PACS Group, Inc. (PACS) Q2 2026 Earnings Report, Transcript and Summary

Hello, and welcome to PACS Group's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Speakers on today's call are Jason Murray, PACS Group's Chief Executive Officer; Carey Hendrickson, Chief Financial Officer; Josh Jergensen, President and Chief Operating Officer; and Ryan Welch, Director of Corporate Finance. The call today is being recorded, and a replay of the call will be available on the PACS Group Investor Relations website an hour after the completion of this call. A replay of the webcast will be available for 30 days. Information to access the replay is listed in yesterday's press release, which is available on our website under the Investor Relations section. Before we begin, I would like to remind everyone that during today's call, we'll be making forward-looking statements regarding future events and financial performance. I'd now like to turn the conference over to Ryan Welch, Director of Corporate Finance. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us for our earnings call. Before we begin the prepared remarks, we would like to remind you that yesterday, PACS Group issued a press release announcing its second quarter 2026 results. An investor presentation was published and is available on the Investor Relations section of pacs.com. I'd also like to remind everyone that during the course of today's conference call, we will discuss certain forward-looking information, including our expectations for 2026 revenue and adjusted EBITDA that is based on our current expectations, assumptions and beliefs about our business. Any forward-looking 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. You should carefully consider the risk factors that may affect our future results as described in our annual report on Form 10-K for the year ended December 31, 2025, and our other SEC filings. During this call, we will discuss certain non-GAAP financial measures, including adjusted net income, adjusted earnings per share, adjusted EBITDA, adjusted EBITDAR and net leverage. These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP measure, please refer to the earnings release and the appendix included in the investor presentation, which are both published and available on the Investor Relations section of PACS Group's website. I'll now turn the call over to Jason Murray, Chairman and CEO.

