Good morning, and thank you for joining us today for Select Medical Holdings Corporation's Earnings Conference Call to discuss the third quarter 2025 results and the company's business outlook. Presenting today are the company's Executive Chairman and Co-Founder, Robert Ortenzio; the company's Chief Executive Officer, Thomas Mullin; and the company's Executive Vice President and Chief Financial Officer, Michael Malatesta. Also on the conference line is the company's Senior Executive Vice President of Strategic Finance and Operations, Martin Jackson. Management will give you an overview of the quarter and then open the call for questions. Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results, growth opportunities and other statements that refer to Select Medical's plans, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to management of Select Medical today, and the company assumes no obligation to update these statements as circumstances change. At this time, I will turn the conference over to Mr. Robert Ortenzio. Please go ahead.

Thanks. Thank you, operator. Good morning, everyone. Welcome to Select Medical's Third Quarter 2025 Earnings Call. As is our custom, I'll provide some overview of the quarter and comment on our development efforts, and then I'll turn the call over to our CEO, Tom Mullin. Let me begin with the regulatory update that affects our critical illness recovery hospital segment. On September 22, CMS announced the deferment of its expanded Medicare outlier reconciliation criteria, what we commonly refer to as the 20% transmittal rule. It was originally slated to apply to cost reporting periods beginning on or after October 1, 2024. This rule will now be effective for periods beginning on or after October 1, 2025. The rules deferral resulted in a favorable revenue adjustment recorded this quarter. We are pleased with the delay of the transmittal and expect the rule to have much less of an impact as labor costs are more stabilized in the cost years now affected by the change. This should result in fewer of our hospitals subjected to an outlier payment reconciliation. While we are pleased with CMS' decision to delay the implementation of the 20% transmittal rule, we believe further reform is needed to ensure Medicare policy supports the treatment of high-acuity patients in our long-term acute care hospitals. We will continue to actively advocate for policies that enable us to provide critical care for these patients. I would now like to turn to an update on development. During the third quarter, we acquired a 30-bed critical illness recovery hospital in Memphis, Tennessee and grew our outpatient portfolio by 3 clinics. Future development efforts remain focused on our inpatient rehabilitation segment. Between now and the first half of 2027, we expect to add 395 inpatient rehabilitation beds through a combination of new openings and strategic bed additions. This month, we opened our fourth rehab hospital with our joint venture partners, the Cleveland Clinic, that operates 32 new beds. By year-end, we expect to open a 45-bed rehabilitation hospital in Temple, Texas and a 32-bed acute rehab unit in Orlando, Florida. We also anticipate adding 10 beds to an existing rehab hospital with our joint venture partner, Riverside in Virginia. Moving to 2026, we expect to open 3 new inpatient rehab hospitals, including a 58-bed facility in Tucson, Arizona in partnership with Banner Health, a 63-bed hospital in Ozark, Missouri with Cox Health, and a 60-bed hospital with AtlantiCare in New Jersey. Additionally, we plan to add 2 acute rehab units and 2 neuro transitional units to further enhance our continuum of care rehabilitation. Looking ahead to 2027, we are preparing to launch a 76-bed rehab hospital in Jersey City, New Jersey under the Kessler brand. Beyond these projects, our pipeline remains active and promising with additional opportunities under various stages of development. As we advance these initiatives, we will remain focused on strategic investments that drive sustainable growth and long-term value for our shareholders. In addition to development, we continue to evaluate opportunities to increase the return on capital to our shareholders through share repurchase and cash dividends. This quarter, the Board of Directors approved a cash dividend of $0.0625 per share, which is payable on November 25, 2025 to stockholders of record as of November 12, 2025. These actions reflect our ongoing commitment to enhancing shareholder value and positioning the company for continued success. This concludes my remarks, and I'll now turn the call over to Tom Mullin for additional remarks regarding financial performance for the quarter of each of our segments.

