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The Pennant Group, Inc. (PNTG) Q4 2020 Earnings Call Transcript | The Motley Fool

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The Pennant Group, Inc. (NASDAQ:PNTG)
Q4 2020 Earnings Call
Feb 25, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Pennant Group Fourth Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your host, Derek Bunker. Please go ahead.

Derek J. BunkerChief Investment Officer, Executive Vice President and Secretary

Thank you, Sarah. Welcome, everyone, and thank you for joining us today. Here with me today, I have Danny Walker, our CEO; Brent Guerisoli, our President; Jen Freeman, our CFO; and John Gochnour, our COO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-K yesterday. The announcement is available on the Investor Relations section of our website at www.pennantgroup.com. A replay of this call will also be available on our website until five p.m. Mountain on Friday, March 26, 2021. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, February 25, 2021, and these statements have not been nor will be updated subsequent to today’s call. Also, any forward-looking statements made today are based on management’s current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Pennant and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, The Pennant Group, Inc. is a holding company with no direct operating assets, employees or revenues.

Certain of our wholly owned independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. The words Pennant, company, we, our and us refer to The Pennant Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries in the Service Center are operated by separate, wholly owned, independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of the terms we, us and our and similar terms used today are not meant to imply nor should it be construed as meaning that The Pennant Group, Inc. has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Pennant Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP-to-non-GAAP reconciliation is available in yesterday’s press release and in our 10-K.

Now with that, I’ll turn the call over to Danny Walker, our CEO. Danny?

Daniel H WalkerChairman of the Board and Chief Executive Officer

Thank you, Derek, and good morning, everyone. Thank you for joining us today to discuss Pennant’s full year and fourth quarter 2020 results. Our first year as a public company was eventful, challenging and ultimately rewarding. We navigated the complexities and dynamics of a new reimbursement methodology in PDGM. We completed the successful transition of key enterprise financial, human capital and IT systems related to our spin-off from The Ensign Group. And we dealt with and continue to deal with the impact of an unprecedented pandemic. I am proud of our collective efforts on each of these fronts, and I want to say thank you to each one of our leaders, resources and team members for the courage and grit that you’ve consistently displayed. Despite the challenges faced, we were able to achieve strong results, both clinically and financially, and we are well positioned to continue growing in 2021. Our overall 2020 results were headlined by an incredible year for our home health and hospice segment, which achieved approximately 51% adjusted EBITDA growth in 2020 over the prior year and nearly 60% adjusted EBITDA growth in the fourth quarter over the prior year quarter. These impressive growth rates were underpinned by strong performances in nearly all facets of the business and were comprised of growth in both new and existing operations. Excluding home health agencies acquired in the previous 12 months, our 2020 total Medicare home health admissions grew nearly 7%. And inclusive of the benefits of the sequestration holiday, our average Medicare revenue per 60-day episode grew 10% as the reimbursement levels were rebased under PDGM to more appropriately account for the higher-acuity nursing acuity of our patient population. Similarly in hospice, excluding agencies acquired in the previous 12 months, our total hospice admissions grew 32%; our hospice average daily census grew 8.4%; and inclusive of the benefits of the sequestration holiday, our average Medicare revenue per day increased 4.1%, each over the prior year quarter.

This growth occurred as a result of strong clinical performance, as evidenced by our average home health star rating improving to 4.3 stars across Pennant, above the national average of three stars. And the percentage of agencies achieving a 5-star rating grew from 3% to 30% sequentially in the fourth quarter. Our home health discharge community rate, home health acute care hospitalization rate and hospice quality composite measures continue to outpace national averages, as reported by CMS. The foundation for these clinical results was laid years ago, and we continue to see the benefits of those investments year after year. And these outcomes are all the more impressive in light of the significant challenges faced during the pandemic. In our senior living segment, we continue to confront a difficult operating environment. But we feel confident in the long-term potential with — potential notwithstanding these near-term challenges. When we shared an update last quarter, we had seen our occupancy decline moderately — decline moderate and even slightly increased from September to October of 2020. Since then, however, we felt the acute impact of the second COVID-19 surge as the markets in which we operate experienced accelerating positive cases. Our segment results in the fourth quarter were negatively impacted even as we moved to offset pressures on occupancy and staffing. And we expect this trend to continue to some degree or another in the first half of 2020. We are also hopeful the ongoing vaccine rollout will bolster public confidence and unlock pent-up demand for senior living services, particularly as restrictions on in-person visitation and touring abate. We are pleased that all of our communities had or have scheduled their first vaccination clinics with 76% of our current residents having received the vaccine.