Thanks, Ryan, and thanks, everyone, for joining us this morning. We're pleased to report another strong quarter for PACS and to close out the first half of 2026 with continued momentum across the organization. Building on the strong start we delivered in the first quarter, our second quarter results reflect the sustainability of our operating model, the continued execution of our teams and the meaningful progress we're seeing across facilities at every stage of our maturity cohorts. Throughout the first half of the year, our teams remain focused on strengthening performance across the existing portfolio, advancing recently acquired facilities toward mature operating levels and continuing to invest in the people and infrastructure required to support our growth. That focus is showing up in our results. Our existing portfolio continues to perform very well. Quality outcomes are improving, and the strength of our leadership bench and balance sheet is allowing us to pursue the next phase of growth from a position of strength. Revenue increased 9.1% in the second quarter, while adjusted EBITDA grew 25% compared to the prior year. That relationship is important because it demonstrates that the growth we are generating is translating into meaningful margin improvement as our facilities mature, occupancy increases, patient mix strengthens and our teams continue to operate with discipline. Just as importantly, the performance this quarter was driven by the existing portfolio. Our same-store facilities delivered revenue growth of 5.8%, while same-store occupancy increased by 150 basis points. Across the broader portfolio, overall occupancy increased by 180 basis points, and skilled mix improved by 100 basis points compared to 2025. We believe these results provide continued evidence of the organic growth embedded within our portfolio and the strength of our locally led centrally supported operating model. As of June 30, PACS operated 324 healthcare facilities across 17 states, with 35,631 total beds, including 32,790 skilled nursing beds and 2,841 assisted living beds. Across this platform, our teams care for more than 31,900 patients each day, supported by approximately 48,000 employees. Our scale provides meaningful geographic diversity, leadership depth and access to clinical and operational resources. However, we believe the more important differentiator is how that scale is organized. Healthcare is local. Our administrators and facility leadership teams are empowered to make decisions closest to the patient where they can have the greatest impact. PACS Services and our regional teams provide the technology, systems and clinical resources, compliance framework and administrative support that allow these local leaders to operate effectively and consistently. This structure enables PACS to retain the responsiveness and accountability of a locally operated healthcare organization, while benefiting from the infrastructure and resources of a scaled national platform. Across the portfolio, facilities continue to progress through our integration life cycle. At the end of the quarter, our skilled nursing portfolio included 184 mature facilities, 100 ramping facilities and 6 new facilities. This mix reflects the significant progress we've made integrating the facilities acquired during our 2024 expansion. As facilities gain tenure within the PACS model, our local and regional teams remain focused on strengthening leadership, implementing our clinical and operating systems and building trusted relationships within their healthcare communities. We continue to believe that this progression represents an important source of organic growth within our existing portfolio and demonstrates the scalability of our operating model. We are also encouraged by the continued improvement in quality across our facilities. At the end of the second quarter, 239 or 83.6% of our skilled nursing facilities with reported CMS quality measure ratings were rated 4 or 5 stars. Our mature facilities achieved an average CMS quality measure rating of 4.5, meaningfully above the industry average of 3.7. We are proud of these important clinical measures, which are the product of the disciplined execution of our caregivers, administrators and clinical leaders, and regional teams every day. We believe these results distinguish PACS as a leader in clinical quality and reinforce our long-held view that delivering exceptional patient outcomes is not separate from financial success. It is one of the primary drivers. When a facility delivers strong clinical outcomes, it builds trust with hospitals, payers, patients and families. That trust supports admissions, occupancy, patient mix and ultimately, the long-term financial performance of the facility. We believe this creates a virtuous cycle centered on delivering excellent care. To bring that model to life, I'd like to highlight the progress made at one of our facilities in California. PACS acquired this large skilled nursing facility while it was already designated as a Special Focus Facility, a designation reserved for nursing homes with a history of significant quality concerns and regulatory noncompliance. The facility's regulatory history and Special Focus designation were significant enough that many potential operators chose not to pursue what was otherwise a highly attractive portfolio transaction. PACS viewed the opportunity differently. We believe our operating model is uniquely designed to improve clinically and operationally challenged facilities, allowing us to pursue opportunities that others often cannot. We recognize both the challenge and the importance of preserving access to care for a uniquely vulnerable patient population, and we