through a combination of new hospitals, acute rehab units, neuro transitional units, and expansions.

Planned openings include a 60-bed hospital with AtlantiCare in Southern New Jersey in the third quarter of 2026, two acute rehab units in Florida, and two neuro transitional units scheduled for the second and third quarters. For 2027, he highlighted a 20-bed expansion at a Banner rehabilitation hospital early in the year, and openings in the third quarter for a 76-bed inpatient rehabilitation hospital in Jersey City and an acute rehab unit in Richmond, Virginia.

Q1 results: revenue up, adjusted EBITDA down

Mullin said total revenue increased 5% year over year, with revenue growth in all three operating divisions. However, adjusted EBITDA declined 6.5% to $141.6 million, compared with $151.4 million in the prior-year period. Earnings per common share were $0.35, compared with $0.44 a year earlier; when adjusted for take-private transaction costs, earnings per share were $0.36.

The board approved a cash dividend of $0.0625 per share, payable May 28 to stockholders of record as of May 14, Mullin said.

Segment performance and regulatory items

Inpatient Rehabilitation Hospitals: Revenue increased more than 14% year over year to approximately $351.9 million. Adjusted EBITDA rose 15% to $81.1 million. Mullin said revenue per patient day increased nearly 3%, average daily census grew 12%, and occupancy increased to 83% from 82%. Same-store occupancy increased to 87% from 83%. Adjusted EBITDA margin increased slightly to 23% from 22.9%.

On the regulatory front, Mullin said CMS issued the proposed rule for inpatient rehabilitation facilities for fiscal year 2027. If finalized as proposed, he said Select Medical would expect an increase of about 2.6% in the standard federal payment rate, with a final rule expected in late July or early August after the comment period.

Critical Illness Recovery Hospitals: Revenue rose to $638.8 million from $637.0 million. Adjusted EBITDA declined 15% to $73.4 million from $86.6 million, and adjusted EBITDA margin fell to 11.5% from 13.6%. Mullin said revenue per patient day increased more than 2% and admissions increased 1%.

Mullin also cited CMS’s proposed rule for long-term acute care hospitals for FY 2027. If finalized as proposed, Select Medical would expect an increase of 2.66% in the standard federal payment rate, and he said the high-cost outlier threshold would remain steady at $78,936, with finalization also expected in late July or early August.

Outpatient Rehabilitation: Revenue increased more than 4% to $321.3 million from $307.3 million, driven by more than 4% growth in patient visits. Net revenue per visit was consistent year over year at $102. Adjusted EBITDA was $22.0 million compared with $24.3 million, resulting in an adjusted EBITDA margin of 6.8% versus 7.9%.

Balance sheet, guidance, and Q&A highlights

Executive Vice President and CFO Michael Malatesta said Select Medical ended the quarter with $1.9 billion of total debt and $25.7 million of cash. Debt included $1.4 billion in term loans, $125 million in revolving loans, $550 million of 6.25% senior notes due 2032, and $165 million of other debt. Malatesta said leverage was 3.75 under the senior secured credit agreements, with $443.5 million of revolver availability. Interest expense was $28.3 million, compared with $29.1 million a year earlier.

Malatesta said operating cash flow was $37.9 million. Investing activities used $56.7 million, primarily driven by $58.9 million of property and equipment purchases. Financing activities provided $18.0 million, including $25.0 million in net borrowings on the revolving credit facility, partially offset by distributions to non-controlling interests, dividend payments, and term loan repayments.

Management maintained full-year 2026 guidance, with Malatesta reiterating expectations for:

• Revenue of $5.6 billion to $5.8 billion
• Adjusted EBITDA of $520 million to $540 million
• Fully diluted EPS of $1.22 to $1.32
• Capital expenditures of $200 million to $220 million

During Q&A, Mullin said outpatient margin improvement efforts include scheduling optimization and market-by-market performance reviews. He noted that exiting Oregon, where the company closed four clinics, resulted in about $1 million of costs flowing through the first quarter, and he indicated additional market consolidations or exits could occur during 2026.

On Medicare Advantage, Mullin said the company saw “an increase” in denials, describing a decrease in conversion in the first quarter in both the long-term acute care hospitals and inpatient rehab, while outpatient was “relatively flat.” He added that commercial and Medicare conversion improved even as Medicare Advantage denials increased.

Addressing critical illness recovery hospital margin pressure, Malatesta attributed performance largely to lower Medicare Advantage conversion impacting volume, with an estimated year-over-year impact of approximately $13 million to $14 million. He said critical illness is “always the most difficult business unit to project throughout the year,” but management still expects results to remain within its expectations for the remainder of 2026.

Malatesta also said the company has not seen a meaningful impact from the Medicare TEAM model on inpatient rehab census, calling it a “very low portion” of the patient mix that could be affected; Mullin agreed it has been a “very minor issue” in rehab hospitals so far.

About Select Medical NYSE: SEM

Select Medical is a leading provider of specialized healthcare services in the United States, operating through two primary business segments: Hospital Division and Outpatient Rehabilitation Division. The Hospital Division offers long-term acute care (LTAC) hospitals and inpatient rehabilitation facilities (IRFs) that serve patients recovering from complex illnesses, trauma or surgery. The Outpatient Rehabilitation Division delivers physical, occupational and speech therapy services through a network of clinic locations and home-based care programs.

Headquartered in Mechanicsburg, Pennsylvania, Select Medical was founded in 1996 and has grown through strategic partnerships, joint ventures and acquisitions.

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