HEALTHCARE HOSPITALITY

Transcription

1 HEALTHCARE HOSPITALITY MEDICAL FACILITIES CORPORATION Fourth Quarter 2014

2 MANAGEMENT S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND TWELVE-MONTH PERIODS ENDED DECEMBER 31, 2013 March 19, 2014 Table of Contents 1. Caution Concerning Forward-Looking Statements Performance Highlights Corporate Overview Operating and Financial Results for the Three Months Ended December 31, Operating and Financial Results for the Twelve Months Ended December 31, Quarterly Operating and Financial Information Performance Measures Non-IFRS Financial Measures Liquidity, Capital Resources and Financial Condition Foreign Exchange Forward Contracts Related Party Transactions Use of Judgements and Estimates Management s Responsibility for Financial Reporting and Disclosure Controls Risk Factors Outlook List of Tables The information in this Management s Discussion and Analysis ( MD&A ) is supplemental to and should be read in conjunction with the consolidated financial statements of Medical Facilities Corporation (the Corporation ) for the year ended December 31, 2013 and the notes thereto, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Substantially all of the Corporation s operating cash flows are in U.S. dollars and all amounts presented in the financial statements and herein are stated in thousands of U.S. dollars, unless indicated otherwise. Additional information about the Corporation and its annual information form are available on SEDAR at or the Corporation s website at 1. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking statements (including, without limitation, in the sections of this MD&A entitled Liquidity, Capital Resources and Financial Condition and Outlook ). Such statements involve known and unknown risks, uncertainties and other factors outside of management s control, including the risk factors set forth in Section 13 Risk Factors of this MD&A and the Corporation s most recently filed annual information form, that could cause actual results to differ materially from those described or anticipated in the forward-looking statements. The Corporation does not assume responsibility for the accuracy and completeness of these forward-looking statements and, except as may be required by law, does not undertake the obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. 1

3 2. PERFORMANCE HIGHLIGHTS For the three months ended December 31, 2013, facility service revenue of the Centers, as defined below under Section 3 Corporate Overview, increased by 17.8 million or 24.7% and income from operations increased by 6.5 million or 28.1% over the same period in The Corporation generated cash available for distribution of Cdn13.5 million which was higher than Cdn10.7 million generated in the fourth quarter of 2012 by Cdn2.8 million. The payout ratio for the fourth quarter of 2013 was 65.2%, compared with 74.7% in the same period in For the twelve months ended December 31, 2013, facility service revenue increased by 69.8 million or 29.2%, and income from operations increased by 12.4 million or 15.7% over the same period in The Corporation generated cash available for distribution of Cdn40.8 million which was higher than Cdn37.8 million generated in the twelve months of 2012 by Cdn3.0 million. Distributions per common share increased by 1.7%, resulting in a payout ratio of 84.3%, compared to the payout ratio of 83.3% last year. The significant increases in facility service revenue for the three and twelve months ended December 31, 2013 are primarily due to the inclusion of Arkansas Surgical Hospital (12.0 million and 54.2 million, respectively) as well as growth in facility service revenue at all specialty surgical hospitals. Furthermore, as has been the case in the past, the Centers recorded strong operating results in the fourth quarter: 29.0% of total annual facility service revenue and 32.7% of total annual income from operations were achieved in the fourth quarter. In August 2013, Black Hills Surgical Hospital began operations of a second urgent care location. Its urgent care initiatives as well as primary care initiatives at Sioux Falls Specialty Hospital continued to contribute to the year-over-year increase in facility service revenue but at the same time had a negative impact on income from operations during the development phase of these service lines. Table 1: Performance highlights Three Months Ended December 31, Twelve Months Ended December 31, % Change % Change ( 000s, except per share amounts and as indicated otherwise) (unaudited) Facility service revenue 89,620 71, % 309, , % Operating expenses 59,864 48, % 218, , % Income from operations (1) 29,756 23, % 91,072 78, % Total net income and comprehensive income for the period 21,041 39,919 (47.3%) 45,122 62,175 (27.4%) Attributable to: Owners of the Corporation 10,067 31,078 (67.6%) 11,239 32,815 (65.8%) Non-controlling interest 10,974 8, % 33,883 29, % Basic earnings per share attributable to owners of the Corporation (70.7%) (68.1%) Fully diluted earnings per share attributable to owners of the Corporation (59.6%) (68.1%) Cash available for distribution (1) C 13,508 C 10, % C 40,823 C 37, % Distributions (1) C 8,822 C 7, % C 34,402 C 31, % Cash available for distribution per common share (1) C C % C C % Distributions per common share (1) C C C C % Payout ratio (1) 65.2% 74.7% (12.7%) 84.3% 83.3% 1.2% Total assets 437, ,791 (0.4%) 437, ,791 (0.4%) Total long-term financial liabilities (2) 59,141 70,119 (15.7%) 59,141 70,119 (15.7%) Note 1: Please refer to Section 7 Performance Measures Non-IFRS Financial Measures and Table 18 Reconciliation of Cash Available for Distribution to the Cash Provided by Operating Activities of this MD&A. 2