committed the resources necessary to execute a long-term turnaround. The facility is specifically designated to serve behavioral health patients and includes a fully secured unit, allowing it to care for some of the most fragile and clinically complex patients in the community. Many residents live with serious mental illness. Only a small percentage have active family involvement and many entered the facility following periods of housing instability or homelessness. The facility had experienced years of operational instability, repeated leadership turnover and an extensive history of regulatory deficiencies prior to our acquisition. While meaningful improvements have been made over time, it had been unable to demonstrate the sustained performance necessary to graduate from the Special Focus Facility program. The severity of the situation became clear in March of 2025 when the facility received written notice of the potential termination of its Medicare and Medi-Cal provider agreements. At one point, CMS communicated in writing its intent to decertify the facility, underscoring both the seriousness of the challenges and the amount of work that still remained. Such an action would have displaced more than 250 highly vulnerable residents and created significant uncertainty for the facility's more than 500 employees. Rather than stepping back, the local leadership team supported by PACS Services intensified its efforts with a clear objective: elevate the quality of care, create organizational stability, preserve this critical community resource and successfully graduate the facility from the Special Focus Facility program. The turnaround required more than new procedures. It required a fundamental cultural transformation. The leadership team aligned employees around a shared purpose, established clear expectations, reinforced accountability and committed to delivering consistent, high-quality care across every department. With close support from the clinical, operational and regulatory expertise of PACS Services and through ongoing collaboration with CMS and the California Department of Public Health and other technical assistance partners, the team strengthened systems, processes and clinical outcomes across the organization. Those efforts culminated on June 29, 2026, when the facility successfully graduated from the Special Focus Facility program. This outcome represents far more than a regulatory milestone. It reflects years of commitment from local caregivers and PACS support teams who refused to accept that the facility's challenges were insurmountable. Most importantly, it preserves continuity of care in a highly vulnerable resident population and protected an essential healthcare resource within the community. We believe this example reflects what our model is designed to accomplish: step into difficult situations, establish strong local leadership, provide the necessary clinical and operational support, create accountability throughout the organization and drive sustainable improvement over time. We are proud of the facilities team and grateful for the discipline, resilience and commitment they demonstrated throughout the process. The strength of our operating platform and leadership bench also gives us confidence as we return to a more active period of acquisition growth. As previously announced, PACS entered into a definitive agreement to acquire the operations of 34 skilled nursing facilities from Eduro Healthcare. The portfolio includes 3,633 skilled nursing beds across Texas, Montana, South Dakota, North Dakota, New Mexico and Utah. On August 1, we closed on the operations of the first 20 facilities in Texas. We currently expect the remaining facilities to close during the third and fourth quarters. The transaction adds significant density in Texas, where we can leverage established regional leadership, clinical resources and referral relationships and operating infrastructure. It also expands our presence across several existing and adjacent markets and creates an opportunity to apply the PACS operating model across a meaningful group of facilities. Our acquisition strategy remains highly disciplined. We focus on opportunities where we can recruit and deploy strong local teams, invest in operational excellence, improve clinical quality and create meaningful long-term value through the support and resources of PACS Services. We believe this transaction is consistent with that approach and provides an opportunity to create additional clinical and financial value over time. Our existing portfolio remains the primary driver of our earnings growth. The strength of that performance, together with our leadership depth and operating capabilities, positions us to pursue disciplined acquisitions that can create additional clinical and financial value over time. Before I turn the call over, I'd like to briefly address our previously disclosed government investigations. These matters continue to progress through the normal course, and we remain fully cooperative and engaged with the government throughout the process. While we're unable to estimate the timing of resolution, we remain confident in our ability to navigate these matters responsibly and thoughtfully, just as we have navigated other challenges throughout our history. Importantly, the investments we've made to strengthen our organization, enhance our infrastructure and reinforce our compliance and reporting processes have positioned the company well for the future. Our focus remains squarely on executing our strategy, supporting our local leaders and caregivers and delivering high-quality care while continuing to build value for our stakeholders. With that, I'll turn the call over to Carey.

