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Select Medical: Expansion will pay off this year

February 25, 2017

Select Medical, one of the nation’s largest operators of specialty hospitals and outpatient rehabilitation clinics, expects its rapid expansion into new markets will pay off in 2017.

But for the time being, the start-up costs associated with opening new facilities pushed Select Medical’s earnings lower in the fourth quarter and overall in 2016, CEO Robert Ortenzio told analysts Friday during an earnings call.

Its 2016 expansion spree included a 138-bed joint venture with California Rehabilitation Institute in Century City; a partnership with Cleveland Clinic in Avon, Ohio; and Cincinnati rehab hospital with TriHealth. The California Rehabilitation Institute joint venture is with UCLA Health System and Cedars-Sinai.

“The investments in these partnerships in new hospitals provide growth in the future of Select,” Ortenzio said. Investors reacted favorably to Select’s improved earnings guidance for 2017. Its shares were up about $1.25, or 9%, to $14.25 in mid-day trading.

Net income in the fourth quarter fell to $20.5 million compared with $25.8 million in the prior-year quarter. Revenue in the quarter increased less than 1% to $1.05 billion. The Mechanicsburg, Penn.-based Select for 2016 posted net income of $125.3 on revenue of $4.27 billion compared with net income of $136 million on revenue of $3.74 billion in 2015.

Hospital start-up losses of $21.8 million in 2016 were $5 million more than in 2015 and partially offset earnings improvements in Select’s growing outpatient rehabilitation and Concentra businesses. Concentra, through contracts with affiliated clinicians, provides occupational medicine, urgent care, physical therapy, and wellness services at 300 medical centers in 38 states

The new hospitals in Select’s network are expected to produce $40 million in additional earnings in 2017 before interest, taxes, depreciation and amortization. That compares to the $20 million hit on EBITDA it absorbed in 2016 from those expansions, CFO Marty Jackson told analysts on Friday’s earnings call.

Select is still on the expansion trail. Its other joint-ventures hospitals under development include two more with Cleveland Clinic and a hospital with Ochsner Health System in New Orleans.

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