4 Note 2: Total long-term financial liabilities consist of long-term debt and convertible debentures. The chart below shows the Corporation s cash available for distribution, distributions and payout ratios for the last nine quarters (1) : Cmill Cash Available for Distribution 120.0% % % % % % - 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Generated C Distributed C Payout Ratio 0.0% Note 1: Please refer to Section 7 Performance Measures Non-IFRS Financial Measures. 3. CORPORATE OVERVIEW The Corporation is a British Columbia corporation. The capital of the Corporation is in the form of publicly traded common shares and 5.9% convertible unsecured subordinated debentures ( 5.9% debentures ). Up to April 30, 2013, the capital of the Corporation also included 7.5% convertible secured debentures ( 7.5% debentures ) which matured on April 30, 2013 as discussed in Section 8 Liquidity, Capital Resources and Financial Condition of this MD&A. The 7.5% debentures and 5.9% debentures are hereinafter individually or collectively referred to as convertible debentures. The Corporation s current monthly dividend on its common shares is Cdn Effective July 29, 2013, Dr. Larry Teuber transitioned from his position as President to a consulting role with the Corporation for a term of twelve months, terminating on July 29, The role of President has been eliminated, and the responsibilities of that office were assumed by members of the Corporation s senior management team. Dr. Teuber has also stepped down as a director of the Corporation. Through its wholly-owned subsidiaries, Medical Facilities America, Inc. ( MFA ) and Medical Facilities (USA) Holdings, Inc. ( MFH ), the Corporation owns controlling interests in, and derives substantially all of its income from, six limited liability entities (each a Center and, collectively, the Centers ), each of which owns either a specialty surgical hospital (an SSH ) or an ambulatory surgery center (an ASC ). The SSHs are located in South Dakota, Oklahoma and Arkansas and the ASC is located in California. ASCs are specialized surgical centers that only provide outpatient procedures, whereas SSHs are licensed for both inpatient and outpatient surgeries. The Centers provide facilities, including staff, surgical materials and supplies, and other support necessary for scheduled surgical, pain management, imaging, and diagnostic procedures and derive their revenue primarily from the fees charged for the use of these facilities. The Centers mainly focus on a limited number of clinical specialties such as orthopaedic, neurosurgery, pain management and other non-emergency elective procedures. In addition, two of the SSHs provide primary and urgent care to their communities. 3

5 Facility service revenue for any given period is dependent on the volume of the procedures performed as well as the acuity and complexity of the procedures ( case mix ) and composition of payors ( payor mix ), as various payors have different reimbursement rates for the same type of procedures. The volume of procedures performed at the Centers depends on (among other things): (i) the Centers ability to deliver high quality care and superior services to patients and their family members; (ii) the Centers success in encouraging physicians to perform procedures at the Centers through, among other things, maintenance of an efficient work environment for physicians as well as availability of facilities; and (iii) established relationships with major third-party payors in the geographic areas served. The case mix at each Center is a function of the clinical specialties of the physicians and medical staff and is also dependent on the equipment and infrastructure at each Center. Non-controlling interests in the Centers are indirectly owned primarily by physicians practicing at the Centers. Upon acquisition by the Corporation of indirect controlling interests in the SSHs located in South Dakota, Oklahoma and Arkansas, the non-controlling interest owners were granted the right to exchange up to 14% (5% in the case of Arkansas Surgical Hospital) of the ownership interest in their respective Centers for common shares of the Corporation. The non-controlling interest owners of several Centers have exercised portions of their exchangeable interests. Table 2: Summary of Center information (as of December 31, 2013) Black Hills Surgical Hospital ( BHSH ) Sioux Falls Specialty Hospital ( SFSH ) Dakota Plains Surgical Center ( DPSC ) Oklahoma Spine Hospital ( OSH ) The Surgery Center of Newport Coast ( Newport Coast ) Arkansas Surgical Hospital ( ASH ) Location Rapid City South Dakota Sioux Falls South Dakota Aberdeen South Dakota Oklahoma City Oklahoma Newport Beach California North Little Rock Arkansas Year Opened Year Acquired by the Corporation Ownership Interest 54.2% 51.0% 64.6% 58.8% 51.0% 51.0% Non-controlling Interest 45.8% 49.0% 35.4% 41.2% 49.0% 49.0% Exchangeable Interest 10.8% 14.0% 0.4% 6.2% - 5.0% Size 75,000 sq ft 76,000 sq ft 19,000 sq ft 61,000 sq ft 7,000 sq ft 126,000 sq ft Operating Rooms Overnight Rooms (1) Note 1: Licensed for 51 beds. Effective January 31, 2014, Orthopedic Surgery Specialists, a physician practice which includes physicians with interests in DPSC, joined Avera Medical Group ("AMG"). Neither the Corporation s interest in DPSC, nor the physicians 35.4% retained interest, is affected by this change which relates solely to the medical practices of the physicians. The physicians will continue to provide services at both DPSC and AMG facilities. 4

