Happy Thursday Hospitalogists! Like I asked on Tuesday, I need a huge favor from you all. We're looking to the future of Hospitalogy's growth across this newsletter, community, and more. Could you please take 5 minutes to complete the below survey for me? I really appreciate it! Onward to today's post, which is Part 3 of the series on Ardent Health, healthcare's most recent gone-public hospital operator. Specifically I'm covering headwinds, challenges, and risk factors from an operating and investment perspective, and why I'd be hard pressed to invest in the hospital operator. |
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Ardent Health: Risks, Headwinds, and Comps |
Not everything is rosy for Ardent. They have several significant risk factors, and I think these are the main reasons why investors passed on the IPO. As always, these are my opinions of the business and not investment advice. But the risk factors identified below shouldn't be ignored and are actually pretty material headwinds to the overall business and perceived invest-ability. We'll touch on a few of these below, and they include: - Exposure to supplemental payments volatility
- REIT related party (Ventas) involvement and potential effects of this arrangement
- Weak margin and profitability profiles relative to peers (and in a rosy hospital operating environment in 2024)
- Lack of an ASC footprint, reliance on a few large employers, and tougher labor dynamics within mid-sized MSAs
- Poor hospital M&A environment may stunt growth or ability to enter new markets
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Volatility of Supplemental Payment Programs Can Materially Alter Ardent's Future Profitability |
Ardent receives disproportionate benefits from supplemental government payment programs directed via Medicaid and other state/federal funds (e.g., Medicaid 1115 waivers). This funding is, relatively speaking, volatile and hard to predict. - "Over the last several years, most states in which we operate have implemented or enhanced Medicaid reimbursement through supplemental payment programs. And while these supplemental programs are growing, it is important to put them in context. They can be complex, variable in their impact from quarter-to-quarter and when taken together with historical Medicaid reimbursement, are still well short of covering the cost to treat Medicaid patients. We believe it is important to understand this backdrop when discussing these programs." - HCA Healthcare Q2 2024 earnings call
Supplemental payment programs are a big unknown question mark for hospital revenues. They tend to vary quite a bit depending on state budgets or priorities at any given moment. When I worked on valuations including nonprofits where we saw significant supplemental dollars, we would ask our clients for their expectations on how these might trend over the coming years. They never had an answer for us, and that's all you need to know. Supplemental payments are impossible to predict. Look at HCA, for example: HCA noted supplemental payments as a headwind in 2023, but a nice $100M+ tailwind in the second quarter 2024. That's a massive delta. Why am I getting into all of this? Because Ardent receives material revenue from supplemental payments. Ardent specifically calls out two major state program changes starting or in effect in the near future, effectively giving the hospital operator commercial-level reimbursement rates for Medicaid patients: - "A new Oklahoma directed payment program (the "OK DPP") became effective on April 1, 2024. Under the OK DPP, hospitals will receive directed payments under Oklahoma's new Medicaid managed care delivery system, resulting in reimbursement near the average commercial rate.
- "In March 2024, New Mexico's Healthcare Delivery and Access Act (the "HDA Act") was signed into law. Subject to CMS approval, the HDA Act provides directed payments for hospitals that serve patients in New Mexico's Medicaid managed care delivery system, resulting in reimbursement near the average commercial rate, and once approved, is expected to represent a material rate uplift for us…we believe [the program] will be approved by early 2025
- Under the OK DPP and the directed payment program pursuant to the HDA Act, the preliminary estimate of our net benefit is in excess of $150 million on an annualized basis."
Adding to this, given its significant presence in east Texas, Ardent recognized $208M in revenue related to Texas' Waiver Program in 2024. In fact, ~60% of Ardent's total revenue and licensed bed footprint resides in Oklahoma and Texas. So any negative changes to these programs in particular would be devastating. On the other hand, any positive changes would obviously boost Ardent. But in general, the fluctuation introduces risk to cash flow and affects profitability in a material way, which I wouldn't like if I were an investor. So adding these expected dollars together, Ardent could receive up to $350M in additional revenue from supplemental dollars, which would have comprised almost 6.5% of net revenue in 2023. This amount is the entirety of Ardent's adjusted EBITDA margin. And you're saying it could be up in the air every year? |
Ventas Involvement and REIT Related-Party Transactions Creates Noise |
Ardent has some related party lease stuff going on with Ventas, where Ventas, a healthcare REIT, owns shares in the Ardent parent company and also owns most of the land & building Ardent operates on. Ventas also owns~6.5% of Ardent having recently sold some of its stake to Pure Health as described in part 1 I published on here two weeks ago.