Thank you, Jason. We're very pleased with our second quarter performance and the strong momentum we've maintained throughout the first half of 2026. And importantly, we expect to sustain that momentum through the rest of the year. The consistency of our results reflects the strength of the PACS platform, the disciplined execution of our operations team and the meaningful earnings potential embedded across our portfolio. Our second quarter results demonstrate continued operational improvement across our existing portfolio, with strong revenue growth translating into meaningful earnings growth and margin expansion. For the second quarter of 2026, our revenue was $1.43 billion, which was an increase of $118.8 million or 9.1% growth year-over-year. Our net income was $76.4 million, an increase of $25.4 million or 50% from the second quarter of last year. Our adjusted EBITDA was $166.8 million, up $32.9 million or 25% from last year, and our adjusted EBITDAR was $261.5 million. Our adjusted EBITDA margin expanded by 150 basis points year-over-year from 10.2% to 11.7% as our revenue growth outpaced our expense growth due to same-store occupancy improvement, favorable patient mix and disciplined cost management. Beginning this quarter, you noted in the release that we introduced 2 new non-GAAP measures: adjusted net income and adjusted EPS. These metrics are widely used by our peers in skilled nursing and across the broader healthcare services sector, and we believe they provide investors with additional transparency into the underlying earnings power of the business and enhanced comparability across companies. Our adjusted net income increased 29.6% year-over-year in the second quarter, and our adjusted EPS increased 34% from $0.47 in the second quarter of last year to $0.63 in the second quarter of this year. We also included a new line below our adjusted EBITDA calculation as additional information, which notes the amount of our noncash lease expense in each period presented. Our adjusted EBITDA includes rent expense on a straight-line accrual basis, which in the second quarter of this year was $10.2 million higher than our actual cash lease expense. Looking at our same-store operating performance, our same-store portfolio includes 284 skilled nursing facilities that we operated as of the beginning of 2025. Given the significant movement of facilities that have progressed from new to ramping to mature, we believe these same-store results provide the most meaningful year-over-year view of our underlying portfolio performance. Our same-store skilled nursing revenue increased 5.8% to $1.35 billion compared with $1.27 billion in the prior year. This is consistent with our same-store revenue growth in the first quarter, which was up a similar 6.1%, excluding supplemental WQIP payments from California. Our same-store occupancy increased to 90.6% from 89.1%, which was an improvement of 150 basis points. And our same-store skilled mix increased to 29.7% from the previous 29.2%. The meaningful improvement in each of these metrics provides a clear view of the underlying strength of the existing portfolio and demonstrates that our growth continues to be supported by internally driven operating improvements. For the total skilled nursing portfolio, occupancy increased to 90.4% compared with 88.6% in the prior year. This represents an improvement of 180 basis points and remains significantly above the industry average of 79.5%. Our overall skilled mix increased by 100 basis points to 30% compared with 29% in the second quarter of 2025. As Jason noted, we ended the period with 184 mature facilities, 100 ramping facilities and 6 new facilities. As expected, our occupancy increases as we move across these cohorts, with new facilities occupancy at 78.7%, ramping facilities at 87.7% occupancy and mature facilities at 93.8% occupancy. Skilled mix was 27.2% for new facilities, 26.9% for ramping facilities and 31.9% for mature facilities. Advancing facilities through this integration life cycle represents an important source for organic growth within our existing portfolio with plenty of upside still to come, particularly from our 106 new and ramping facilities. From a cost perspective, cost of services totaled $1.09 billion, an increase of 6.7% compared with the prior year. Our general and administrative expense was $114.3 million compared with $100.3 million in the prior year. That increase reflects continued investment in the personnel, systems and compliance infrastructure necessary to support the scale and complexity of our organization, as well as higher stock-based compensation expense. Taken together, our total operating expenses increased 7.3% year-over-year. We believe these results demonstrate our ability to continue investing in the infrastructure necessary to support long-term growth while generating meaningful operating leverage across the platform. Turning to cash flow and the balance sheet. We generated $371.8 million of cash from operating activities during the first 6 months of 2026. During the second quarter, we deployed $104.3 million to acquire real estate within our operating footprint, bringing our total real estate investment to $190.8 million for the first 6 months of the year. We've exercised a few other real estate purchase options since the quarter end, and we currently own the underlying real estate associated with 64 of our operated facilities. As of June 30, we had $756.6 million of available liquidity, including $164.5 million of cash and cash equivalents. We had nothing drawn on our $600 million line of credit at June 30. We ended the quarter with net leverage of 0.1x. Our conservative leverage profile and substantial liquidity provide meaningful flexibility to invest in our existing facilities, support the integration of our newly acquired operations, selectively increase real estate ownership and pursue acquisition opportunities that meet our clinical, operational and financial criteria. We believe our ability to pursue growth, while maintaining this balance sheet position remains an important strategic advantage. Regarding our previously disclosed material weaknesses in internal control over financial reporting, we are actively advancing our remediation plan and have made substantial progress, and we expect to have them remediated by the end of the year. We're strengthening our leadership team, enhancing our compliance department and implementing additional controls across key areas of the business, particularly within our revenue processes. Importantly, our financial statements continue to be prepared in accordance with GAAP, and we believe the results that we reported this quarter fairly present the financial position and performance of the company. As we look at the back half of the year, we expect to continue to perform at a high level, and therefore, we're increasing both our full year revenue and our adjusted EBITDA guidance. As noted in our earnings release, we're increasing our full year revenue guidance to a range of $5.75 billion to $5.85 billion, which is up $100 million on both ends of the range from our previous range of $5.65 billion to $5.75 billion. At the new midpoint of $5.8 billion, our revenue guidance represents 10% growth in revenue for the full year over 2025. We're also increasing our adjusted EBITDA guidance to a range of $640 million to $660 million, which is up $35 million on both ends of the range from our previous range of $605 million to $625 million. At the midpoint of the range, this represents a 29% increase in our adjusted EBITDA over the full year 2025. Our guidance methodology remains consistent with the approach we introduced last quarter, under which we include the expected contribution from transactions that have been completed as of the date of this guidance while excluding transactions that remain pending. Our updated guidance, therefore, includes a modest contribution from the 20 Texas facilities that we acquired from Eduro on August 1, for the portion of the year in which we'll operate those facilities. However, the remaining 14 facilities associated with the Eduro transaction are not reflected in our current guidance because those acquisitions have not yet closed. We currently expect those facilities to close during the third and fourth quarters, subject to customary closing conditions and regulatory approvals. We continue to see a robust pipeline of acquisition opportunities and remain actively engaged in evaluating potential transactions that align with our strategic, operational and financial criteria. Beyond the remaining Eduro facilities, we expect to announce and close on other facilities before year-end. Overall, our updated guidance reflects confidence in the underlying performance of our existing portfolio and in our ability to integrate acquired operations while maintaining financial and operational discipline. With that, I'll turn the call back to Jason.