6 4. OPERATING AND FINANCIAL RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 The following table and discussion compares operating and financial results of the Corporation for the three months ended December 31, 2013 to the three months ended December 31, Table 3: Operating and financial results for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 Three Months Ended December 31, (unaudited) ( 000s, except per share amounts and as indicated otherwise) Change % Change Facility service revenue 89,620 71,864 17, % Operating expenses Salaries and benefits 21,350 17,317 4, % Drugs and supplies 24,815 18,498 6, % General and administrative expenses 11,194 10, % Depreciation of property and equipment 2,505 1, % Total operating expenses 59,864 48,643 11, % Income from operations 29,756 23,221 6, % Amortization of other intangibles 4,680 3,277 1, % Finance costs Interest expense, net of interest income 958 2,826 (1,868) (66.1%) Interest expense on exchangeable interest liability 2,738 1, % Loss on foreign currency 2, , % 6,269 5, % Increase (decrease) in values of convertible debentures 188 (1,753) 1,941 (110.7%) Increase (decrease) in value of exchangeable interest liability 9,609 (4,916) 14,525 (295.5%) Income before income taxes 9,010 21,290 (12,280) (57.7%) Income tax recovery (12,031) (18,629) 6,598 (35.4%) Net income and comprehensive income for the period 21,041 39,919 (18,878) (47.3%) Attributable to: Owners of the Corporation 10,067 31,078 (21,011) (67.6%) Non-controlling interest 10,974 8,841 2, % Basic earnings per share attributable to owners of the Corporation (0.776) (70.7%) Fully diluted earnings per share attributable to owners of the Corporation (0.473) (59.6%) Facility Service Revenue Table 4: Facility service revenue by Center for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 Three Months Ended December 31, (unaudited) ( 000s, except as indicated otherwise) Change % Change BHSH 20,364 19, % SFSH 26,199 23,518 2, % DPSC 5,136 4, % OSH 19,026 17,289 1, % Newport Coast 2,542 2,937 (395) (13.4%) ASH 16,353 4,361 11, % Facility service revenue 89,620 71,864 17, % The Corporation s consolidated facility service revenue of 89.6 million increased by 17.8 million or 24.7% over the same period in 2012 primarily due to the acquisition of ASH effective November 30, 2012 and growth in facility service revenue at all SSHs. The factors favourably impacting facility service revenue at SSHs were (i) an increase in surgical cases, in particular orthopedic and neurology cases, at SFSH, (ii) an 5

7 increase in surgical cases and pain management procedures and higher charges per case at OSH, and (iii) increased revenue from urgent care and a favourable case mix at BHSH. Also in the fourth quarter of 2013, most SSHs received Medicare and Medicaid incentive payments for implementing electronic health records ( EHR ) which were recorded in facility service revenue. In particular at DPSC, the EHR incentive payment was the main reason for the increase in facility service revenue. Without accounting for the EHR incentive payment at DPSC, the Center recorded a 0.4 million or 8.9% decline in facility service revenue due to a decrease in surgical cases and pain management procedures. The growth in facility service revenue was also moderated by a less favourable payor mix recorded by the SSHs which was primarily attributable to an increase in Medicare and Medicaid cases at these Centers. In addition, BHSH s facility service revenue was negatively impacted by a decline in surgical cases as well as receipt of a lower EHR incentive payment in the fourth quarter of 2013 compared to the same period in Despite an increase in surgical cases and pain management procedures, the Corporation s ASC recorded a decline in facility service revenue which was primarily attributable to the planned movement to contracting with certain payors. This has resulted in lower reimbursement rates from these payors which have been partially offset by higher case volumes. Operating Expenses Consolidated operating expenses, including salaries and benefits, drugs and supplies, and general and administrative expenses, totaled 59.9 million, an increase of 11.2 million or 23.1%. As a percentage of facility service revenue, the consolidated expenses decreased to 66.8% from 67.7% a year earlier. The acquisition of ASH accounted for the majority of the increase in consolidated operating expenses. Table 5: Operating expenses by Center and corporate level for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 (unaudited) ( 000s, except as indicated otherwise) 2013 Three Months Ended December 31, % of facility service revenue % of facility service revenue Change % Change BHSH 13, % 12, % % SFSH 14, % 12, % 2, % DPSC 2, % 2, % % OSH 13, % 13, % % Newport Coast 1, % 1, % % ASH 11, % 3, % 8, % Corporate 1,690 n/a 2,390 n/a (700) (29.3%) Operating expenses 59, % 48, % 11, % Consolidated salaries and benefits increased by 4.0 million or 23.3% compared to the same period in 2012 primarily due to the acquisition of ASH as well as increases at BHSH, SFSH and corporate level. Salaries and benefits increased at BHSH due to the opening of a second urgent care location and employment of hospitalists who were previously under independent contract arrangements. Higher case volumes resulted in an increase in salaries and benefits at SFSH. DPSC, OSH and Newport Coast recorded marginal changes in their salaries and benefits compared to At the corporate level, salaries and benefits increased primarily due to contractual payments to a former officer of the Corporation and an increase in expenses related to the deferred share unit component of directors compensation. As a percentage of facility service revenue, consolidated salaries and benefits declined to 23.8% compared to 24.1% a year earlier. Consolidated drugs and supplies expenses increased by 6.3 million or 34.1% compared to the same period in 2012 primarily due to the acquisition of ASH and increases at all Centers primarily attributable to higher case volumes, shifts in case mix and inflationary vendor price increases. In addition, SFSH has been performing an increased number of pain management procedures which involve implantation of expensive stimulators while BHSH and OSH had an increase in the types of cases which generate higher supply cost