While the current operating environment is a significant short-term headwind, we are confident in our ability to overcome these challenges as our leaders apply our proven principles and look forward to taking advantage of opportunistic acquisitions resulting from industry disruption in the wake of the pandemic. In short, these near-term pressures equate to long-term opportunity in the senior living segment. And as an organization, we are built to work through the challenges that come with turning around difficult operating situations. As Jen will discuss, we announced yesterday that we increased the capacity of our revolver from $75 million to $150 million. As our long-term stakeholders are aware, we opportunistically allocate capital where we have healthy operating markets and a strong leadership pipeline. In our senior living segment, we have not allocated and do not anticipate allocating capital for strategic acquisitions in the near term as our leaders focus their efforts on navigating the challenges of the pandemic and driving improved results in our existing buildings. On the other hand, we have deployed a significant amount of capital opportunistically in the home health and hospice segment. And our capacity to deploy even more continues to increase because we have multiple healthy operating markets and a strong leadership pipeline. We are grateful to our lending partners for entrusting us with increased borrowing capacity to execute our disciplined growth strategy. And we continue to work diligently to improve the health of our operating markets and strengthen our leadership pipeline so we can strategically invest across many markets in both segments simultaneously. As we announced yesterday in our press release, we are affirming our 2021 annual revenue and annual adjusted earnings per share guidance.

This strong momentum in our home health and hospice business lays the foundation for our continued year-over-year growth. We are cognizant of the ongoing challenges facing our senior living business, and there are multiple reasons to be optimistic we will return to growth in late 2021. Last year, we maintained annual guidance when the uncertainties regarding COVID-19 were at their peak based on the confidence we had and the ability of our local leaders to drive results despite the unexpected impact of the pandemic. With more visibility into how the pandemic is affecting top end bottom line performance in both segments, including the strength exhibited in the home health and hospice and the very real headwinds in senior living, we are affirming our 2021 guidance because we have similar confidence we can navigate the complexities of the current operating environment and perform consistent with the high expectations we’ve set for ourselves. We commend our local leaders for continuing to execute on the face of the adversity we have encountered this past year and for positioning us to continue our growth trajectory in 2021 in spite of the ongoing uncertainties.

Now with that, I’ll hand it off to Derek to discuss our recent investment activities. Derek?

Derek J. BunkerChief Investment Officer, Executive Vice President and Secretary

Thanks, Danny. During 2020 and since, we added 19 operations to the Pennant family. Our investment in these operations reflect the many ways in which we can grow through our disciplined deployment of capital and leadership talent. We expanded strategically within existing geographies and into adjacent markets. We expanded the continuum by adding home health services where we have a hospice agency and vice versa. We acquired large regional providers with a strong local reputation that we expect to further develop in our operating model. We acquired small, budding agencies that have significant long-term organic growth potential. And we executed multiple start-ups, consistent with our history of successful start-up ventures. We also began a joint venture relationship with a key hospital system partner. The common theme across these transactions was that we maintained discipline with the allocation of our dollars and our most important asset are leaders. Our strategy of entrusting talented entrepreneurial leaders with high-upside operations acquired at favorable entry points has laid the foundation for impressive year-over-year growth. Among these deals, many were off-market opportunities. And of these, some were the second or third transaction we closed with the same seller, evidencing our reputation as a strategic buyer of choice. Other deals were marketed processes which we were able to win not just because we were the highest bidder but more often that sellers saw value in our decentralized model and our commitment to carrying on their legacy by empowering local leaders, closing swiftly and welcoming employees into our unique culture. We are able to close a high volume of transactions each year, often multiple simultaneously, because of the collective expertise of our field and Service Center resources built over dozens and dozens of transactions and who continue to improve our due diligence, acquisition and onboarding processes. While we refrain from providing hard targets for the number or aggregate purchase price of acquisitions we anticipate in any given year, our historical track record of acquisitions is a good indicator of our likely future growth rate. Our capacity to execute a higher number and larger, more complex transactions increases as our operating markets mature and our leadership pipeline grows. The strength of our leaders and clusters, the ability of our resources to support acquisitions, our access to capital and a favorable M&A landscape combine to represent an exciting period of growth for Pennant, particularly in the home health, hospice and home care spaces. We are working feverishly to recapture strength in our senior living operating markets and leadership pipeline so that we are poised to pursue opportunities that may present themselves in the future.