Thank you, Bob, and good morning, everyone. On a consolidated basis, revenue grew over 7% to $1.36 billion compared to $1.27 billion in the prior year. Adjusted EBITDA also increased over 7% to $111.7 million, up from $103.9 million. 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. Moving into our segment results, we will start with the inpatient rehab hospital division, where we delivered another strong quarter. Revenue increased 16% year-over-year to $328.6 million and adjusted EBITDA was up 13% to $68 million. Our revenue per patient day increased nearly 5% and our average daily census rose 11%. Occupancy improved to 83% from 82% with same-store occupancy rising to 86% from 85%. Our adjusted EBITDA margin declined slightly to 20.7% from 21.3%. In our outpatient rehab division, revenue increased 4% to $325.4 million, which was driven by over 5% growth in our patient visits. Net revenue per visit decreased to $100 from $101 in the same quarter last year. The decrease in net revenue per visit was driven by a reduction in our Medicare reimbursement and an unfavorable shift in payer mix. Adjusted EBITDA decreased over 14% to $24.2 million, with margin declining from 9.1% to 7.4%. In our critical illness recovery hospital division, our revenue increased over 4% to $609.9 million, while adjusted EBITDA rose over 10% to $56.1 million, up from $50.8 million in the same quarter of last year. Our adjusted EBITDA margin increased to 9.2% from 8.7%. Occupancy remained steady at 65% with our admissions up 2.1%. That concludes my remarks, and I will turn the call over to Mike Malatesta for additional financial details before we open the call up for questions.

Thank you, Tom, and good morning, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding and $60.1 million of cash on the balance sheet. Our debt at quarter end includes $1.04 billion in term loans, $150 million in revolving loans, $550 million in 6.25% senior notes due 2032, and $47.1 million of other miscellaneous debt. We ended the quarter with net leverage of 3.4x under our senior secured credit agreement and have $419.1 million of availability on our revolving loans. Our term loan carries an interest rate of SOFR plus 200 basis points and matures on December 3, 2031. Interest expense was $30 million compared to $31.4 million in the same quarter last year. For the quarter, cash flow from operating activities was $175.3 million. Our days sales outstanding or DSO from continuing operations was 56 days at September 30, 2025, compared to 60 days at September 30, 2024, and 58 days at December 31, 2024. Investing activities used $32.6 million, which includes $53.1 million used for purchases of property and equipment, offset by $22.1 million of proceeds from the sale of interest in one of our hospitals. Financing activities used $135 million, including $100 million in net repayments on our revolving line of credit, $7.7 million in dividends, $17 million in net distributions to non-controlling interest, and $2.6 million in term loan repayments. We are reaffirming our business outlook for both revenue and adjusted EBITDA for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion and adjusted EBITDA to be in the range of $510 million to $530 million. We are increasing our estimate for earnings per common share to be in the range of $1.14 to $1.24. Excluding capital expenditures subsequently contributed to non-consolidating joint ventures, we still expect capital expenditures to be in the range of $180 million to $200 million. This concludes our prepared remarks. At this time, we'd like to turn the call back to the operator to open the line for questions.

The first question for today will be coming from the line of Ben Hendrix of RBC Capital Markets.

I appreciate the opening commentary about the 20% transmittal delay. I wanted to see if you could focus a little bit on the ongoing impact of the high-cost outlier. What it's doing to the admission volume, occupancy and kind of what types of mitigation tactics you guys can employ to help offset that? And then just close with any development conversations in Washington.

Ben, this is Tom Mullin. I'll start with your question. To your point about the high-cost outlier and the fixed loss threshold continuing to increase at a pretty dramatic rate over the last 4 years and now sitting at just under $79,000, it does have a negative impact on our LTAC business because whenever you think of how our LTACs are positioned across the country, many of our LTACs are with some of the largest academic medical centers that carry the highest case mix index and most acute patients across the country. So as we see that fixed loss threshold continue to go up, we are unable to accommodate as many of those very acutely ill patients just because there's so much more loss to get to any outlier reimbursement. So it has had an effect on our ADC and some of the mitigation efforts that we have. We're fortunate that we have inpatient rehab hospitals in those shared markets with the large academic medical centers that we partner with. And we're able to use those as downstream opportunities to get some of the patients moved from the LTAC to the inpatient rehab as they're able to take more acutely ill patients, and we get our rehabs able to do that. So we've seen year-over-year, our patient days or our length of stay on some of these patients has decreased by 1.5 days on our patients. As a result of that, our ADC is down slightly, but our admissions are up. So obviously, we're going to continue to focus on that high-cost outlier threshold. And I'll let Bob comment on what we're doing in D.C. to try and combat some of those efforts.