8 per case. The costs of drugs and supplies at DPSC and Newport Coast were marginally higher compared to the same quarter last year and reflect the types of cases performed at these Centers. As a percentage of facility service revenue, consolidated cost of drugs and supplies increased to 27.7% from 25.7% a year earlier. Consolidated general and administrative expenses ( G&A ) increased by 0.3 million or 2.9% compared to the same period in 2012 primarily due to an increase in the G&A at SFSH attributable to EHR related costs and higher pharmacy, contracted services and marketing costs. On the other hand, G&A at BHSH declined compared to the same period last year due to the employment of hospitalists and a reduction in urgent care development costs while other Centers recorded marginal changes in their G&A. At the corporate level, G&A was lower compared to the same period in 2012 due to acquisition costs and costs related to the 5.9% debentures offering incurred in As a percentage of facility service revenue, consolidated G&A decreased to 12.5% from 15.1% a year earlier. Consolidated depreciation of property and equipment increased by 0.6 million or 28.6% due to the acquisition of ASH and increased depreciation primarily attributable to urgent care initiative at BHSH and investments in EHR systems. As a percentage of facility service revenue, consolidated depreciation of property and equipment increased slightly to 2.8% from 2.7% a year earlier. Income from Operations Consolidated income from operations of 29.8 million was 6.5 million or 28.1% higher than consolidated income from operations recorded a year earlier, representing 33.2% of facility service revenue compared to 32.3% in Table 6: Income from operations by Center and corporate level for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 (unaudited) ( 000s, except as indicated otherwise) 2013 Three Months Ended December 31, % of facility service revenue 2012 % of facility service revenue Change % Change BHSH 6, % 6, % % SFSH 11, % 10, % % DPSC 2, % 2, % % OSH 5, % 4, % 1, % Newport Coast % 1, % (507) (34.1%) ASH 4, % % 3, % Corporate (1,690) n/a (2,390) n/a 700 (29.3%) Income from operations 29, % 23, % 6, % Newport Coast s income from operations was impacted by lower reimbursement rates from certain payors and an increase in operating expenses due to higher case volumes. Amortization of Other Intangibles The increase of 1.4 million in amortization of other intangibles is primarily due to the acquisition of ASH. Finance Costs Interest Expense The decrease of 1.9 million in interest expense is primarily due to 2012 financing costs related to the issuance of 5.9% debentures in December

9 Interest on Exchangeable Interest Liability The increase of 0.9 million in interest expense on exchangeable interest liability is primarily due to the increased distributions from the Centers. Foreign Currency Losses (Gains) The change in the foreign currency losses (gains) of 1.9 million is primarily attributable to the losses on foreign exchange forward contracts which matured in the current period as a result of the weakening Canadian dollar. This is in contrast to the gains on foreign exchange forward contracts that matured in the same period in 2012 due to a stronger Canadian dollar during that period. Change in Values of Convertible Debentures The convertible debentures are recorded as a financial liability at fair value and re-measured at each reporting date and the changes in fair value are included in net income and comprehensive income for the respective periods. Changes in the recorded values of the convertible debentures are driven by the changes in the market price of the Corporation s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S. dollar. Table 7: Calculation of the change in value of 5.9% debentures for the three months ended December 31, 2013 and from the date of offering (December 21, 2012) to December 31, 2012 Dec. 31, 2013 Sep. 30, 2013 (unaudited) Change Dec. 31, 2012 Dec. 21, 2012 Change ( 000s, except as indicated otherwise) Face value of 5.9% debentures outstanding C41,800,000 C41,800,000 - C41,800,000 C41,800,000 - Closing price of the Corporation s 5.9% debentures C C C3.75 C C C1.00 Closing exchange rate of U.S. dollar to Canadian dollar (1) Market value of 5.9% debentures outstanding 41,266 41, ,434 42, Note: 1: Noon exchange rate of U.S. dollar to Canadian dollar on the date of offering of 5.9% convertible debentures. Change in Value of Exchangeable Interest Liability The liability for the exchangeable interest is recorded at fair value, which is re-measured at each reporting date, and the changes in fair value are included in net income and comprehensive income for the respective periods. Changes in the recorded value of the exchangeable interest liability between the reporting periods are attributable to (i) changes in the number of common shares to be issued for the exchangeable interest liability, which are driven by the distributions to the non-controlling interest during the twelve-month period ending on the reporting date, (ii) changes in the market price of the Corporation s common shares and (iii) fluctuations of the value of the Canadian dollar against the U.S. dollar. 8

10 Table 8: Calculation of the change in value of exchangeable interest liability for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 Dec. 31, 2013 Sep. 30, 2013 (unaudited) Dec. 31, 2012 Sept. 30, 2012 (unaudited) Change ( 000s, except as indicated otherwise) Change Number of common shares to be issued for exchangeable interest liability 6,274,969 6,271,197 3,772 6,162,453 5,951, ,071 Closing price of the Corporation s common shares C17.94 C15.81 C2.13 C13.84 C14.38 (C0.54) Closing exchange rate of U.S. dollar to Canadian dollar Exchangeable interest liability 105,841 96,232 9,609 85,726 87,043 (1,317) Liability to the holders of ASH s exchangeable interest recognized on acquisition of ASH - (3,599) Change in value of exchangeable interest liability 9,609 (4,916) Income Tax Table 9: Current and deferred tax components of the income tax expense (recovery) for the three months ended December 31, 2013 compared to the three months ended December 31, 2012 (unaudited) ( 000s, except as indicated otherwise) Three Months Ended December 31, Change % Change Current income tax expense 1, % Deferred income tax recovery (13,271) (18,915) 5,644 (29.8%) Income tax recovery (12,031) (18,629) 6,598 (35.4%) The increase in current income tax expense is primarily attributable to the improved performance of the Centers and decreased corporate expenses. The decrease in deferred income tax recovery is primarily attributable to the tax effect of the change in exchangeable interest liability offset by the recognition of deferred tax asset related to the Canadian cumulative tax operating losses during