Thanks, Carey. We're pleased with our performance through the first half of the year and remain focused on carrying that momentum into the second half. And so with that, operator, we're ready with questions.

[Operator Instructions] Our first question is from Benjamin Rossi with JPMorgan.

Just regarding the updated guidance outlook, when we think about your 2026 guidance range and outlook for the back half of the year, it sounds like you're incorporating the beat in 2Q and then assuming stronger core trends. On a consolidated basis, it looks like unit costs are in check and rates are developing nicely, particularly for Medicaid. Can you just walk us through what you're seeing with your business and how trends year-to-date have given you this added confidence in your earnings growth during the back half of the year?

Sure. Yes. Ben, we feel very good about the momentum in our business. But we do want to be disciplined in our guide. So the range reflects the continued strength we saw across all of our cohorts in the first half, including occupancy, skilled mix, quality and cash flow. We do have -- the second half includes integration activity related to the Eduro transaction. Our guidance only includes a modest contribution from those 20 Texas facilities that we closed on August 1. It doesn't include, as I mentioned, the remaining Eduro facilities that we've yet to close or any other future acquisitions. So we feel good about that guidance range, and we're just accounting for normal execution and integration considerations in that guidance.

Got it. Okay. I guess I just want to spend some time then on the ramping cohort, in particular, during 2Q. Looked like ramping occupancy and skilled mix stood out versus my modeling. I saw some noticeable rate growth on the Medicaid side, too, within ramping that stood out compared to the rest of the group. Can you just walk through what's changed operationally across this cohort for things like facility mix, clinical programs, staffing and improvements to your referrals or rate design? And then maybe what's expected in the go-forward for this segment for the remainder of the year?

Yes, I'll take that one. This is Josh. Thanks for the question, Ben. I appreciate you recognizing that. This is a cohort we're incredibly proud of. Obviously, the numbers have increased in this cohort. And as we would expect, as facilities mature along those cohorts, they're set up that particular way because we expect as these facilities enter ramping that they have solid facility leadership that, that leadership has started to build a reputation in the community of consistent care outcomes of quality, of customer service. And that reputation, as we often talk about, leads to an increased confidence in the consumers and our partners and our payers. And so you do see increased activity around executed managed care agreements, and we have those in place in those ramping facilities. We've proven that we can be good partners and they can rely upon us for excellent outcomes. And so you see, again, not only occupancy increase, but skilled mix increase. As those facilities also stabilize, you see stabilization in labor and overtime, double time, agency usage. And so not only do you see the expansion in revenue, but you also see expanded margin, particularly there in ramping. And so as we've seen the progress in that cohort, we're excited for that to continue as those mature even inside of that cohort. But as they move towards maturity metrics, we still see there to be substantial upside because we've seen these facilities as they get even more established in our portfolio and in their communities, that there's still upside for them to capitalize on, and we would anticipate those ramping facilities as they move towards maturity to continue along those same metrics.

Our next question is from David MacDonald with Truist Securities.

A couple of quick questions. One, Jason, can you just talk a little bit more about when you have conversations with payers and your referral sources, just how critical the quality metrics that you guys are posting right now is in terms of either working on contracting or just kind of securing referral sources? And then I got 1 or 2 quick follow-ups.