And With that, I’ll hand it back — hand it over to Jen to provide some detail on the company’s financial performance. Jen?

Jennifer L. FreemanChief Financial Officer

Thank you, Derek, and good morning, everyone. Detailed financial results for the full year and three months ended December 31, 2020, are contained in our 10-K and press release filed yesterday. For the full year ended December 31, 2020, we reported total GAAP revenue of $391 million, an increase of $52.4 million or 15.5% over the prior year, GAAP diluted earnings per share of $0.52 and non-GAAP adjusted earnings per diluted share of $0.77, which represent a 26.2% increase over 2019 adjusted earnings per share of $0.61 and 71% over our 2019 spin-adjusted earnings per diluted share of $0.45. We had strong revenue and earnings per share results due to the consistent operational execution of our field leaders during a very difficult operating environment. We also benefited from a disciplined management of general and administrative costs even as we completed multiple key enterprise system transitions, much of which impacted fourth quarter G&A. [Technical Issues].2 million for the full year, exclusive of $28 million of Medicare advance payments received, $9.5 million of cash drawn on our revolving line of credit at year-end, 1.02 times net debt-to-adjusted EBITDA if Medicare advance payments have been paid back as of the year-end. As a reminder to our listeners, our strong annual results do not include any funds from the Provider Relief Fund established by the CARES Act.

We continue to [Technical Issues] Medicare payments and approximately $8.4 million from the CARES Act [Technical Issues] tax [Technical Issues]. We expect automatic recoupment of the advance payments to begin April 2021. Finally, please note that our full year non-GAAP adjusted earnings per share results exclude revenue from the Medicare sequestration holiday and certain limited COVID-19 expenses. As a reminder, our adjustments for COVID-19 expenses are those that we are able to easily capture directly related to the pandemic but do not include more intangible impacts such as lost revenue, lost efficiencies or other very real impacts on our revenue and expenses that resulted from the pandemic and are not easily quantifiable. As Danny mentioned, we expect our near-term results to include some lumpiness as we confront this phase of the pandemic. Nevertheless, our growth potential remains compelling, and we are confident we can meet the annual guidance we’ve provided and make it a defining year as we execute on our long-term growth strategy and realize a significant upside in both our business segments. We were pleased to announce yesterday that we amended our credit facility to increase our revolving line of credit from $75 million to an aggregate principal borrowing amount of $150 million. The amendment also refreshes the facility’s 5-year tenor, extends termination of the facility out to 2026 and reduces the interest rate on drawn and undrawn capital, among other updates. We are grateful for the partnership of our banking group and the confidence in our models that this upsize represents. As of February 23, 2021, $131.7 million remains undrawn on the revolver, providing us substantial dry powder to continue our disciplined growth strategy.

And with that, I’ll turn the call back over to Danny. Danny?