11 5. OPERATING AND FINANCIAL RESULTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2013 The following table and discussion compares operating and financial results of the Corporation for the twelve months ended December 31, 2013 to the twelve months ended December 31, Table 10: Operating and financial results for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 Twelve Months Ended December 31, ( 000s, except per share amounts and as indicated otherwise) Change % Change Facility service revenue 309, ,380 69, % Operating expenses Salaries and benefits 79,947 59,934 20, % Drugs and supplies 86,425 60,623 25, % General and administrative expenses 42,253 33,016 9, % Depreciation of property and equipment 9,465 7,121 2, % Total operating expenses 218, ,694 57, % Income from operations 91,072 78,686 12, % Amortization of other intangibles 17,128 12,709 4, % Finance costs Interest expense, net of interest income 4,742 6,709 (1,967) (29.3%) Interest expense on exchangeable interest liability 9,006 7,624 1, % Loss (gain) on foreign currency 5,561 (2,662) 8,223 (308.9%) 19,309 11,671 7, % Increase in values of convertible debentures 306 3,431 (3,125) (91.1%) Increase in value of exchangeable interest liability 20,414 10,818 9, % Income before income taxes 33,915 40,057 (6,142) (15.3%) Income tax recovery (11,207) (22,118) 10,911 (49.3%) Net income and comprehensive income for the period 45,122 62,175 (17,053) (27.4%) Attributable to: Owners of the Corporation 11,239 32,815 (21,576) (65.8%) Non-controlling interest 33,883 29,360 4, % Basic and fully diluted earnings per share attributable to owners of the Corporation (0.789) (68.1%) Facility Service Revenue Table 11: Facility service revenue by Center for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 Twelve Months Ended December 31, ( 000s, except as indicated otherwise) Change % Change BHSH 69,345 66,261 3, % SFSH 89,304 78,906 10, % DPSC 16,002 14,030 1, % OSH 66,703 65,651 1, % Newport Coast 9,206 10,171 (965) (9.5%) ASH 58,602 4,361 54,241 1,243.8% Facility service revenue 309, ,380 69, % The Corporation s consolidated facility service revenue of million increased by 69.8 million or 29.2% over the same period in 2012 primarily due to the acquisition of ASH and an increase in facility service revenue at all SSHs. The factors favourably impacting facility service revenue at SSHs were (i) an increase in surgical cases and an increase in complexity of cases resulting in higher charges per case at SFSH, (ii) increased revenue from urgent care and favourable case mix at BHSH, (iii) a receipt of EHR 10

12 incentive payment and an increase in surgical cases and in cases generating higher per case revenue at DPSC, and (iv) an increase in surgical cases and a receipt of EHR incentive payment at OSH. These favourable factors were partially moderated by a less favourable payor mix at SFSH and OSH, a decline in surgical cases at BHSH and lower charges per case at OSH. Despite an increase in surgical cases, the Corporation s ASC recorded a decline in facility service revenue which was primarily attributable to the planned movement to contracting with certain payors. This has resulted in lower reimbursement rates from these payors which have been partially offset by higher case volumes. Operating Expenses Consolidated operating expenses, including salaries and benefits, drugs and supplies, and general and administrative expenses, totaled million, an increase of 57.4 million or 35.7%, reflecting the acquisition of ASH and costs associated with the development phases of the primary and urgent care initiatives at SFSH and BHSH, respectively. As a percentage of facility service revenue, the consolidated expenses increased to 70.5% from 67.1% a year earlier. Table 12: Operating expenses by Center and corporate level for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 Twelve Months Ended December 31, % of facility service revenue 2012 % of facility service revenue ( 000s, except as indicated otherwise) 2013 Change % Change BHSH 50, % 44, % 5, % SFSH 51, % 43, % 7, % DPSC 8, % 8, % % OSH 51, % 49, % 1, % Newport Coast 5, % 5, % % ASH 45, % 3, % 41, % Corporate 5,721 n/a 6,255 n/a (534) (8.5%) Operating expenses 218, % 160, % 57, % Consolidated salaries and benefits increased by 20.0 million or 33.4% compared to the same period in 2012 due to the acquisition of ASH and increases in salaries and benefits at BHSH, SFSH, OSH and corporate level. Increases in salaries and benefits were primarily due to annual wages and salaries increases, higher case volumes, shifts in case mix, implementation of EHR at certain Centers, primary and urgent care initiatives at SFSH and BHSH, respectively, and employment of hospitalists at BHSH. Marginal shifts in salaries and benefits were recorded by DPSC and Newport Coast. At the corporate level, salaries and benefits increased primarily due to the contractual payments to a former officer of the Corporation. As a percentage of facility service revenue, consolidated salaries and benefits increased to 25.9% from 25.0% a year earlier. Consolidated drugs and supplies expenses increased by 25.8 million or 42.6% compared to the same period in 2012 primarily due to the acquisition of ASH and increases at all Centers. These increases were primarily attributable to higher case volumes, shifts in case mix, an increase in complexity of cases and inflationary vendor price increases. In addition, SFSH has been performing an increased number of pain management procedures which involve implantation of expensive stimulators while other Centers had an increase in the types of cases which require the use of implants and thus generate higher supply cost per case. Moreover, in 2012, DPSC took advantage of one-time cost savings in respect of drugs and supplies. As a percentage of facility service revenue, consolidated cost of drugs and supplies increased to 28.0% from 25.3% a year earlier. Consolidated G&A increased by 9.2 million or 28.0% compared to the same period in Increases in G&A were primarily due to the acquisition of ASH and a G&A increase at SFSH, partially offset by a 11

