Executive Summary / Key Takeaways

• Leadership-Driven Operating Model as Core Differentiator: Pennant Group's unique decentralized model, emphasizing local C-level leadership and clinical excellence, is its primary competitive advantage, driving superior patient outcomes, high employee engagement, and robust financial performance across its diversified post-acute care portfolio.
• Robust Growth Trajectory Fueled by Strategic Acquisitions: The company has demonstrated consistent, aggressive expansion through targeted acquisitions in both home health/hospice and senior living, including the significant Signature Healthcare integration and the pending UnitedHealth Group (UNH)/Amedisys (AMED) divestiture, which is set to establish a strong Southeast presence.
• Solid Financial Performance and Upgraded 2025 Outlook: Pennant delivered strong Q2 2025 results, with revenue up 30.1% and adjusted EBITDA up 24.5% year-over-year. Management has raised its full-year 2025 guidance, projecting adjusted EPS growth of 19.1% at the midpoint, reflecting confidence in ongoing operational momentum and successful integration.
• Resilience Amidst Regulatory Headwinds: Despite potential challenges from the proposed 2026 Home Health rule and Medicaid reforms, Pennant's diversified revenue streams (traditional Medicare home health is ~18% of total revenue) and operational agility position it to adapt and find competitive advantages through disruption.
• Strong Balance Sheet Supports Future Expansion: With $208.8 million in available borrowing capacity and a low net debt to adjusted EBITDA ratio of 0.38x, Pennant possesses ample liquidity to pursue its strategic acquisition pipeline and continue its growth trajectory.

The Pennant Group's Differentiated Approach in Post-Acute Care

The Pennant Group, Inc. (NASDAQ:PNTG) operates as a holding company, providing a comprehensive suite of healthcare services across the post-acute care continuum through its independent operating subsidiaries. Established in 2019 following its separation from The Ensign Group, Inc. (ENSG), Pennant's mission is to deliver high-quality care to a diverse patient and resident base, particularly the growing senior population in the United States. The company's footprint spans 13 states, offering home health, hospice, home care, and senior living services, with additional operational support in Connecticut.

The broader healthcare industry is experiencing significant shifts, driven by an aging demographic, a preference for care in lower-cost settings like the home, and persistent inflationary pressures. These trends underscore the increasing demand for integrated post-acute care solutions. Pennant's overarching strategy is to be the provider of choice in its communities, a goal achieved through its innovative operating model and a relentless focus on five key areas: leadership development, clinical excellence, employee engagement, margin improvement, and growth.

Pennant's core differentiation, its "technological moat," lies not in a proprietary device or software, but in its highly effective, decentralized operating model and robust leadership development programs. This organizational "technology" empowers local C-level leaders to act as true owners, fostering a culture of accountability and driving superior outcomes. This model enables Pennant to consistently achieve an average CMS star rating of 4.1 for its home health agencies, significantly exceeding the national average of 3.0, and maintain a potentially preventable hospitalization rate of 8.6%, which compares favorably to the national average of 9.9%. These quantifiable benefits translate into stronger referral relationships, enhanced patient satisfaction, and a more resilient business.

The Engine of Growth: Leadership, Clinical Excellence, and Strategic Acquisitions

Pennant's growth narrative is deeply intertwined with its unique operating model. The company's multi-year investment in leadership development has created a robust pipeline of talent, with 52 local leaders earning C-level designations since January 2024, including 19 local CEOs. In 2025, Pennant is ahead of its goals for recruiting CEOs in training and elevating clinical leadership through its Clinical Operations Leadership Training program. This focus ensures that new acquisitions can be quickly and effectively integrated, and existing operations can continue to thrive.

The tangible benefits of this model are evident in the performance of individual operations. For instance, Symbii Home Health & Hospice in Idaho Falls, under its C-level leadership, achieved a 100% employee engagement score and 90% employee satisfaction, leading to a 46.6% increase in revenue and a 120.3% increase in EBITDA over the prior year. Similarly, The Shores of Sheboygan senior living community saw revenues increase 22% and EBITDA jump 187% year-over-year, driven by a strong culture and 96% occupancy. This local empowerment and peer accountability are critical to Pennant's ability to scale and integrate new businesses successfully.

Pennant's growth strategy is aggressive yet disciplined, prioritizing opportunities where it has the leadership capacity and operational strength within existing clusters. The company has significantly expanded its operational footprint through a series of strategic acquisitions. In January 2025, Pennant completed the second stage of the Signature Healthcare at Home acquisition, integrating Oregon operations, which contributed $32.456 million in revenue and $5.626 million in operating income for the first six months of 2025. This multi-site acquisition demonstrated the model's effectiveness at scale. Further expanding its senior living portfolio, Pennant acquired The Villages at Red Mountain in Arizona in April 2025, a 128-unit community acquired from state receivership at a favorable price, highlighting the company's ability to unlock value in underperforming assets.