Daniel H WalkerChairman of the Board and Chief Executive Officer

Thank you, Jen. I wanted to just conclude with a couple of final remarks. First, we knew when we chose not to take the CARES Act provider relief funds that we would experience some difficulty and that we wouldn’t come out of the pandemic unscathed. However, we feel confident that the course that we have chosen is right for our organization and keeps our ability to move forward in both segments intact. And we look forward to realizing the untapped potential that we have in both segments. Now at this time, we normally take time to highlight individual operations that have achieved exceptional results clinically and financially. However, today we’d like to provide insight and pause to give thanks to that — for the incredible bravery and courage that so many of our caregivers, clinicians and frontline staff, supported by our local leaders and resources, that they provided each day during a turbulent year in 2020. We took care of nearly 13,000 patients and residents in our home health, hospice and senior living operations each day of 2020. Each of these interactions involved great personal risk and extreme difficulties for the members of our team. These — our frontline staff didn’t have the luxury of waiting and hunkering down while the danger passed. Instead, they were responsible for running to the danger and meeting needs at a very, very high level in a complex environment. We feel so thankful for them. One example of this was in the state of Idaho. During the early stages of the pandemic, there were severe challenges in the assisted living space. And in collaboration with the state, the Twin Falls Manor was opened by the Pennant team as the state’s only COVID dedicated assisted living operation. It took an extraordinary amount of coordination and work to staff and stand up that facility. Today, it’s closing its doors because its work is done, and — but behind the care that was delivered is the same kind of bravery and courage to run toward the danger, be there even when your own families were at risk and you personally were at risk. And we are so grateful for the frontline team and what they have done. We have taken steps internally that — to honor those individuals as a collective group but also individually for their contributions. And we look forward to continuing to build from this defining year, this defining moment in our organization’s history toward the very bright future that we possess in both of our segments.

Now with that, we’ll turn to the QA portion of our call. As Derek mentioned earlier, we are here with Brent Guerisoli, our President; and John Gochnour, our COO, who are both available to help with the — with answering of questions. Sarah, can you instruct everyone on the Q&A procedure, please?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of David MacDonald with Truist. Your line is now open.

David MacDonaldTruist — Analyst

Good afternoon. A couple of quick questions. Danny, one thing I was wondering if you could talk about a little bit more, you mentioned in the release just the completion of the effort to decouple your IT systems and move everything onto your own platform. So I was wondering if you could just spend a minute and talk about what that does for you guys in terms of efficiency, spending and just agility of the organization. And then I got a couple of quick follow-ups.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Great. Yes, thanks. Great question, David. Thank you. The biggest initial impact will be the manhours that our resources and leaders have now free to devote to other elements of growing the business. Each of these systems on the financial and accounting side of things, the human capital/HRIS side of things as well as the IT, involved hundreds and hundreds of manhours in planning and execution. Each of them involved significant risk of disruption to the day-to-day business but also our reporting, and so we took extraordinary care to make sure we move forward. So the major benefits of being in our own platforms really are, involve the ability to provide better field data on an operation-by-operation basis. These systems were most disruptive in the transition on our senior living side of our business. Part of the process was implementing a new instance of the electronic medical record and customizing it to the senior living space. Some of those things were more challenging to do under a combined umbrella. So we see opportunities for our internal data practices to improve. And then we anticipate that once those massive undertakings are no longer constantly on our radar, that we’ll be able to devote more of those hours toward our bread and butter, doing good acquisitions, strengthening our current operations, current markets, so that we can continue to deploy capital strategically like we have for the past 10 years.

David MacDonaldTruist — Analyst

And then just a couple of other quick questions. One, within your markets. Just given the relative strength of the company, can you talk about what you’re seeing in terms of local leadership talent and just the pipeline there?

Daniel H WalkerChairman of the Board and Chief Executive Officer

Sure. Yes, great question. I think I’ll have John tackle that one.

John J. GochnourChief Operating Officer

Yes, David, it’s a great question, and we appreciate it because it’s right at the heart of everything we’ve been talking about today of momentum that’s building in both segments. Our leadership pipeline right now is more robust than it’s ever been. And one of the exciting things about that, we’ve got 18 different administrators in training in our program right now. And of that group, about 1/3 of them are folks who have been elevated internally. And I think what that speaks to is our leadership ethos that is built around this idea that if you elevate those around you, it allows you to expand your influence not just in the community that you’re serving but also within the organization. And so we’re excited about this new group of leaders, that so many are being elevated internally, and let it positions us to be able to do from a capital allocation standpoint in the future.