13 decline in G&A at the corporate level and BHSH. SFSH recorded an increase in G&A due to EHR-related costs and higher pharmacy, contracted services and marketing costs. On the other hand, G&A at BHSH declined compared to the same period last year due to the employment of hospitalists, despite urgent care development costs. Other Centers recorded marginal changes in their G&A. The decline in G&A at the corporate level was primarily attributable to acquisition costs and costs related to the 5.9% debentures offering incurred in As a percentage of facility service revenue, consolidated G&A decreased slightly to 13.7% from 13.8% a year earlier. Consolidated depreciation of property and equipment increased by 2.3 million or 32.9% primarily due to the acquisition of ASH and increased depreciation attributable to the urgent care initiative at BHSH and investments in EHR systems. As a percentage of facility service revenue, consolidated depreciation of property and equipment increased slightly to 3.1% from 3.0% a year earlier. Income from Operations Consolidated income from operations of 91.2 million was 12.4 million or 15.7% higher than consolidated income from operations recorded a year earlier, representing 29.5% of facility service revenue compared to 32.9% in Table 13: Income from operations by Center and corporate level for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 Twelve Months Ended December 31, % of facility service revenue % of facility service revenue ( 000s, except as indicated otherwise) 2013 Change % Change BHSH 18, % 21, % (2,807) (12.9%) SFSH 38, % 35, % 2, % DPSC 7, % 5, % 1, % OSH 15, % 16, % (940) (5.7%) Newport Coast 3, % 4, % (1,216) (25.5%) ASH 13, % % 12, % Corporate (5,721) n/a (6,255) n/a 534 (8.5%) Income from operations 91, % 78, % 12, % BHSH s income from operations was impacted by a decline in surgical cases and costs related to its urgent care development phase. OSH s income from operations was impacted by a shift in case and payor mix. Newport Coast s income from operations was impacted by lower pain management revenues and lower reimbursement rates from certain payors. Amortization of Other Intangibles The increase of 4.4 million in amortization of other intangibles is primarily due to the acquisition of ASH. Finance Costs Interest Expense The decrease of 2.0 million in interest expense is primarily due to 2012 financing costs related to the issuance of 5.9% debentures in December Interest on Exchangeable Interest Liability The increase of 1.4 million in interest expense on exchangeable interest liability is primarily due to the increased distributions from the Centers in 2013.

14 Foreign Currency Losses (Gains) The change in the foreign currency losses (gains) of 8.2 million is attributable to the fluctuations in the value of the Canadian dollar in relation to U.S. dollar during 2013 compared to Change in Values of Convertible Debentures The convertible debentures are recorded as a financial liability at fair value and re-measured at each reporting date and the changes in fair value are included in net income and comprehensive income for the respective periods. Changes in the recorded values of the convertible debentures are driven by the changes in the market price of the Corporation s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S. dollar. Table 14: Calculation of the change in value of 5.9% debentures for the twelve months ended December 31, 2013 ( 000s, except as indicated otherwise) Dec. 31, 2013 Dec. 31, 2012 Change Face value of 5.9% debentures outstanding C41,800,000 C41,800,000 - Closing price of the Corporation s 5.9% debentures C C C4.00 Closing exchange rate of U.S. dollar to Canadian dollar Market value of 5.9% debentures outstanding 41,266 42,434 (1,168) As discussed in Section 8 Liquidity, Capital Resources and Financial Condition of this MD&A, the 7.5% debentures matured on April 30, From January 1, 2013 to the date of their maturity, the change in value of 7.5% debentures was 1,474. Change in Value of Exchangeable Interest Liability The liability for the exchangeable interest is recorded at fair value, which is re-measured at each reporting date, and the changes in fair value are included in net income and comprehensive income for the respective periods. Changes in the recorded value of the exchangeable interest liability between the reporting periods are attributable to (i) changes in the number of common shares to be issued for the exchangeable interest liability, which are driven by the distributions to the non-controlling interest during the twelve-month period ending on the reporting date, (ii) changes in the market price of the Corporation s common shares and (iii) fluctuations of the value of the Canadian dollar against the U.S. dollar. Table 15: Calculation of the change in value of exchangeable interest liability for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 Dec. 31, 2013 Dec. 31, 2012 Change Dec. 31, 2012 Dec. 31, 2011 Change ( 000s, except as indicated otherwise) Number of common shares to be issued for exchangeable interest liability 6,274,969 6,162, ,516 6,162,453 6,288,026 (125,573) Closing price of the Corporation s common shares C17.94 C13.84 C4.10 C13.84 C11.65 C2.19 Closing exchange rate of U.S. dollar to Canadian dollar (0.0221) Exchangeable interest liability 105,841 85,726 20,115 85,726 72,031 13,695 Exercise of exchangeable rights by non-controlling interests Liability to the holders of ASH s exchangeable interest recognized on acquisition of ASH - (3,599) Change in value of exchangeable interest liability 20,414 10,818 13

