Healthcare Valuation Trends Report Q2 2019 Healthcare Valuation Trends Report Unique Solutions for the Healthcare Industry Sector Highlights Objective Our objective for this quarterly healthcare market update is to provide a high-level summary of healthcare providers. While there are many healthcare indexes and healthcare market updates available, few or none cover healthcare providers only. This market overview intentionally excludes payors, HIT companies, staffing companies, life sciences, and other non-provider organizations. Industry Fragmentation Except for dialysis services, most healthcare sectors are highly fragmented. As such, public company information provides limited insight into the innerworkings of an industry segment. In addition, each public company has a unique focus and value proposition. This overview is intended to convey general market sentiment. Industry Themes We expect four “C”s to drive much of the year 2019: Capital, Convergence, Customization, and Connectivity. CAPITAL: merger and acquisition activity is expected to be near or above prior year levels, with the healthcare IT and home health & hospice sectors anticipated to outpace other healthcare industry sectors. Continued CONVERGENCE of payers and providers, as evidenced by the mergers between CVS and Aetna, Humana and Kindred, and UnitedHealth and Optum. CUSTOMERIZATION will continue to drive care delivery models that provide a high degree of convenience to patients, such as telehealth, drug dispensation, and connected devices. Finally, CONNECTIVITY, between disparate systems, devices, and individuals will grow exponentially, as robotics, IoT, AI, wearables, et cetera evolve and become more sophisticated. Disclaimer: LBMC Healthcare Valuation Trends are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice. Q2 2019 Healthcare Valuation Trends Report 2 Unique Solutions for the Healthcare Industry Health Systems HEALTH SYSTEMS - SECTOR HIGHLIGHTS The fragmented acute care hospital industry continues to consolidate - Enterprise Value / EBITDA both vertically and horizontally. EBITDA multiples have been in the 8-9x range for HCA, THC, and UHS. As CYH and QHC EBITDA margins have 16 improved over the last twelve months, EBITDA multiples have 14 moderated and forward multiples are in line with the overall group. CYH 12 is notable for its 455 basis point improvement in its EBITDA margin. 10 Ardent Health's December 2018 filing for an initial public offering will 8 add another health system operator to the roster of publicly traded 6 companies. According to Ardent's March 6 filing with the Securities and 4 Exchange Commission, the company operated 30 acute care hospitals 2 (4,395 licensed beds) at December 31, 2018, and provided physican and other ancillary services. 0 CYH HCA THC UHS QHC 2018 2019 NTM Stock Price TEV/Revenue EBITDA Margin Debt / TEV/EBITDA Company Ticker 2018 2019 TEV LTM NTM LTM YoY Δ (bps) EBITDA LTM NTM Community Health Systems, Inc. CYH $ 4.09 $ 2.66 $ 14,192.3 1.03 1.09 11.2% 455 8.79 9.18 8.60 HCA Healthcare Inc HCA 103.14 120.96 78,667.2 1.65 1.51 19.5% 76 3.94 8.47 7.89 Tenet Healthcare Corporation THC 35.43 19.96 19,018.6 1.05 1.03 13.0% 34 6.72 8.08 6.95 Universal Health Services, Inc. Class B UHS 114.98 119.55 14,780.0 1.36 1.29 15.6% (74) 2.50 8.72 7.87 Quorum Health Corp. QHC 4.10 1.76 1,263.2 0.69 0.69 6.3% 108 11.17 10.96 7.51 Outpatient Based Services OUTPATIENT SERVICES - SECTOR HIGHLIGHTS With exception of the dialysis industry, outpatient based services continue to be highly fragmented. Median EBITDA multiples have Enterprise Value / EBITDA declined modeslty, from 11.0x in 2018 to 10.0x in 2019. 25 The table below groups the three publicly traded dialysis companies 20 (American Renal, DaVita, and Fresenius) together. Direct comparisons between the three companies can be challenging due to the scale of 15 DaVita and Fresenius relative to American Renal. In addition, Fresenius derives a portion of its revenues and earnings from products and 10 services outside the dialysis industry. 