07-17 09-17 11-17 01-18 03-18 05-18 07-18 HEALTRE SERVICES Healthcare Facilities Market Weight HOLDINGS, INC. ( $108.16 Outperform) Conference Call Takeaways Core Growth Accelerated in Q2 Solid volume and rate growth combined with strong expense management resulted in robust core EBITDA growth in Q2. Reported Adjusted EBITDA grew 6.6% y/y, with management indicating growth closer to 11% ex headwinds from the sale of Oklahoma hospitals and continued drag from recent acquisitions. This represents an acceleration from HSD % in Q1 despite Q1 benefiting from strong flu. Clearly business momentum is strong as evidenced by the company raising EBITDA guidance by $150M or 1.7% for the year. As good as the current business momentum is, 2019 is setting up just as strongly and mgmt. noted that guidance assumes continued drag from acquisitions and does not include any benefit from above average Medicare / DSH that could come with finalization of rates. Overall the setup here is clearly becoming more transparent and being reflected in the stock up 9-10%. We continue to see the risk / reward in as compelling at reiterate Outperform. Same Store Volumes SS admissions +2.7%, SS adjusted admissions +2.8%. was especially pleased with same facility managed care and exchange adjusted admissions +1.9%, the highest growth rate since 1Q16. SS Volume Trends by Payer SS Medicare admissions +3.6%, adjusted admissions +4.2%. SS Med Adv admissions +11%, 37% of total Medicare admissions. SS Medicaid admissions +1.6%, adjusted admissions -0.3%. SS managed care and exchange admissions +0.9%, adjusted admissions +1.9%. SS self-pay and charity admissions +7.8%, adjusted admissions +6.5%. TX and FL represent ~70% of uninsured admission. Other SS Volume Trends SS ER volumes -80bps. SS surgeries +2.3%, SS inpatient surgeries +1.7%, SS outpatient surgeries +2.6%. Behavioral admissions +3.0%, Rehab +7.4%, Cardio +2.5%, Births +0.4% Neonatal - 0.6% (patient days +1.8%), Urgent care -3.6% (+12% ex SS). Acuity Acuity increased in Q2, with SS case mix +4.1%. thinks acceleration in case mix driven is in part by service line initiatives plus lower acuity volume migrating to outpatient setting. Rate SS rev per adjusted admission +3.6%. Hospital-only Managed Care and exchange rev per adjusted admission +3.5%, YTD +5.0% Trading and Fundamental Data Target Price YE 18 $115 Prior Target Price NA Current Price $108.16 % Upside to Target 6% 52-Week Range $71-$110 Market Cap. (M) $37,780 EV (M) $72,881 EV/EBITDA 8.8x Shares Out. (M) 349 Avg. Daily Vol. (000) 1,614 Net Debt to EBITDA 3.9x Short-Interest Ratio 4.7 % of Float 2% Price Performance YTD LTM 23% 26% XLV 6% 8% S&P 500 5% 14% $112 $107 $102 $97 $92 $87 $82 $77 $72 Source: FactSet/Wolfe Research Justin Lake, CFA (646) 582-9280 jlake@wolferesearch.com Stephen Baxter, CFA (646) 582-9282 sbaxter@wolferesearch.com Shehryar Amir (646) 582-9285 samir@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications, Important Disclosures and Other Disclosures. WolfeResearch.com Page 1 of 5
Drag from Acquisitions New facilities were a 230bps headwind to EBITDA growth in Q2, implying a $48M headwind. These facilities will remain a headwind to EBITDA growth in 2H18 but hopes to get to breakeven by the end of the year, implying a nice tailwind to 2019 and beyond as margins continue to improve. Same Facility Margin / Expense Trends Same facility EBITDA margins +90bps. Same facility SWB down 50bps, same facility supplies down 20bps and same facility other opex down 20bps. Divisional Trends In general volume growth accelerated and was broad based across divisions. 12 of 14 divisions grew admissions, especially strong in 6 markets (North Texas, Gulf Coast, North Florida, San Antonio, central Texas and South Atlantic) with East Florida and Mountain divisions down. 12 divisions grew adjusted admissions. 5 divisions grew ED volumes. Emergency Department Same Store Freestanding ED volumes grew 14%. Hospital ER volumes declined 2.5%. Higher acuity ED visits grew, lower acuity ED visits declined. Medicaid ED volumes down 4.8%. Admissions through ER +3.4%. Trauma +3.3%, EMS +0.7%. Surgical Same Store Surgical admits 27.5% of total, generally consistent y/y. Strength in cardiovascular, vascular, orthopedic. 