15 Income Tax Table 16: Current and deferred tax components of the income tax expense (recovery) for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012 ( 000s, except as indicated otherwise) Twelve Months Ended December 31, Change % Change Current income tax expense 1,929 2,198 (269) (12.2%) Deferred income tax recovery (13,136) (24,316) 11,180 (46.0%) Income tax recovery (11,207) (22,118) 10,911 (49.3%) The decrease in current tax expense is primarily attributable to higher interest expense claim for income tax purposes and the reduction in the amounts of the taxable realized foreign exchange gains. The decrease in deferred income tax recovery is primarily attributable to the tax effect of the change in exchangeable interest liability offset by the recognition of the deferred tax asset related to the Canadian cumulative tax operating losses during QUARTERLY OPERATING AND FINANCIAL INFORMATION Table 17: Summary of the eight most recently completed consolidated quarterly operating and financial results (unaudited) ( 000s, except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Facility service revenue 89,620 72,974 73,677 72,891 71,864 54,322 54,285 58,909 Operating expenses Salaries and benefits 21,350 19,601 19,439 19,556 17,317 14,615 14,080 13,922 Drugs and supplies 24,815 20,843 20,707 20,060 18,498 14,444 13,539 14,142 General and administrative expenses 11,194 10,799 10,405 10,679 10,880 7,465 7,478 7,193 Depreciation of property and equipment 2,505 2,458 2,312 2,191 1,948 1,736 1,723 1,714 Total operating expenses 59,864 53,701 52,863 52,486 48,643 38,260 36,820 36,971 Income from operations 29,756 19,273 20,814 20,405 23,221 16,062 17,465 21,938 Amortization of other intangibles 4,680 4,195 4,149 4,104 3,277 3,112 3,078 3,242 Finance costs Interest expense, net of interest income 958 1,201 1,142 1,719 2,826 1,315 1,295 1,273 Interest expense on exchangeable interest liability 2,738 1,995 1,939 2,334 1,846 1,635 2,126 2,017 Loss (gain) on foreign currency 2,573 (2,105) 3,079 2, (3,195) 1,549 (1,667) 6,269 1,091 6,160 6,068 5,323 (245) 4,970 1,623 Increase (decrease) in values of convertible debentures 188 (154) (3,232) 3,505 (1,753) 4,577 (709) 1,316 Increase (decrease) in value of exchangeable interest liability 9,609 7,816 (4,609) 7,595 (4,916) 10,254 2,403 3,077 Income (loss) before income taxes 9,010 6,325 18,346 (867) 21,290 (1,636) 7,723 12,680 Income tax expense (recovery) (12,031) (1,688) 3,588 (1,076) (18,629) (3,291) (712) 514 Net income and comprehensive income for the period 21,041 8,013 14, ,919 1,655 8,435 12,166 Attributable to: Owners of the Corporation 10,067 1,075 7,406 (7,308) 31,078 (4,298) 1,875 4,160 Non-controlling interest 10,974 6,938 7,352 7,517 8,841 5,953 6,560 8,006 Basic earnings (loss) per share attributable to owners of the Corporation (0.258) (0.152) Fully diluted earnings (loss) per share attributable to owners of the Corporation (0.258) (0.152)

16 7. PERFORMANCE MEASURES NON-IFRS FINANCIAL MEASURES The Corporation uses certain non-ifrs measures which it believes provide useful measures for evaluation and assessment of the Corporation s performance. Non-IFRS measures do not have any standard meaning prescribed by IFRS, are unlikely to be comparable to similar measures presented by other issuers, and should not be considered as alternatives to comparable measures determined in accordance with IFRS as indicators of the Corporation s financial performance, including its liquidity, cash flows and profitability. Income from operations, as used by the Corporation, is a non-ifrs measure used to measure operating results before amortization of other intangibles, interest expense, gains or losses on foreign currency and other non-operating income and expenses. Cash available for distribution (presented in Table 18 below) is a non-ifrs measure of cash generated from operations during a reporting period which is available for distribution to common shareholders. Cash available for distribution is derived from cash flows from operations before changes in non-cash working capital, less maintenance capital expenditures, interest and principal repayments on non-revolving debt obligations and non-controlling interest in cash flows at the Center level and gains or losses on foreign exchange forward contracts matured in the respective periods. Distributions (presented in Table 18 below) are a non-ifrs measure that represent the aggregate of dividends paid to common shareholders. The payout ratio (presented in Table 18 below) is a non-ifrs measure calculated as distributions divided by cash available for distribution. Pro forma cash available for distribution excluding realized gains or losses on foreign exchange forward contracts and interest expense on convertible debentures (presented in Table 22 below) is a non-ifrs measure calculated as the actual amount of cash available for distribution for the twelve months ended December 31, 2013 adjusted for the interest expense on the convertible debentures that are deemed to be converted and excluding realized gains or losses on foreign exchange forward contracts matured during the period. Pro forma dividend payments (presented in Table 22 below) are the amount of dividends expected to be paid over the period indicated, calculated as the number of common shares outstanding at the end of the period multiplied by the annualized dividend of Cdn1.125 per common share. 15