David MacDonaldTruist — Analyst

Okay. And then just last question, Danny, just on the quality metrics, the 4.25 stars. Can you give us a sense of where that number was last year? And then during your prepared remarks, you quoted a 3% to 30% number sequentially. I just wanted to figure out what that was.

John J. GochnourChief Operating Officer

I missed that.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes. We’ll pull the number on where we were at in the prior year. The 3% we track internally what percentage of our agencies achieve the 5-star rating. And so a year ago, we had 3% of our agencies that had achieved a five-star rating. And now we have 30% of them that have achieved a five-star rating. So that’s that metric. So John?

John J. GochnourChief Operating Officer

Last year, we were at four stars in the fourth quarter on average. And this year, we’ve moved that up to that 4.25. That’s on the publicly reported CMS data. One of the things we’re excited about is that we continue to use data partners like SHP to monitor and track that on a real-time basis, and we continue to move the dial there. And this is, again, the cumulative effort of hundreds of people spending thousands of hours, working to make sure that we’re delivering that highest-quality clinical product, documenting and coding appropriately to capture it. So that’s the [Indecipherable].

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes. And the dynamic there, David, is when we acquire agencies, rarely but occasionally, they have a good star structure, right, where their clinical systems are built to deliver well within those confines. It takes time for us to implement systems, both on the compliance but also the operational side, and continue to move that. So this is a lag measure. We’re constantly looking out at what are we doing today and how is that going to affect us. So we’re pleased with the progress. That’s the overview, though.

David MacDonaldTruist — Analyst

And I guess just last question. 3% to 30% is a pretty significant jump. And as you highlighted, just the way that stars work makes that even more difficult. Is there anything that you would call out? I’m sure COVID and maybe a slower acquisition pace probably helped a little bit. But anything else that you would call out in terms of, that’s a pretty meaningful uptick in terms of the percentage.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes. So it really is, just how our acquisition and onboarding and integration of new teams really works is as people spend more time, as teams spend more time in our system, they have more and more clarity around the data on these topics. And then behaviors start to change and execution improves. And then maintaining that over a lengthy period of time that, that is supported by these reporting structures, that’s the key. So it really is the foundation of why we’re able to execute year over year over year over year on the kind of growth that we’ve been able to achieve. So it’s a huge compliment to our teams that dig in, our efforts to elevate our clinical leaders and reward them for excellent performance and really get out of their way to deliver care in the local markets the way they need to and the way they really want to as well. So now on the comment that, our acquisition pace really hasn’t slowed on a per, like on an average basis. So we’ve been able to achieve this progress. As deals layer into our system, they get better and better over time. And it takes time for these clinical systems to really become ingrained and highly consistent. So we’re pleased with it.

David MacDonaldTruist — Analyst

Okay. Thanks very much.

John J. GochnourChief Operating Officer

Thanks, David.

Operator

Thank you. Our next question comes from the line of Scott Fidel with Stephens. Your line is now open.

Scott FidelStephens — Analyst

Great, thanks. Hi everybody. Good afternoon, I guess for you guys good morning. I had a few questions I wanted to ask really more focused just on modeling for 2021 just based on some of the most recent developments in the market that you’ve highlighted. I guess first just on senior living. And certainly appreciate some of the framework that you provided around the pressures in the one half likely persisting for a bit and then hoping to return to growth. I think it might be helpful to the extent you can if you can give us any insight maybe into what your building maybe to the midpoint of guidance or into the base case, around how you’re thinking about occupancy progressing in senior living from that 75.5% figure in the fourth quarter. If you can maybe help us in terms of first quarter to second quarter, and then maybe what sort do you get to in the back half of the year.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes, I’ll have Jen provide what she can. The projections on this are a little more difficult, right, as you know. The main thing that I would say is we’re seeing really good signs. I mean January, the same trends from December have continued into January, and they’ll linger into February and possibly into March. But we’re seeing signs of things moving in the right direction. So increasingly, we feel confident that the further into the year we get, that exceeding the prior year will be something that we can achieve for sure. And we’re not used to having declining performance ever, right? So this is the first for us in a quarter, and we won’t tolerate it very long. I think you’ve known us or watched us for long enough to know that. So we’re rallying and doing the things that are necessary to do that. As far as the modeling goes, Jen, can you provide whatever detail you can?

