Outpatient Healthcare Services Benefit From Recession As Wage Pressures Decline; 50% Of Expenses For These Companies

• On 12:27 pm EDT, Monday September 21, 2009

67 WALL STREET, New York - September 21, 2009 - The Wall Street Transcript has just published its Medical Real Estate: Healthcare REITs, Long-Term Care Facilities & Hospitals Report report offering a timely review of the sector to serious investors and industry executives. This 45 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investor Perception -- Secular Shift -- Health Care Reform -- REITs Growth -- Public Markets -- Divident Yields -- Debt Levels -- Grow Generation -- Outpatient Versus Inpatient Care -- Health Care Delivery -- Leaseback Arrangements -- Skilled Nursing -- Seniors Housing -- Growth and Expansion -- Positioning the Company for Winning -- Portfolio Diversification -- Geographical Growth -- Advantages to Investing in Licensed Hospitals -- Higher Returns -- Underwriting -- Fragmented Industry -- Consolidation Opportunities -- Debt Refinancing -- Growth in Health Care Spending

Companies include: LifePoint Hospitals (LPNT); Community Health Systems (CYH); Psychiatric Solutions (PSYS) and Tenet (THC); Medical Properties Trust (MPW); Healthcare Realty Trust (HR); LTC Properties (LTC); Health Care REIT (HCN); National Health Investors (NHI); HCP Inc. (HCP); Alexandria (ARE); BioMed (BMR); Senior Housing Properties Trust (SNH); Omega Healthcare Investors (OHI); Ventas (VTR); Emeritus (ESC); Brookdale (BKO); Fannie Mae (FNM); US Physical Therapy (USPH); AmSurg (AMSG)

In the following brief excerpt from just one of the 9 interviews in the 45 page report, an industry expert on healthcare services discusses the outlook for the sector and for investors.

David Bachman is a Senior Research Analyst covering health care facilities and services at Longbow Research. He holds an MBA in finance and strategy, as well as a certificate in health systems management from Case Western Reserve University. Prior to joining Longbow Research, Mr. Bachman spent 10 years in health care administration with acute care, long-term care and behavioral care providers in Indiana, Ohio and New York. His primary areas of responsibility were revenue cycle management, patient flow, and clinic and ward operations management.

TWST: What's most impacting operating cost for these companies and how is that affecting revenues?

Mr. Bachman: On the cost side, interestingly, the recession or economic downturn has really been a tailwind for many of these operators because it has really helped them lower their salary, wages and benefits expense costs, which for most is the single largest expense line item. Oftentimes it can be 40% to 50% of revenue. Health care continues to be, of course, a people-intensive, employee-intensive type of business, as you can imagine with the nurses and everybody involved. What we have seen though, over the past 12 months or so, is consistently facility operators have seen that salary, wages and benefit line come down. The wage pressure has really come off. So many of them have either not given cost-of-living increases or have limited those based on what they've seen in the past. Some have even cut some of their benefits, feeling that they are not competing as much as they had been in the past to keep talent. Probably the single most important thing, however, is as people are looking around and they are seeing job losses, people who have a job and are employed in health care are not leaving their job. So the number of people quitting positions, the turnover rate, has slowed pretty dramatically, and that's really created a tailwind for companies in terms of keeping costs down, which has really helped them to boost earnings because it is such a big expense line item. In terms of overall revenue growth, as I've alluded to already, we have not seen really strong volume growth - some on the outpatient side, very weak to no growth on the inpatient side. But many facility operators have continued to get pretty strong reimbursement. Medicare reimbursement so far has held up pretty well, within the range historically where the reimbursement rates have been. Managed-care reimbursement rates have held up. So they've gotten some pricing as well. The impact of the lower-wage pressure with continuing to get some decent pricing has actually helped some of these facility operators manage pretty well through a challenging time.

TWST: What are some of your favorite names in this space and why? What do you think sets apart the better business models or the better management teams from the rest?

Mr. Bachman: My single best idea in terms of health care facilities right now is in the behavioral health care space. Psychiatric Solutions (PSYS) is the only pure-play inpatient behavioral health care operator that's publicly traded. Behavioral health care has far less economic sensitivity than the acute care hospitals, for example. Importantly, given where we started the conversation, for the vast majority of their patients - who are really patients who very much need intensive inpatient psychiatric care - at this point there are very few viable alternatives to the inpatient care that they provide. It's still a very fragmented industry, but they've got about 19% of the inpatient psychiatric beds in the country, and I think they are very well positioned to continue to grow and dominate that industry. PSYS trades at just 10 times our fiscal year 2010 EPS estimate. It looks, for a company that has strong double-digit earnings growth prospects, very compelling to us right now. A couple of other names, on which right now we are neutral-rated based on valuation but that we like, are really a play on that move toward an outpatient setting. And that would be AmSurg Corporation (AMSG), that operates outpatient surgery centers, and then a small stock, US Physical Therapy (USPH), that operates outpatient physical therapy clinics. Both of them have done a very nice job of managing through a difficult time and of really conveying to health care consumers the value proposition around their offerings in the outpatient setting. We think over the long term, both those companies are very well positioned for how we see health care delivery evolving.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 45 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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