Sure. Yes, Dave. Thanks for the question. Yes, it is incredibly important. I think the way that we talk about quality is that it is the fundamental basis behind our entire business thesis, right? Like we need to make sure that we are very good at providing high-quality care and high-quality outcomes. And the reason that's important is not only for the outcome of the patient, but also, it allows us to be more competitive in the way that we negotiate our managed care contracts and other payer contracts. What we have found is there are many of these different payers who have thresholds of when they will allow providers to participate in their plans, quality thresholds that is. And so if you are performing below those thresholds, then you typically are excluded from conversations around those new contracts. And so that's why it's very important for us to make sure that we're executing well on that front is because we want to have a seat at the table when we are looking at different payer contracts, and we want to make sure that we're in the best seat available when we are negotiating. And the best way that you have the ability to negotiate with our payers is, number one, quality. And then I would point to number two being density in the different markets where we operate. And so it all starts and ends with quality, though.

And then guys, just a couple of other ones. One, just on, kind of, automation/AI, can you give us any sense in terms of how you guys are thinking about that, maybe not in the context of direct care, but more in the context of providing more efficiency so you free up your clinical people to spend more time just on direct care?

Dave, I think that's exactly it. There are certainly really good use cases for AI. We have to be mindful of, obviously, the compliance element, as everyone is aware that AI being integrated into healthcare. There's a number of questions around that and how it works. And so fortunately, with the additional resources we've added to our compliance team, people with specific experience around privacy and other sorts of things that matter as it relates to AI are able to help ensure that the tools that we are exploring, and some of them now using and have integrated into our systems, are keeping the organization away from any of those potential risks. But we have seen some good use cases where it's doing exactly what you mentioned. It's allowing us to identify what patients need, what level of care they need based on their history and physical that comes from a hospital. To be able to scan that information and ensure not only save time for the clinicians, but ensure that we're capturing every element of care that, that patient needs when they come into our facility. And as you do that and as you provide the care and have the clinicians that are capable to do it at a high level, your quality measures increase. The return rates to the hospitals decrease. All of the metrics that, as Jason mentioned, these payer sources are looking for, we're able to actually make improvements. We envision there to be additional ways for us to implement AI as it looks to scrubbing documentation to ensure we're documenting things correctly. And so there's just a number of opportunities and use cases. And I think you'd see consistent with PACS, and one of the things that differentiates us, is that we lean fully into technology and the uses. We've built integrated dashboards, as we've talked about historically. And so there's been a full lean-in where historically, our space hasn't seen people do that. And we would anticipate with what we've seen so far and what we continue to see into the future, an ability for us to layer these things on and make us more efficient in the way that we operate, hopefully leading to margin expansion as well and to free up clinicians so they can do what they should be doing, which is have as much touch and interaction with the patient as possible.

Okay. And guys, just last question. Look, obviously, the operating environment broadly across healthcare has been fairly dynamic over the last couple of years. I'm just curious, when you look at your pipeline, can you just provide us a little bit more detail? Is the breadth of the pipeline bigger than it's kind of been historically? Any chunkier assets kind of coming into the pipeline? Just any additional detail in terms of what you're seeing would be helpful.

Yes. I think that -- I'll take that question. This is Jason. The -- I think what we're seeing is just, again, another high level of activity with M&A. It's been very busy, especially since getting back in compliance with the SEC with our filings. We've seen more and more activity come our way. And I would characterize it, Dave, as being kind of a mixed bag of everything, from smaller one-off deals to smaller kind of regional operators to large chunky deals. We really are seeing pretty significant diversity in the types of deals that we're looking at. And so that's encouraging to us because it gives us the optionality that we would want when trying to be disciplined and strategic with -- when we're thinking about our growth.

Our next question is from A.J. Rice with UBS.

Maybe just first to ask you about what you are seeing on the payer side, we know the Medicare rates that have been proposed. But any comment on what you're seeing on a go-forward basis in your discussions with your various states about Medicaid updates? I know in the quarter, you were up 3%. Is that sort of the rate type of dynamic you're seeing? And then managed care, there's been some discussion about managed care contracting, generally, in the industry. You had a healthy rate increase in this quarter. What are you seeing in contracting there?