Jennifer L. FreemanChief Financial Officer

Sure. It’s Jen. So on the projections concerning senior living revenue, I would say on the occupancy side we’re looking at kind of flat quarter-over-quarter. We have seen some pressure in this first quarter. We probably will continue at more of a flat pace through as far as what we’re projecting through the beginning, middle of the second quarter with slight uptick toward the end of the year to try to get probably to around what we did for the year in 2020, so that 77.7%, and looking at what we’re doing and how we’re moving in the right direction, achieving that toward as a year-end goal.

Daniel H WalkerChairman of the Board and Chief Executive Officer

And there are still opportunities for us, Scott. I’ll just mention that the adjustment process in the fourth quarter to the combined heavy, heavy response on the COVID front, combined with declining census and an increasing survey and enforcement environment all to keep our residents safe, the ability to capture efficiencies was limited during that window. And we’re seeing those conditions change, and so we’ll be able to make further adjustments to the cost structure so that we can function well from an earnings perspective even at lower occupancy. It’s one of the virtues of our portfolio, frankly, having assembled it at a low-cost basis, opportunistic entry points. We can still be successful even with these challenges. So it’s something that it’s got all our attention. We’re highly focused on it. And we knew that, well, like I mentioned in the script, that by choosing not to have provider relief funds that we could fill gaps with, that we were going to face a little bit of this. And we’re excited about the opportunities that it presents in terms of getting better, and we’re fully committed to building from where we’re at and overcoming the difficulty.

Scott FidelStephens — Analyst

I’m excited. And I think, Dan, you were sort of just qualitatively talking about what my follow-up question was going to be on just this topic, just around sort of translating that into how you’re thinking about sort of holding the line on EBITDA margins in the segment. Obviously, there was a bit more pressure in the fourth quarter where you did have your first sort of modest decline in revenues. It sounds like from Jen’s comments that you’re expecting now to sort of stabilize on the revenue front and then ultimately start to grow again. And would definitely be interested in your thoughts on how that would translate into EBITDA margin sort of progression in SL in 2021 off of that 4Q sort of exit rate and how many levers you have at this pull on the expense side to sort of manage around that.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes. Jen can provide a little bit that’s gone into our thinking there. The combination of having to provide a robust clinical response and some of the efficiencies that get lost when you were in total lockdown is you can’t, that doesn’t just hamper your marketing and business development efforts, but you’re feeding residents in their own rooms, you can’t do some of the communal kinds of things that actually cause your labor to be leveraged better, let alone the whole world of protective equipment is something that we’ve kind of built into the system. So I think on a margin basis, you’ll see us returning to the levels in Q2 and Q3 of this year fairly quickly. Probably Q2, Q3 of this year, I think those will be pretty achievable. And Q4, assuming there isn’t some recurrence of what we experienced here, I think we can get back to where we had been in the past. So that’s the general feeling as we’ve dug in. Obviously, the execution on it is well within our control. The control of the pandemic and some of what might occur there is less in our control. However, we’re very encouraged by the way the vaccine is affecting rates. In our operations, in other skilled nursing settings, in hospital discharge structures, I think there are some really positive signs there that point toward sort of return to a manageable operating environment that would be very favorable for us.

Scott FidelStephens — Analyst

Got it. And just two more quick ones for you. First, just thinking about the first quarter and a couple of, I guess, exogenous sort of dynamics that affect everyone. But just interested if you wanted to just call out your thoughts there. One, obviously just weather. Obviously, extreme dynamics playing out, particularly in the South. And we’re used to it here up North where I am, but I’m just interested in the impacts on the business there. And then from business days, I think there’s a couple fewer business days year-over-year and sort of how you think about that impacting comps in the first quarter.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes, great question. The weather situation hit pretty hard in Texas. We were not immune to that. It affected several of our operations quite significantly. We had a few of them that we had to temporarily evacuate. And so that’ll work its way into our systems. Obviously, there’s insurance coverage and things like that, that we’ll work on. But yes, it was a little disruptive. So there’ll be a little bit of that in the first quarter that we expect will kind of be another headwind. But we feel good about the way our leaders are responding. We feel great about how the residents that are in our care are being treated and protected. And I think everything related to being intact and enthused about recovery is just kind of exciting for the group. And it’s a battle kind of environment, and we’re glad to be in the battle, so.