8 divisions grew inpatient surgeries. Outpatient surgeries showed strong growth. 12 divisions grew outpatient surgeries. Freestanding ASC surgeries +1.5%. Hospital-based surgeries +3.5%. Demand Growth First 3 quarters of 2017 reflected moderate growth but 4Q18 improved 1.8%. The company doesn t yet have #s for 1Q18 or 2Q18 see below for the full comment from President Sam Hazen. Well let me give a little backdrop first. If you look at 2017, we indicated throughout the year that we believe that the markets that we were in had strong fundamentals, and they would ultimately show themselves. They don't show themselves in every year consecutively, as we mentioned, but nonetheless, they do show themselves. And what we saw in 2017 was moderate demand growth in the first 3 quarters of the year across all of 's markets. But in the fourth quarter, we started to see some elevation in overall demand growth within our markets. It's stepped up almost 1.8%. We don't have the first quarter of '18 nor the second quarter yet. But it is our belief that the fundamentals within our market are in fact, strong, as we've mentioned historically. Commercial Coverage The company has seen data suggesting growth in employer commercial coverage, thinks that will translate into results and noted improvement in managed care trends this quarter. Also seeing that small group employees are offering coverage to a greater % of their employees. This supports what sees as a strong macro backdrop. Color on Recent M&A The Texas acquisitions have been a disappointment to date. Management believes they have turned corner on operations. Think LT they have made the right decision to expand their footprint in Houston. Savanah continues to be a LT play for the company. That market is performing about how thought it would. Savanah has really strong fundamentals in a tight certificate of need state (Georgia) but needs the right leadership, resources and strategy. thinks 3-5 years from now they will be in a really good position there. Finally, Mission Health in North Carolina is a logical acquisition candidate and has been impressed during diligence process. Medicare Rate Outlook Preliminary Medicare rate looks better than previous years but waiting for final rule to comment more conclusively. 4Q18 imbeds a Medicare rate update more typical of what has seen in recent years. Market Positioning thinks their competitive positioning is better now than a year ago, including access to capital, service line development, outpatient development, patient / doctor / labor satisfaction, etc. WolfeResearch.com Page 2 of 5
Outpatient Surgery Pleased with existing strategy and doesn t feel the need to go out and acquire a large ASC platform. WolfeResearch.com Page 3 of 5
DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Important Disclosures: Price Chart with Ratings and Target Price History Note: OP = Outperform; PP = Peer Perform; UP = Underperform Wolfe Research, LLC Fundamental Valuation Methodology: Fundamental Valuation Methodology: EV / EBITDA less Noncontrolling Interest Wolfe Research, LLC Fundamental Recommendation, Rating and Target Price Risks: Risks That May Impede Achievement of the Recommendation, Rating or Target Price: Industry downside risks include rate pressure from commercial or government payers, increased bad debt expense as more financial responsibility is shifted to the patient, pressure on volumes from economic weakness, pressure on volumes from payer efforts to reduce the use of costly hospital services, changes to Health Care Reform legislation resulting in fewer people having health insurance coverage, pressure on labor costs due to nurse and physician shortages, expense pressure from drug cost inflation and the risk of government investigations. Company specific downside risks include slowing volume trends and a continued moderation in the company s ability to drive market share gains due to increased competition. Wolfe Research, LLC Research Disclosures: Research Disclosures: None Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. WolfeResearch.com Page 4 of 5
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