University General begins building out healthcare system in Dallas

Zacks Small Cap Research

By Steven Ralston, CFA

Earlier today University General Health System (UGHS) announced the acquisition of Ennis Healthcare Systems, a physical therapy center located in a suburb of Dallas. As anticipated, the company has begun to replicate the successful model implemented in Houston. This is the first ancillary acquisition the company has made in Dallas since it entered the market in December 2012 with the purchase of South Hampton Community Hospital.

Ennis Healthcare Systems is a physical therapy, rehabilitation and pain management facility. It will operate as an HOPD (Hospital Out-Patient Department) of University General Hospital – Dallas. Management expects that the facility will refer patients to University General Hospital Dallas, just as the Houston HOPDs refer patients to University General Hospital in Houston. In this manner, HOPDs serve dual functions. 1) They operate as profitable standalone satellite facilities, and 2) they also help raise overall occupancies at the core hospital facility. Ennis Healthcare Systems will be rebranded to leverage what we believe is growing recognition of the University General name within Texas.

 

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This system has enabled University General Hospital – Houston to boost hospital occupancies and, in turn, to improve economic productivity. Specifically, the company recorded an impressive 74.4% revenue advance in the third quarter of 2012, primarily due to a 15% improvement in the average daily inpatient census at the Houston hospital. Overall, the Houston hospital is operating well above its 38% breakeven threshold.

Financials are expected to improve in 2013 at UGH Dallas

Management believes there is significant upside opportunity at University General Hospital – Dallas, which was an underperforming facility compared to the company’s initial hospital in Houston. UGH Dallas is a 111-bed, 270-physician facility, which was operating significantly below its breakeven threshold at the time of the acquisition in December 2012. By developing a healthcare ecosystem with satellite HOPDs around a core hospital, management expects to improve capacity utilization mimicking the successful growth trajectory experienced in developing the University General Hospital system in Houston. Management has indicated that once census exceeds the breakeven point, incremental revenue is expected to contribute towards profitability at approximately a 75% margin.

UGH Dallas generated $11.3 million in net revenue during the first nine months of 2012. However, management expects the Dallas facility to contribute $40 million to its consolidated revenue and $15 million to consolidated EBITDA in 2013 as a result of substantially improving census and operating efficiency. Earlier this week, the company announced that year-end 2012 results are expected to be filed within the next 15 days; however, overall occupancy the University General hospital in Houston for 2012 should be approximately 58%, an 11% improvement over 2011. In addition, 2012 revenues should be in excess of $118 million, an approximate increase of 64% over 2011 revenues.

Although the acquisition price for Ennis Healthcare Systems was not disclosed, we believe that management has been made attractive acquisitions in the past, especially relative to forward-looking metrics once the facilities have entered the UGH system. Management expects Ennis to contribute more than $2 million to annual revenue and $700,000 of EBITDA.

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