That's not the only thing Ardent has been up to with Ventas. The two parties have engaged in a few sale-leasebacks, first in 2015 then in 2022. More context: |
Then in February 2022, Ardent and Ventas conducted another sale-leaseback, selling 18 medical office buildings ("MOBs") to Ventas for $204 million. Ardent then leased the space back from Ventas through a 12-year term with renewal options thereafter. 3 months later in May 2022, Ardent declared a special cash dividend, distributing $174.8 million in proceeds. Ardent distributed $17.1M to Ventas and $148.8 million to its majority shareholder, Equity Group Investments. Presumably Ardent retained the remaining ~$27 million but as an investor I would immediately question why they're going public now - raising $192M in an IPO to pay down debt - after declaring a $175 million special dividend on the heels of raising $200M in capital via a related party sale-leaseback. Is it me, or is this some financial engineering nefariousness going on behind the scenes? I'll withhold judgment unless someone from Ardent or Ventas wants to correct the record. But unless I'm misinterpreting the below, it's a huge eyebrow-raiser. |
Anyway, while this REIT ownership setup exists elsewhere (most notoriously lately with Steward Health Care and Medical Properties Trust, which also has involvement in Steward-run Hackensack Meridian Mountainside Medical Center, or in post-acute facilities like SNFs), the model differs from other publicly traded hospital operators. Like I mentioned above, we can get into some weird financial territory with a related party owning shares in Ardent but also owning the land and building underneath the hospital operations. You can move money around, or burden cash flows with high fixed costs. Notably, that's why Ardent presents adjusted EBITDAR as a key non-GAAP financial/valuation metric for its company and argued it should be valued based on EBITDAR and not EBITDA - therefore not comparable with peers. Yeah sorry…that's not how this works. And while I'm not an accountant, it looks sketchy when you add back related party expenses into your adjusted EBITDA metric: |
Right or wrong here, simply put, this related-party environment introduces noise for investors, and it would turn me off immediately. Keep this dynamic in mind as Ardent navigates the public markets. Engaging in a sale-leaseback introduces business risk. You're adding fixed costs (triple net leases) to your expense structure, which prevents Ardent from operating as nimbly as they might be able to otherwise, and this dynamic could have a serious dampening effect on its ability to grow, or health system transformation efforts, or even its willingness to engage in things like ASC network development/buildout or population health initiatives that may bolster bottom lines in the coming years. Again, this is a 'tread carefully' situation, not a death knell. But take a look at what REIT exposure and sale-leasebacks did to the SNF industry for an example of what can go wrong QUICKLY for stakeholders and outside investors. |
How Ardent Stacks up to Peers |
Valuation, Revenue Growth, Operating Performance, and Profitability. As you can see in the charts and tables I've pulled together below, Ardent is trading generally at a discount to other hospital operators (and I believe there's some non-controlling interest causing noise understating the Tenet multiple that I'd need to double-check - I just pulled these from the stock screener TIKR). This data is as of 8/7/2024, and financials are as of Q1 2024 given this was Ardent's most recently available financial data through its S-1. Ardent is a significantly smaller operator than its publicly traded peers across multiple dimensions. It has also seen the most adjusted EBITDA margin decay from FYE 2021 through Q1 2024, though all hospital operators have seen margin recovery starting in 2022. Combined with the dynamics described above, you can probably see why investors are discounting Ardent - a mid-sized health system if you look across both for-profit and nonprofit entities - when more attractive players like HCA, Tenet, and UHS are firing on all cylinders. |
Here's another view looking at trended revenue and adjusted EBITDA performance over the past 2.25 years. It paints a similar picture and the contrast in size and performance is even more apparent. As the labor market and inflation dynamics struck hospitals hard in 2021, Ardent experienced the heaviest hit to margins. I'd speculate this is because its pool of clinical talent isn't as strong, and it likely had to pay premiums to staff its hospitals. |
Share Performance. How has Ardent fared in the public markets so far, and how is it trading vs. its peers? Albeit on an unbelievably small sample size and with its peers having reported solid Q2 earnings results across the board, Ardent is significantly lagging behind HCA, Tenet, UHS, and CHS on share price performance since its debut on 7/18/2024. This may turn around once Ardent reports its second quarter - its first quarterly earnings as a publicly traded company on August 14. Given the results of its peers, I'd expect to see better performance in Q2 and margin expansion. |
Alright, hopefully these last 3 weeks have provided you with a pretty fair and balanced perspective on Ardent Health - the latest hospital operator to hit the public markets.
We talked about Ardent's history, how it rose to become a market leader across multiple states in mid-sized MSAs, its growth strategy, its financial backers, its M&A, its investment into technology (single Epic instance) and tech partnerships.
We also discussed Ardent's operating strengths and tailwinds, including a JV-heavy model, historical financial trends, and other competitive advantages.
Finally, today, we wrapped up the Blake Madden Hospitalogy take on Ardent by stacking up Ardent against its publicly traded peers and talked about some of the challenges or risks they might face as an operator, or investors may face in holding shares in the company. Ardent's next chapter begins on 8/14 when it reports its Q2 financials, and plenty of eyes will be on the mid-sized player.
I hope you found the write-ups over the last 3 weeks valuable! If you did, please consider passing it along to colleagues and other healthcare folks as that helps me continue to do this whole newsletter and community thing for you guys.
As always, if you have any commentary about any of the above, feel free to reach out.
Until next time! |
For exclusive content, access to original research from me, and thoughtful conversations / networking around healthcare issues that matter across siloes, join the Board Room community! Reply to this email to ask any questions or learn more from me. |
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| I want to give a big shout out to my better half Emily, who is a speech-language pathologist and is transitioning to a new office in Dallas. She spends her professional career pouring into kids with autism and other communication challenges, and hearing her talk about her patients' reactions to her departure was both heartwarming and bittersweet. Emily is a fantastic therapist and is on to even bigger and better things (like a much shorter commute!!) |
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Thanks for the read! Let me know what you thought by replying back to this email. — Blake |
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