The situation in Washington, D.C. seems better than it has been historically. We have established more open lines of communication with both CMS and relevant committees in the House and Senate. Our recent efforts have focused on seeking the postponement of the 20% transmittal to ensure it is applied more equitably, especially considering our cost reports and the significant labor costs resulting from the pandemic. While we are pleased with this development, it does not address the long-term challenges we face. Notably, the fixed loss threshold has increased from $38,000 to $59,000, then to $77,000, and recently to $79,000. Although this is still a significant increase, it is less severe compared to the proposed rule that suggested a fixed loss threshold of $91,000, which would have been very damaging if enacted. Like always, we are anxious about the upcoming proposed rules, which provide us an opportunity to provide feedback. The regulatory environment remains challenging as the outlier pool is intended to remain below 8%, and the way CMS approaches this is by consistently increasing the fixed loss threshold to align with that legislative goal. However, this approach contradicts the overarching policy for LTACs, which is to accommodate higher acuity patients. This creates a difficult balancing act. Our primary focus remains on advocating for the most critically ill patients admitted to our LTACs. If you have further questions, please feel free to ask.

No, I think that covers it.

Our next question will be coming from the line of Justin Bowers of DB.

I have two quick questions regarding LTAC. First, Bob and Tom, have there been any discussions with CMS or in D.C. about increasing the targeted payment amount or raising the 8% threshold for outlier patients? Second, with many variables impacting reimbursement, I noticed you received an increase for 2026 and a modest rise for the HCO. Can we use the current trends in length of stay in ADC as an indicator of how the business may perform moving forward, assuming no significant changes occur?

It's a great question. The best way I can respond is to highlight that there are many factors in a very complex reimbursement system. As I've mentioned in previous calls, the LTAC reimbursement has become extremely complicated. We hear concerns from our shareholders and the analyst community regarding this complexity, especially when considering options like the fixed loss threshold, site neutrality, the compliance requirement of a 20-day length of stay, and the 8% outlier pool. These are all avenues we can explore for Select and the industry as a whole, and we would welcome any relief from these areas. Strategically, I believe we should propose various options to policymakers to support an industry that has struggled over the last several years. We are presenting all possible options for relief, but it can be challenging to determine which paths are easier for regulators from a legislative or regulatory perspective. Sometimes, the transparency needed to understand their constraints is lacking. Regulatory bodies like CMS may feel limited by legislative restrictions, while lawmakers are often hesitant to overstep into regulatory territory. Hence, we collaborate with the industry to propose numerous options, and although we often discuss the more challenging issues, like the increasing fixed loss threshold, there may be other considerations for CMS to address.

Appreciate that. And then just pivoting, there's a lot of development activity, especially on the IRF side over the next couple of years. Can you help us understand how much of the CapEx this year is maintenance versus growth?

I'll take that question on maintenance. Maintenance for this year, we're projecting overall $180 million to $200 million. Maintenance is going to range in that $100 million to $105 million range. The remainder is related to growth initiatives.

And our next question will be coming from the line of Ann Hynes of Mizuho Securities.

I know you said in the prepared remarks that you had a revenue benefit from the delay of the 20% transmittal rule. What was the impact in the quarter from a revenue and EBITDA perspective?

So Ann, the net impact when we take into account the revenue and some expense reversals was in the $12 million to $15 million range.

For EBITDA?

EBITDA for the quarter.

Okay. What about for the year? I would have expected this to positively impact guidance. Is there another reason you didn't raise guidance despite this change?

Well, as you saw, we had some softness in our outpatient segment this quarter. So while we're comfortable raising EPS guidance, we thought it was prudent just to maintain EBITDA guidance.

Okay. What was the delay in terms of the year impact? I understand the quarter was impacted by the 12% to 15%, but how did that affect your guidance for the entire year?

So for the year, we experienced only a minimal impact in Q4 because, as Bob mentioned earlier, as time went on, the significance of the 20% transmittal rule decreased since we had more labor periods for comparison.

And maybe you mentioned outpatient. Maybe can you give us some more detail on what type of softness you're seeing and the impact? And what you think driving it?

We did have a nice increase in the volume of approximately 5%, but we did have pressure on rates. And Medicare has been a headwind that we've had to deal with for all of 2025 and actually the last few years significantly. But we also did see a deterioration in our mix for this quarter. We look to get that back on track, but just not the mix within categories, but sometimes the mix within the mix of certain geographic areas and certain managed care commercial payers.

Okay. And then maybe focusing on 2026. I know you're not giving guidance today, but are there any high-level headwinds and tailwinds that you want to call out?

What I think is noteworthy about outpatient care is that, despite being modest, we are seeing an increase in Medicare and our Medicare Advantage payers, which I view as a slight tailwind. Additionally, I believe Tom can also elaborate on the significant developments we've announced as we prepare for the upcoming year.

