[Management View]
Select Medical Holdings (SEM) reported consolidated revenue of $1.36 billion, up 7% YoY, and adjusted EBITDA of $111.7 million, also up 7% YoY. Earnings per share from continuing operations increased by 21% to $0.23. The company highlighted strategic expansion efforts, including the addition of a 30-bed critical illness recovery hospital and three outpatient clinics. The development pipeline includes 395 inpatient rehab beds to be added by 2027.

[Outlook]
Revenue guidance for 2025 is reaffirmed at $5.3 billion–$5.5 billion, with adjusted EBITDA expected to be $510 million–$530 million. Earnings per share guidance is increased to $1.14–$1.24. Capital expenditures are projected at $180 million–$200 million, with maintenance capex at $100 million–$105 million. The company anticipates a more stable labor market and continued strategic investments.

[Financial Performance]
- Consolidated Revenue: $1.36 billion, up 7% YoY
- Adjusted EBITDA: $111.7 million, up 7% YoY
- Earnings Per Share: $0.23, up 21% YoY
- Inpatient Rehabilitation: Revenue up 16% to $328.6 million, adjusted EBITDA up 13% to $68 million
- Outpatient Rehabilitation: Revenue up 4% to $325.4 million, adjusted EBITDA down 14% to $24.2 million
- Critical Illness Recovery Hospital: Revenue up 4% to $609.9 million, adjusted EBITDA up 10% to $56.1 million

[Q&A Highlights]
Question 1: Impact of high-cost outlier on admission volume and occupancy, and mitigation tactics?
Answer: The fixed loss threshold increase has negatively impacted LTAC business, reducing the ability to accommodate acutely ill patients. Mitigation includes using inpatient rehab hospitals in shared markets for downstream opportunities. Admissions are up, but ADC is slightly down.

Question 2: Discussion with CMS about raising the 8% outlier threshold?
Answer: Relief could come from various levers in the reimbursement system. The company is advocating for multiple options to help the industry, which has struggled in recent years.

Question 3: CapEx split between maintenance and growth?
Answer: Maintenance capex is projected at $100 million–$105 million, with the remainder allocated to growth.

Question 4: Revenue and EBITDA impact from the delay of the 20% transmittal rule?
Answer: The delay resulted in a $12 million–$15 million EBITDA benefit for the quarter. The impact for the year is negligible for Q4.

Question 5: Softness in the outpatient segment?
Answer: The segment saw a 5% increase in volume but faced rate pressure due to Medicare reimbursement cuts and an unfavorable payer mix shift.

Question 6: High-level headwinds and tailwinds for 2026?
Answer: Modest Medicare rate increase expected to be a tailwind. The 20% transmittal rule will be a headwind but less significant due to stabilized labor costs.

Question 7: Break-even and peak margin profile for new rehab hospitals?
Answer: Break-even is approximately six months, with full maturity at around three years.

Question 8: Impact of the 20% transmittal rule delay on 2026?
Answer: The impact is expected to be much smaller, approximately a third of the 2025 effect.

Question 9: Trends in the critical illness hospitals and IRF segment?
Answer: Inpatient rehab continues to exceed expectations. Critical illness hospitals saw increased occupancy and admissions compared to the prior year.

Question 10: Labor cost trends and stability?
Answer: Agency utilization in the critical illness segment is stable at around 15%, with hourly rates at pre-COVID levels. Full-time equivalent increases are under 3%.

Question 11: Leverage and capital allocation priorities?
Answer: Leverage is stable at 3.4 times. Capital allocation priorities include development CapEx, dividends, stock buybacks, and debt reduction.

Question 12: Impact of Medicare rate changes on outpatient rehab margins?
Answer: A modest rate increase is expected to help. Focus on productivity and system enhancements to improve margins.

[Sentiment Analysis]
The tone of the management was cautiously optimistic, highlighting strategic growth and regulatory developments. Analysts' questions focused on regulatory impacts, segment performance, and future outlook, indicating a balanced interest in both opportunities and challenges.

[Quarterly Comparison]
| Metric | Q3 2025 | Q3 2024 | YoY Change |
|-------------------------------|-----------------|-----------------|------------|
| Consolidated Revenue | $1.36 billion | $1.27 billion | +7% |
| Adjusted EBITDA | $111.7 million | $103.9 million | +7% |
| Earnings Per Share | $0.23 | $0.19 | +21% |
| Inpatient Rehabilitation Rev | $328.6 million | $283.2 million | +16% |
| Outpatient Rehabilitation Rev | $325.4 million | $312.9 million | +4% |
| Critical Illness Recovery Rev | $609.9 million | $586.4 million | +4% |

[Risks and Concerns]
- Continued pressure from Medicare reimbursement cuts
- Unfavorable payer mix shifts impacting outpatient rehab margins
- Potential headwinds from the reimplementation of the 20% transmittal rule in 2026

[Final Takeaway]
Select Medical Holdings demonstrated solid financial performance in Q3 2025, driven by strategic expansion and regulatory developments. While inpatient rehabilitation outperformed expectations, the outpatient segment faced challenges due to Medicare rate pressures and payer mix shifts. The company remains focused on growth through new facility openings and partnerships, with a stable leverage position and prudent capital allocation. Investors should monitor regulatory changes and their potential impact on future performance.