A major strategic move occurred on April 30, 2025, with an agreement to acquire between 38 and 50 home health, hospice, and palliative care locations from UnitedHealth Group and Amedisys for $113 million to $147 million. This transaction, primarily concentrated in Tennessee with additional locations in Alabama and Georgia, is anticipated to close in Q4 2025 and will establish a significant center of strength in the Southeast. Post-quarter end, Pennant also acquired GrandCare Home Health in Southern California on July 1, 2025, for approximately $8 million, enhancing its regional continuum of care. These acquisitions underscore Pennant's commitment to expanding its integrated service offerings and leveraging its operational model in new, compelling markets.

Segment Performance: A Tale of Diversified Strength

Pennant's diversified business segments have demonstrated robust performance, contributing to the company's overall growth and resilience.

Home Health and Hospice Services

The Home Health and Hospice segment continues to be a primary growth driver. In Q2 2025, segment revenue reached $166.02 million, a substantial 32.5% increase over the prior year quarter, representing 75.6% of total revenue. Year-to-date Q2 2025 revenue grew 34.8% to $325.89 million. This growth was fueled by both organic expansion and new acquisitions. Hospice admissions increased 14.7% and average daily census (ADC) grew 21.4% in Q2 2025, with mature operations showing same-store admissions up 4.5% and ADC up 6.6%. Home health admissions rose 26.1%, with Medicare admissions up 21.6% and average Medicare revenue per 60-day episode increasing 5.9%. The segment's adjusted EBITDA from operations for Q2 2025 was $25.47 million, up 29.9% year-over-year. The cost of services as a percentage of revenue remained relatively stable at 83.3% in Q2 2025, reflecting efficient management despite increased volume.

Senior Living Services

The Senior Living segment has shown significant resurgence and positive momentum. Q2 2025 revenue improved to $53.48 million, a 23.1% increase over the prior year quarter, contributing 24.4% to total revenue. Year-to-date Q2 2025 revenue grew 23.4% to $103.45 million. Segment adjusted EBITDA from operations increased 25.7% to $5.14 million in Q2 2025. This improvement more than offset the phaseout of pandemic-era support programs, which contributed over $1 million in Q2 2024. Same-store occupancy grew 90 basis points sequentially, now exceeding 80%, while average monthly revenue per occupied unit rose to $5,188, an 8.3% increase over the prior year quarter. Management attributes this to a strategic focus on improving revenue quality and strengthening local leadership. The cost of services as a percentage of revenue for senior living increased by 210 basis points in Q2 2025, primarily due to decreases in state relief funding.

Financial Health and Capital Deployment

Pennant's consolidated financial performance reflects its strategic execution. For the full year 2024, revenue reached $695.2 million, a 27.6% increase over the prior year, with adjusted EBITDA growing 30.9% to $53.3 million. The latest trailing twelve-month (TTM) gross profit margin stands at 13.54%, operating profit margin at 5.53%, and EBITDA margin at 6.50%. Net income for Q2 2025 was $7.08 million, contributing to a TTM net profit margin of 3.36%.

The company maintains a healthy balance sheet and robust liquidity. As of June 30, 2025, Pennant had $14.39 million in cash and $208.81 million available on its $250 million revolving credit facility, which matures in July 2029.

The net debt to adjusted EBITDA ratio is a conservative 0.38x, and the company remains compliant with all financial covenants. While Q1 2025 saw cash flows used in operations ($21.2 million) due to significant acquisition-related accounts receivable and timing of incentive payouts, management clarified this was not a fundamental shift in its longer-term operating cash flow expectations. Indeed, Q4 2024 was a prolific quarter for cash accumulation, generating $20.6 million in net cash from operating activities and $17.2 million in free cash flow. Pennant expects full-year 2025 operating cash flows to be between $35 million and $45 million, with capital expenditures similar to 2024 levels, indicating strong free cash flow generation.

Navigating Headwinds: Regulatory Shifts and Competitive Dynamics

The healthcare industry is subject to significant regulatory and competitive pressures. Pennant's operating model is designed to thrive in such dynamic environments, but key risks warrant investor attention.

Regulatory Landscape

The proposed 2026 Home Health Prospective Payment System (HH Payment Proposed Rule) by CMS presents a significant headwind, proposing a net payment reduction of 6.4% for home health agencies in 2026. This includes a 3.7% negative permanent behavioral adjustment and a 4.6% negative temporary adjustment. Management views this proposal as "seriously misguided" and is actively engaged in advocacy efforts, noting that traditional Medicare home health revenue constitutes only approximately 18% of Pennant's total revenue, providing some insulation. The company's local teams are already developing plans to adjust operations.