Yes. I think starting just with LTAC briefly, we'll have the 20% transmittal back in place starting this October 1 and rolling in by cost year. So that will be a bit of a headwind, but far less because of the point Mike just made about the labor markets and being further from the pandemic labor costs. So we will be able to mitigate that far more than what we would have experienced in the past year. And as it relates to inpatient rehab, there is a fair amount of development that to get started in 2026 with new hospitals. And there's also consideration for converting more of our LTAC beds in markets where there's rehab demand to add an ARU within our LTACs. So you'll see a fair amount of rehab growth in the next year.

All right. Maybe one more question, just on rehab. Can you remind us like when you build a development hospital, how long to break even and how long do you get to your like peak margin profile?

It's Mike Malatesta again. It's approximately 6 months until we reach breakeven. For full maturity, it takes about 3 years for a hospital to achieve 85% occupancy that we see in our core hospitals.

Our next question will come from the line of Joanna Gajuk Of Bank of America.

A couple of follow-ups. So on the 20% transmittal goal delay in implementation. So because of the more recent cost reports will be used, should we think about the, I guess, the headwind much smaller than that $12 million to $15 million you saw in the first half of '25?

Joanna, I think your question is that is for next year, we project the impact to be much less in '26 than it would have been if it was implemented for '25. Yes. And we think the impact will be maybe approximately a third of what we would have anticipated if it was put in place for this year and not rescinded.

Okay. That's super helpful. And I guess, to Bob's commentary around D.C. environment, maybe a little bit warming up or at least open channel, so that's positive. And I guess as we think about heading into next year and the proposal for fiscal '27, any indication whether the CMS would propose again to increase the outlier threshold to $90,000? Or you think that's kind of off the table? How should we think about that?

Well, the short answer is I have no idea. These proposals are completely closed off. This is why they become such a significant event for us every year, because there is virtually no discussion that comes out of CMS on the proposed rules for reasons you can understand. Those matters are secured. They are drafted and circulated within the administration before they are released with extreme confidentiality.

Okay. So I guess we'll just have to wait and see. That's fine. I was just checking. If I may, I have a couple more follow-ups. Regarding outpatient rehab, you mentioned that the weakness in that segment was due to payer mix. Can you elaborate on what exactly is happening? Is it related to different markets growing at different rates, or is there an issue with managed care denying or not covering certain services?

Well, the first part is with Medicare, there's over a 3% decrease this year. So that's the challenge that our operation had to face the entire year. For this particular quarter, though, we did see a slight shift in mix to Medicare, Medicare Advantage. And also, it depends with which geographic areas have comprised a little more of your volume. And also within managed care commercial, that's a wide basket. Certain payers pay different rates higher and lower than others. So this quarter, we did have, as we say, a shift in our mix, but along with our sustained Medicare cut that we've had to endure all year. And again, that is going away next year where we'll have a modest increase.

Right. Because that was my other follow-up. But before I ask that, on this payer mix. So should we think this is something that could persist in terms of these margins all the way down to 7%? And is there something you can do to kind of mitigate that headwind?

We believe this situation is not likely to continue. The improvements in Medicare and Medicare Advantage will contribute positively. Furthermore, we have previously mentioned our commitment to investing in our systems. Our upcoming investment in the scheduling module is expected to enhance our operations. Additionally, we are concentrating on addressing the issues related to the shift in our mix.

I would like to ask a follow-up question about the outpatient rehab Medicare rate for next year. We do not have the final information yet, and it might be delayed. However, the proposal indicates that it is finalized as originally proposed without any adjustments. What can you share regarding the rate update for your rehab therapy codes? Our estimation is likely between 2.6% and 2.8%, but any insights you can provide would be appreciated.

Actually, with the mix of codes, and there's just a few codes that predominantly make up the base of revenue over 95% of your revenue mix for therapy codes. We're a little more modest. We're around that 1.8%, 1.75% increase for next year when you take all factors into account for Medicare.

But it's still better than the cost, so I guess.

Yes.

And if I may, just very last question. Just talking about how the segment did versus your internal expectations. So you said the outpatient was a little worse. And then the LTAC business or the critical illness hospitals, it sounds like were better because of this reversal. But outside of the reversal, how were the trends in the critical illness hospitals? And also, how did the IRF segment did versus your internal?

I believe we're all on the same page that inpatient rehab has consistently surpassed our expectations this year. Tom may have more to add regarding critical illness.