Scott FidelStephens — Analyst

Great. And then just last one for you. Just interested in an update on hospice ADC as it relates to length of stay. Some of your peers in their earnings calls have recently called out some pressure there from the COVID pressures in November and December. Frankly, just looking at your disclosures and your release, it was hard for me really to, I didn’t really see those, frankly. I mean your ADC actually looked, came in strong, frankly, relative to at least my projections. But I know there was M&A and stuff in there, so just interested in your update there on whether what you were seeing on length of stay in hospice as it relates to ADC.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes, it’s something we’re watching really closely. We’ve seen normal seasonality. The holidays are always a little interesting from the hospice ADC perspective. But John has a little more detail he can provide to you.

John J. GochnourChief Operating Officer

Scott, I think what you’re seeing is a fairly typical seasonality for us in the first quarter, and that’s been impacted a little bit by a higher-than-average impact on length of stay in the fourth quarter. So we did see a little bit of impact. Length of stay declined meaningfully. But I think what’s telling is that our operators were able to adjust to that as they continue to find new referral sources. And the ultimate impact on our actual ADC hasn’t been as pronounced and kind of fits within our typical first quarter framework. So we’ve been pleased with the way we’ve been able to navigate that sort of decline related, we believe, to the second wave of COVID in the second half of the year.

Scott FidelStephens — Analyst

Okay. All great that. Thank a lot.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Thanks Scott.

Operator

Thank you. Our next question comes from the line of Frank Morgan with RBC Capital. Your line is now open.

Frank MorganRBC Capital — Analyst

Good morning. Most of my questions have been answered. But I guess going back to just sort of the external growth outlook, obviously, with the near-term pressures on the senior housing side. Does that really change your priority of M&A activity going forward? Does this make you be more inclined to look at the home healthcare and hospice side? Or any way that this changes your interest in growing the senior housing side?

Daniel H WalkerChairman of the Board and Chief Executive Officer

Yes, great question, Frank. Thanks for that. Our capital allocation strategy remains quite similar to how it’s been in the past. But given the opportunity that’s inherent in our existing buildings just by recovering from the pandemic and moving occupancies back up to where we would expect them to be and beyond, we just would remind listeners that we were at an all-time high in March, right, before the pandemic came, and so we see a lot of upside in just building in our own portfolio. It’s not that we won’t do any acquisitions, but there’s not, if we follow our acquisition like strategy and our disciplined approach to allocation of capital, it’s hard to see how our senior living business will qualify for that right now. So we grow from a position of strength. And when we have headwinds like we face, we confront those headwinds head on and we overcome them. So that will be the order of the day for until we see significant, consistent signs of strength in the senior living business and recovery there. So the equation on the home health and hospice side is very much intact. And strong markets, strong leadership pipeline, great momentum. We’ll put a lot of capital to work in that space. So that’s consistently how we’ve made decisions. And had our momentum not been interrupted or disrupted during the pandemic, we probably would have put some capital to work in the senior living space during the second half of last year. But we don’t want to lose sight of our core sort of thoughts on capital allocation to grow where we have strength. So I hope that helps.

Frank MorganRBC Capital — Analyst

Thank you very much.

John J. GochnourChief Operating Officer

Thanks Frank.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back to Daniel Walker for closing remarks.

Daniel H WalkerChairman of the Board and Chief Executive Officer

Thank you, Sarah. And we’d just like to thank everyone for joining us today. We look forward to the bright future in 2021 together. Thank you.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Derek J. BunkerChief Investment Officer, Executive Vice President and Secretary

Daniel H WalkerChairman of the Board and Chief Executive Officer

Jennifer L. FreemanChief Financial Officer

John J. GochnourChief Operating Officer

David MacDonaldTruist — Analyst

Scott FidelStephens — Analyst

Frank MorganRBC Capital — Analyst

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