Yes. I'll maybe start, A.J., this is Josh. I'll start with just the underwriting process that we go through as we evaluate, particularly to talk about the Medicaid. We specifically identify states that we think that we have an opportunity to make improvements on Medicaid rate reimbursement. And we've been fortunate to enter a number of those states where they incentivize quality, not just in quality payments, but there's an element of the rate that includes your ability to provide quality care to your long-term population, the Medicaid base. And we've seen those increases. And it's come because of the efforts of our clinical teams, ensuring that we're capturing appropriate care, taking, generally, even on a long-term custodial basis, a more clinically acute patient and being able to be reimbursed appropriately for the services being provided to them. And so it is not a surprise to us that we've seen increase in our Medicaid rates. We've also been very active, like many other operators, in ensuring that we get in front of the individuals at the state level, making decisions on how they reimburse nursing homes. And we think we've positioned that narrative very well, that we are the lowest-cost institutional setting for people to receive care, and they can receive that care in a very quality setting. And that's what I think PACS has done to differentiate. And so we're grateful for the recognition that those people at the state level have paid attention to and ensured that they've included appropriate rate reimbursement for the services being provided. And so that 3%, we anticipate continuing to see growth in that regard. And as we underwrite new deals, we look to ensure that on the Medicaid front, we continue to see that rate expansion. On the Medicare and managed care side, like you mentioned, you see the increase. We've continued to be increased. I think at the federal level, they're seeing that nursing homes can provide care to highly acute patients who are in need of those services, and appropriately are giving us an increase yet again this year, which has been consistent for the sector. On the managed care front, Jason, I think, nailed it when he said these managed care providers more than ever are paying attention to the people that they are contracting with, the providers they're contracting with. They're looking for a couple of things. First and foremost, they're looking for quality outcomes. They're basing rate and the willingness to reimburse a certain provider in that contract based on your quality outcomes. They're also looking at density. And as we talk about growth and strategic growth in areas where we can have density, bed density, bed availability for these providers, they are very interested in ensuring that they have access for their patients with beds. And that's, again, another differentiator for PACS as we go into these contract negotiations, that we're able to negotiate favorably for us when we give them bed density combined with the quality metrics that we've seen historically.

Okay. That was helpful. Maybe also just to ask you on your largest expense item, what the dynamics are around labor, availability of supplies, need to rely on temporary staff and other things, wage updates. Any commentary around there and any initiatives you have underway related to labor?

Yes. The general dynamics of the labor market are continuing to improve. And I know we referenced post-COVID, that was the most recent challenge that the industry have had. And since that point, not only across the nation for all providers, but for us specifically, we've actually seen that numerically have an impact. We don't have a major issue with job postings and responses to those job postings, which we had once upon a time. As we look at our labor, oftentimes, we measure that as a percentage of revenue. And our contract labor in Q2 was the lowest it had been in any of the past 2 years. And so as we look at those trends, we're incredibly encouraged to see that those labor dynamics are leading to increased margin expansion as our facilities continue to operate at the level that they are.

Our next question is from Raj Kumar with Stephens.

Maybe just trying to, kind of, parse out the 20 Eduro facilities in Texas and kind of the embedded contribution into guidance. Maybe just any helpful color around revenue and earnings contribution here in 2026. And maybe just any qualitative commentary around how those facilities, kind of, compared to your, kind of, existing 5 facilities that you've had in Texas for...

Thank you, Raj. This is Carey. Thanks for the question. Yes, our guidance, as I noted, it includes a modest contribution from the 20 Texas facilities that we've closed so far. And I'd say it's modest because there is some integration that has to occur in the first several months of an acquisition. Revenue is contributing more than EBITDA in our guide. But the Eduro facilities still had a lot of upside, a lot of upside. And I'll let Josh actually talk about where they are now and where we think they can get to.