And in critical illness, we did see occupancy increase compared to prior year. But as everyone on this call knows, in the critical illness business, there's a fair amount of seasonality, and we're always going to see a decrease in the third quarter. And then we start to really pick back up as we enter October and the fourth quarter as the season starts to change and we start to see respiratory volumes start to pick up. So we saw the normal trend that we see every year in critical illness. But compared to the prior year same period, occupancy was ahead, admissions were ahead and revenue was ahead. But obviously, the 20% transmittal deferment played into the rate increase.

And our next question will be coming from the line of A.J. Rice of UBS.

First, can you provide insight into the development pipeline for rehab IRF? What were the relative start-up costs you faced this year, and how do you anticipate those will compare to next year? Will that amount pose a challenge for you? Additionally, your main competitor in that area is considering a shift in their facility model, exploring smaller locations to enter new markets. Are there any updates to how you're approaching the sizing of your development sites that you'd like to share?

A.J., it's Mike. In regards to losses, we've had a pretty consistent cadence from last year and projecting into next year, we're projecting approximately $15 million to $20 million of start-up losses per annum. So that's going to be fairly consistent. Tom is going to speak to our strategy on the size of the hospitals.

Our focus will remain partnership-focused and looking to expand partnerships with the larger health systems across the country. So you'll see more new partners added in the coming year or 2 across the country. You'll also see us in our markets where we're running at or near capacity with existing partners, we'll be adding new hospitals, like Bob spoke to in his opening remarks where we added a fourth rehab hospital with Cleveland Clinic that just opened earlier this week. So there will be additions in our existing markets, but we'll be looking to add large new academic medical centers with inpatient rehab as well. We typically build 60-bed rehab hospitals, but we're considering 80 to 100-bed rehab hospitals in future markets where the demand deems it necessary.

Okay. Interesting. Any thoughts on labor? I think you've sort of tangentially commented on a couple of times across different business lines. But what are you seeing there as you think about '26? It sounds like it's probably a more stable labor environment than you've seen in a number of years, but I just don't want to put words in your mouth. What's sort of the cost trend on labor that you're seeing this year and for the different business lines? And do you see it being pretty stable going into next year?

So A.J., if we look back at the agency challenges we faced in 2022 and the first half of 2023, the utilization within our critical illness division has been consistently around 15%, which is a stable figure. Our agency rates have returned to pre-COVID levels, and full-time equivalents across all three business lines have increased by just under 3%. Overall, the environment is much more stable compared to a couple of years ago.

You're currently at a leverage ratio of 3.4x. How should we view this going forward? Is this a comfortable level for stability? As the focus on paying down debt may lessen, does this influence your approach to capital allocation in any way?

No, A.J., this is Bob. The 3.4 is a stable, comfortable leverage. We can take it down. But as you've heard Marty and I in the past talk about it, it's opportunistic. I mean, divided by the CapEx for development is obviously our #1 priority. And then you've got dividends, you've got stock buybacks, and you've got debt reduction is then on the list, and we'll take advantage of the one that is the most advantageous to us, and we'll take the one the market gives us.

And we now have a follow-up question from Justin Bowers of DB.

I just wanted to follow up on PT. So Mike, what percentage of your MA rates are tied to the Medicare fee schedule? Additionally, do you have an idea of how much of an impact Medicare has had on EBITDA in the division over the past few years? Lastly, what steps can you take to return to double-digit margins?

Okay. Let me address the questions, Justin. The first question is that about 80% of our Medicare Advantage is linked directly to the Part B fee schedule. Could you please repeat your last two questions?

Yes. There has been a decrease and headwinds for about 4 or 5 years now.

The decrease over the last 4 or 5 years has been significant, and if we had just achieved a 2% increase, which is a modest rise over that period compared to the reductions we've faced, it would amount to nearly $65 million added directly to our bottom line.

Is the rate increase going to help? Are there any other strategies you can implement to bring margins back to double digits?

The focus going into 2026 will be on productivity. We have invested in our systems and the scheduling module. Minor increases in productivity can significantly impact our bottom line. Therefore, enhancing our systems, particularly the front-end system, will be a priority for outpatient services in the coming year.

And this does conclude today's Q&A session. I would like to go ahead and turn the call back over to Mr. Ortenzio for closing remarks. Please go ahead, sir.

Thank you, operator. There are no closing remarks. We look forward to updating you next quarter.

This concludes today's program. You may all disconnect.