5 0 RDNT SEM SGRY USPH ARA DVA FMS 2018 2019 NTM Stock Price TEV/Revenue EBITDA Margin Debt / TEV/EBITDA Company Ticker 2018 2019 TEV LTM NTM LTM YoY Δ (bps) EBITDA LTM NTM RadNet, Inc. RDNT $ 12.70 $ 12.08 $ 1,341.2 1.32 1.21 11.9% (26) 5.61 11.15 7.92 Select Medical Holdings Corporation SEM 18.10 14.05 5,989.1 1.16 1.11 12.2% 40 6.96 9.55 8.73 Surgery Partners, Inc. SGRY 16.25 8.57 4,086.3 2.31 2.16 18.4% 248 7.48 12.51 14.70 U.S. Physical Therapy, Inc. USPH 93.35 111.71 1,568.4 3.40 3.11 15.7% 13 1.56 21.68 22.04 American Renal Associates Holdings, Inc. ARA 14.44 6.49 1,032.6 1.26 1.14 21.3% (106) 3.18 5.93 8.07 DaVita Inc. DVA 66.84 43.42 18,494.2 1.64 1.59 18.3% (320) 6.51 8.95 8.47 Fresenius Medical Care AG & Co. KGaA SpFMS 49.92 36.41 37,409.7 1.94 1.87 19.7% 378 3.90 9.83 9.21 Source: FactSet financial data and analytics. Q2 2019 Healthcare Valuation Trends Report 3 Unique Solutions for the Healthcare Industry Behavioral Health Services BEHAVIORAL HEALTH - SECTOR HIGHLIGHTS The fragmented behavioral health industry has been represented by three publicly traded companies in recent years. While Acadia(ACHC) Enterprise Value / EBITDA provides a broad spectrum of inpatient- and outpatient-based 14 behavioral health services, AAC Holdings is focused on substance abuse 12 treatment services. Meanwhile, Civitas Solutions is a provider of home- and community-based health and human services. On March 8, 10 2019, Civitas Solutions was taken private through a merger transaction. 8 6 4 2 0 AAC ACHC 2018 2019 NTM Stock Price TEV/Revenue EBITDA Margin Debt / TEV/EBITDA Company Ticker 2018 2019 TEV LTM NTM LTM YoY Δ (bps) EBITDA LTM NTM AAC Holdings, Inc. AAC $ 10.76 $ 0.90 $ 347.3 1.27 1.20 -9.4% (2,299) (15.73) n/a 6.91 Acadia Healthcare Company, Inc. ACHC 40.19 32.22 6,123.6 2.02 1.91 18.6% (181) 5.88 10.88 9.74 Assisted Living and Skilled Nursing ASSISTED LIVING AND SKILLED NURSING - SECTOR HIGHLIGHTS The Assisted Living and Skilled Nursing Industry has faced several headwinds in the recent past, primarily related to declining census (in Enterprise Value / EBITDA part driven by declining lengths of stay) and staffing shortages. As a 18 result, most of the publicly traded companies had experienced EBITDA 16 margin pressure. 14 12 As shown in the table below, the three companies with a focus on 10 assisted living facilities (Brookdale, Capital Senior Living, and Five Star) 8 have experienced larger declines in EBITDA margins than those companies with a focus on skilled nursing facilities (Diversicare, Ensign 6 Group, Genesis, and NHC). 4 2 FVE intends to undergo a one-for-10 reverse stock split in September 0 2019 to bring the company into compliance with Nasdaq listing BKD CSU DVCR ENSG GEN NHC standards. 2018 2019 NTM Stock Price TEV/Revenue EBITDA Margin Debt / TEV/EBITDA Company Ticker 2018 2019 TEV LTM NTM LTM YoY Δ (bps) EBITDA LTM NTM Brookdale Senior Living Inc. BKD $ 7.87 $ 6.18 $ 5,296.9 1.21 1.32 11.4% (149) 9.04 10.61 12.43 Capital Senior Living Corporation CSU 10.91 4.19 1,073.3 2.34 2.34 14.0% (527) 19.62 16.68 13.59 Five Star Senior Living Inc FVE 1.30 0.61 0.5 0.00 n/a -4.2% (437) (25.79) (0.01) n/a Diversicare Healthcare Services, Inc. DVCR 7.21 3.67 95.6 0.17 n/a 1.1% (176) 11.94 15.32 n/a Ensign Group, Inc. ENSG 36.61 53.26 3,187.7 1.52 1.31 9.1% 125 6.67 16.72 12.76 Genesis Healthcare Inc Class A GEN 2.10 1.13 1,770.9 0.37 0.39 7.6% (47) 5.67 4.79 11.13 National HealthCare Corporation NHC 66.40 77.67 1,057.7 1.07 n/a 10.2% (26) 0.79 10.50 n/a Source: FactSet financial data and analytics. Q2 2019 Healthcare Valuation Trends Report 4 Unique Solutions for the Healthcare Industry Home Health and Hospice HOME HEALTH & HOSPICE - SECTOR HIGHLIGHTS The publicly traded home health and hospice sector saw significant changes and record multiples in 2018 and into 2019. Enterprise Value / EBITDA 30 In April 2018, LHC Group completed its acquisition of Almost Family, which operated 330 home healthcare locations across 26 states. In July 25 2018, Humana, along with private equity firms TPG Capital and Welsh, 20 Carson, Anderson & Stowe, completed the acquisition of Kindred Healthcare. The company's approximately 600 home health, hospice, 15 and community care sites, are being operated by Humana, while the private equity groups will assume responsibility for the hospital-based 10 services, which includes a portfolio of ~75 LTAC hospitals, ~20 IRFs, and 5 nearly 100 ARUs.