17 Table 18 below presents the reconciliation of cash available for distribution to the cash provided by operating activities. Table 18: Reconciliation of cash available for distribution to the cash provided by operating activities Three Months Ended December 31, Twelve Months Ended December 31, ( 000s, except as indicated otherwise) (unaudited) CASH PROVIDED BY OPERATING ACTIVITIES USD 30,463 26,225 85,275 77,145 Non-controlling interest in cash flows of the Centers (1) (14,524) (11,358) (44,447) (37,793) Interest expense on exchangeable interest liability (2) 2,155 1,846 9,006 7,624 Maintenance capital expenditures (3) (912) (1,100) (4,295) (3,526) Difference between accrual based amounts and actual cash flows related to interest and taxes (4) (1,307) 414 (5,195) (3,000) Change in non-cash operating working capital items (5) (1,290) (4,646) 4,901 (2,839) Realized gains (losses) on foreign exchange forward contracts which matured in the current period (6) (389) ,522 Repayment of debt (non-revolving) (7) (1,324) (1,010) (5,704) (3,349) CASH AVAILABLE FOR DISTRIBUTION USD 12,872 10,746 39,638 37,784 CDN 13,508 10,653 40,823 37,769 Realized losses (gains) on matured foreign exchange forward contracts, net of taxes USD 229 (221) (58) (2,078) CASH AVAILABLE FOR DISTRIBUTION EXCLUDING REALIZED LOSSES USD 13,101 10,525 39,580 35,706 (GAINS) ON FOREIGN EXCHANGE FORWARD CONTRACTS CDN 13,748 10,433 40,763 35,692 DISTRIBUTIONS CDN 8,822 7,967 34,402 31,467 CASH AVAILABLE FOR DISTRIBUTION PER COMMON SHARE (8) Including realized losses (gains) on foreign exchange forward contracts CDN Excluding realized losses (gains) on foreign exchange forward contracts CDN TOTAL DISTRIBUTIONS PER COMMON SHARE (8)(9) CDN PAYOUT RATIO Including realized losses (gains) on foreign exchange forward contracts 65.2% 74.7% 84.3% 83.3% Excluding realized losses (gains) on foreign exchange forward contracts 64.2% 76.4% 84.4% 88.1% Average exchange rate of Cdn to US for the period Weighted average number of common shares outstanding 31,366,749 28,328,681 30,474,446 28,336,905 Note 1: Non-controlling interest in cash flows of the Centers is deducted in determining cash available for distribution as distributions from the Centers to the non-controlling interest holders are required to be made concurrently with distributions from the Centers to the Corporation. Note 2: Interest expense on exchangeable interest liability represents a notional amount of interest expense deducted in the determination of net income and comprehensive income attributable to owners of the Corporation. It is added back to determine cash available for distribution as it is a non-cash charge and is not distributable to the holders of the non-controlling interest. Note 3: Maintenance capital expenditures at the Center level reflect expenditures incurred to maintain the current operating capacities of the Centers and are deducted in the calculation of cash available for distribution. Note 4: Cash flows from operating activities, as presented in the Corporation s consolidated statements of cash flows, represent actual cash inflows and outflows, while calculation of cash available for distribution is based on the accrued amounts and, therefore, the difference between the accrual based amounts and actual cash inflows and outflows related to interest, income and withholding taxes are included in Table 18 above. Note 5: While changes in non-cash operating working capital are included in the calculation of cash provided by operating activities, they are not included in the calculation of cash available for distribution as they represent only temporary sources or uses of cash due to the differences in timing of recording facility service revenue and corresponding expenses and actual receipts and outlays of cash. Such changes in non-cash operating working capital are financed from the available cash or credit facilities of the Centers. Note 6: Realized gains (losses) on foreign exchange forward contracts which matured in the current period are adjusted in the determination of cash available for distribution while they are excluded from cash provided by operating activities. Note 7: Repayment of non-revolving debt at the Centers level reflects contractual obligations of the Centers and is deducted in the calculation of cash available for distribution. Note 8: Calculated based on the weighted average number of common shares outstanding. Note 9: The Corporation s current level of annual distributions is Cdn1.125 per common share. However, due to the dividends paid on the additional common shares resulting from the conversion of 7.5% debentures into common shares, as discussed in Section 8 Liquidity, Capital Resources and Financial Condition of this MD&A, the average annual distribution per common share was Cdn1.129 in Cash available for distribution in the three-month period ended December 31, 2013 (Cdn13.5 million) exceeded the total amount of distributions in the same period (Cdn8.8 million) by Cdn4.7 million. On a per common share basis, cash available for distribution of Cdn0.431 was Cdn0.150, or 53.4%, higher 16

18 than distributions of Cdn0.281, resulting in a payout ratio of 65.2% as compared to a payout ratio of 74.7% in the same period in Compared to the three-month period ended December 31, 2012, the cash available for distribution in U.S.- dollar terms increased by US2.1 million primarily due to a stronger operating performance of the Centers, lower corporate expense and lower interest expense on convertible debentures, which were partially offset by a decline in foreign currency gains and higher provision for current income taxes (please refer to Table 19 below). Cash available for distribution in the twelve-month period ended December 31, 2013 (Cdn40.8 million) exceeded the total amount of distributions in the same period (Cdn34.4 million) by Cdn6.4 million. On a per common share basis, cash available for distribution of Cdn1.340 was Cdn0.211, or 18.7%, higher than distributions of Cdn1.129, resulting in a payout ratio of 84.3% as compared to a payout ratio of 83.3% in the same period in Compared to the twelve-month period ended December 31, 2012, the cash available for distribution in U.S.- dollar terms increased by US1.9 million as stronger operating performance of the Centers was partially offset by declines in foreign currency gains (please refer to Table 19 below). The following table provides the reconciliation of the Corporation s cash available for distribution to cash flows from the Centers. Table 19: Reconciliation of cash available for distribution to cash flows from the Centers Three Months Ended December 31, Twelve Months Ended December 31, ( 000s) (unaudited) Cash flows from the Centers: Income before interest expense and depreciation 33,910 27, ,096 91,900 Debt service costs: Interest (402) (444) (1,433) (1,850) Repayment of debt (non-revolving) (1,324) (1,010) (5,704) (3,349) Maintenance capital expenditures (912) (1,100) (4,295) (3,526) Cash available for distribution at Center level 31,272 24,964 94,664 83,175 Non-controlling interest in cash available for distribution at Center level (14,524) (11,358) (44,447) (37,793) Corporation's share of the cash available for distribution at Center level 16,748 13,606 50,217 45,382 Corporate expenses (1,655) (2,060) (5,446) (5,623) Interest expense on convertible debentures (592) (889) (3,301) (3,299) Realized gains (losses) on foreign exchange forward contracts which matured in the current period (389) ,522 Provision for current income taxes (1,240) (286) (1,929) (2,198) Cash available for distribution 12,872 10,746 39,638 37, LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION As noted in the cautionary language concerning forward-looking disclosures in Section 1 Caution Concerning Forward-Looking Statements of this MD&A, this section contains forward-looking statements including with respect to the Corporation s and the Centers abilities to renew and extend their respective credit facilities, the level of dividends and future contractual payments. Such statements involve known and unknown risks, uncertainties and other factors outside of management s control, including the risk factors set forth in Section 13 Risk Factors of this MD&A and the Corporation s most recently filed annual information form, that could cause results to differ materially from those described or anticipated in the forward-looking statements. 17