Additionally, the recently signed "One Big Beautiful Bill Act" (OBBBA) includes Medicaid reforms that could indirectly impact Pennant's operations through mandatory work requirements, expanded cost-sharing, and potential reductions in federal Medicaid funding. Approximately 15% of Pennant's revenue is exposed to Medicaid, primarily in its senior living and home care segments. While management believes its services represent a lower expenditure of Medicaid dollars, the potential for reduced or delayed reimbursement remains a risk. Furthermore, 13 of Pennant's subsidiaries are currently undergoing Medicare revenue recoupment reviews, which could result in sanctions or additional recoupments. The company is also managing elevated hospice cap liabilities in California, though it expects to taper its 2025 exposure to about one-third of 2024 levels through strategic referral pattern adjustments.

Competitive Environment

Pennant operates in a highly competitive landscape across both its segments. In senior living, the environment is competitive, with inflationary factors impacting revenue per occupied unit. Pennant's focus on "revenue quality" and sequential occupancy growth (90 basis points in Q2 2025) demonstrates its ability to compete effectively.

Compared to larger, publicly traded competitors:

• Brookdale Senior Living (BKD): BKD has a broader national presence in senior living. Pennant, while more regionally focused, leverages deeper local expertise and an integrated service model to foster stronger community ties and potentially more stable profitability in its niche markets. BKD's scale offers economies of scale, but Pennant's localized adaptability is a key strength.
• Encompass Health (EHC): EHC specializes in post-acute rehabilitation. Pennant's broader care ecosystem, integrating home health, hospice, and senior living, offers a more holistic solution for aging populations, appealing to clients seeking seamless transitions. While EHC excels in specialized rehabilitation, Pennant's integrated approach enhances customer loyalty.
• Chemed Corporation (CHE): CHE, through VITAS Healthcare, is a high-efficiency hospice operator. Pennant's diversified portfolio provides a more comprehensive offering across care stages. CHE may have an edge in specialized hospice efficiency, but Pennant's service variety supports broader customer retention.
• Amedisys (AMED): AMED emphasizes technological advancements for care delivery in home health and hospice. Pennant's regional focus and integrated senior living options provide operational advantages in specific markets. While AMED might lead in innovation speed, Pennant's integrated care model and strong community ties offer a distinct value proposition.

Pennant's competitive advantage stems from its "leadership-driven" operating model, which consistently delivers superior clinical outcomes and efficient integration of acquisitions. This allows the company to differentiate itself through quality and localized service, even against larger, more specialized rivals.

Outlook and Value Creation

Pennant's management has expressed strong confidence in the company's trajectory, reflected in its updated 2025 guidance. The company anticipates full-year 2025 revenue in the range of $852.8 million to $887.6 million and adjusted earnings per diluted share between $1.09 and $1.15. The midpoint of $1.12 represents a $0.05 increase over original guidance and a 19.1% increase over 2024 adjusted EPS. Adjusted EBITDA is projected to be between $69.1 million and $72.7 million. This guidance incorporates current operations, organic growth, and a 26% effective tax rate, but notably excludes additional earnings from the UnitedHealth Group/Amedisys acquisition due to timing uncertainties, with a further guidance update expected upon closing.

The outlook assumes a ramp in performance throughout the year, driven by increasing home health and hospice ADC, continued occupancy and rate improvement in senior living (targeting mid-single-digit RevPOR growth and 10.5% margin), and anticipated reimbursement rate adjustments. The 2026 Hospice Final Rule, with its 2.6% rate increase (modeled as a ~2.5% increase for Pennant), is expected to provide a tailwind for Q4 2025 and into 2026. While the 2025 Home Health Final Rule is anticipated to have a net neutral impact on reimbursement per episode, Pennant's operational agility and diversified revenue streams are expected to mitigate the impact of potential future cuts. The company's robust acquisition pipeline and strong balance sheet position it for continued strategic growth, leveraging its leadership-driven model to unlock value in new markets and operations.

Conclusion

The Pennant Group stands as a compelling investment opportunity, distinguished by its unique, leadership-driven operating model that fosters clinical excellence, employee engagement, and robust financial performance. This "organizational technology" has been the cornerstone of its consistent growth, enabling successful integration of numerous strategic acquisitions and driving strong organic expansion across its diversified home health, hospice, and senior living segments. Despite a challenging regulatory environment, including proposed home health reimbursement cuts and Medicaid reforms, Pennant's diversified revenue base and operational agility provide a strong foundation for resilience. With a healthy balance sheet, ample liquidity, and a clear strategic roadmap for continued acquisitions and organic growth, Pennant is well-positioned to capitalize on the increasing demand for post-acute care services. The company's ability to consistently execute its growth strategy and adapt to market dynamics, underpinned by its differentiated approach to leadership and operations, points to sustained value creation for investors.