Yes. This is an acquisition that we were underwriting for a while. And although there's a strong foundation in the Eduro team, maybe different than some of the acquisitions that we've done historically, where you sense more distress when you walk into these facilities, the Eduro team worked hard on prioritizing care and outcomes and actually did have positive EBITDA margins. With that being said, we still recognize that as we underwrote this deal, we saw opportunities for the uniqueness of PACS model to actually add particularly on certain KPIs. On the quality measure front, we think there's room for improvement. And as we make those improvements in quality measures, we believe that we can see expansion in both occupancy and skilled mix, particularly in these 20 facilities, as example, they run in about the mid-60% occupancy and around 10% to 11% skilled mix. And so when you compare them to other new facilities that we've taken on, they have similar metrics in that regard. And we believe as they begin to progress with the PACS' specific attention to those areas, we're going to see them move from the new and the ramping and to the mature cohorts. And so as each of you look at that and model it just like we have done, you can count on those facilities following a similar path to what you've seen historically from our acquisitions.

Great. And then maybe as my follow-up, just kind of thinking about or tying the topics of quality and then reimbursement. I think Ohio had finalized the 3 calculations of some prior year quality incentive payments. So curious on any, kind of, sizing color you could kind of provide on that and whether there's [Audio Gap] kind of been baking in for those payments.

Yes. Thank you, Raj. Yes, those payments haven't come yet, so we don't know exactly what they're going to be. We have not been accruing for them because of that very fact. We don't know how much they're going to be and we don't know when we're going to receive them. We've had some -- we thought we might have received them actually before now and the amounts have varied from time to time. So that's why we have not accrued anything for those. I would say we do expect to receive them in the second half of the year, but we've not included any of that in our guidance. So I think that would be upside to where we are. I know it would be upside to where we are because we've not included any of it in our guidance.

Our next question is from Ben Hendrix with RBC Capital Markets.

Great. Just one more question on the new facilities in the guidance. You mentioned some integration costs. And I imagine there's more expense kind of coming on associated with those facilities. Just wanted to see if we could parse that out a little bit in terms of are we expecting a step-up in agency utilization as we bring those on versus your legacy platform? Is there any kind of degree that we have additional overhead and administrative costs and then versus costs related to local leadership change? Do you expect to have to put a meaningful portion of or replace a meaningful portion of the local leaders with some of your leaders in training? Any kind of thoughts on the geography of those costs would be great.

Yes. Specifically, Ben, I don't see anything -- you mentioned labor. I don't see any sort of increase in agency labor. When we take on new acquisitions and this transaction, although slightly different, won't be different than how we handle these. We go in, we evaluate the teams in place. I think these teams generally have a little more strength than we've historically seen in some of the more distressed assets that we've taken on. And we are going to grow those platforms strategically to ensure that whatever we're doing that relates to census or additional labor that may be needed that, that's done very strategically prioritizing care. So we're going to go and assess the teams. We're going to deploy our systems, policies, procedures, things that we would do in any acquisition, and then we will begin building responsibly on top of that. And so specific costs outside of what Carey mentioned, just the integration of IT network and infrastructure and other things that come with any acquisition, especially large-scale that you do, I would anticipate that the operational metrics aren't going to change on the cost side substantially. I think we're going to see over time, consistent with what you've seen, new moving to ramping, ramping to mature, that these facilities are going to follow a similar track.

And Ben, as a follow-up to your question about the Ohio supplemental payments, just as a reminder, we do expect another -- at least one more California WQIP payment in 2026. We haven't accrued it again, same thing, because we don't know the amount, and we don't know exactly when we're going to receive it. We've started receiving some of that in the third quarter. So I think we will receive some in the third. And then the second payment related to that will be either late this year or early in 2027. But we -- again, we're not accruing that. It's not in the guidance because we don't know what those amounts will be.

And to be sure, those will be reflected in your same-store revenue growth?

Yes, they will, just like they were in the first quarter.

This now concludes our question-and-answer session. I would like to turn the floor back over to Jason Murray for closing comments.

Yes. Thank you, operator. And again, thanks, everyone, for joining us today. We appreciate your support of PACS. Have a nice rest of your day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.