Community Health Systems, Inc. CYH has signed a definitive agreement to sell four South Carolina hospitals along with related businesses, including physician clinic operations and outpatient services, to the Medical University Hospital Authority in Charleston, SC.
The transaction is expected to close in the first quarter of 2019, subject to customary regulatory approvals and closing conditions. The four hospitals to be divested are among the additional planned divestitures discussed on the company’s third-quarter 2018 earnings call.
These divestitures are part of Community Health’s massive debt restructuring program to reduce its highly leveraged balance sheet. The company’s debt woes started post acquisition of Health Management Associates in 2014, consequently resulting in a huge debt load (deal price was $3.9 billion and debt totaled $3.7 billion). As a consequence of this deal, its debt level soared from $9.3 billion in 2013 to $16.7 billion in 2014.
Though its debt has reduced to $13.5 billion (as of Sep 30, 2018), the level still remains very high. Along with the huge debt load, the company was also suffering from a decline in patient volumes and high uncompensated care. Community Health suffered a double whammy as a result.
Consequently, this took a toll on its revenues, which has been declining from 2016 through the first nine months of 2018. High operating cost and constrained revenues in turn weighed on its EBIDTA, which has been falling from 2015 through the first nine months of 2018.
Additionally, doubts surrounding the company’s ability to cover its interest expense persist. Its times interest earned ratio, which measures the company’s interest paying ability, deteriorated from -0.8% in 2016 to -1.9% as of Sep 30, 2018. The company is running a stockholders’ deficit of $1.2 billion as of Sep 30, 2018.
Investors lost confidence in the company, which resulted in the free fall in share price and a decline in market capitalization, which plummeted from $4.47 billion recorded four years ago (November 2014) to $0.4 billion (at present).
Notably, the company’s shares have lost 8% in a year’s time against the industry’s growth of 59%.
The scenario looks further discouraging when compared with the performance of other players in the industry. For instance, HCA Healthcare Inc. HCA, Tenet Healthcare Corp. THC and Universal Health Services, Inc. UHS recorded a gain of 88%, 78% and 37%, respectively, in the same time frame.
In response, the company has undertaken hospital divestitures to weed out the unprofitable ones. This will enable it to consolidate operations and generate funds for paying down debt and reducing leverage ratio to strengthen capital position.
As part of its ongoing portfolio rationalization efforts, the company sold 30 hospitals during 2017. Its current divestiture plan calls for sell-out of hospitals that accounted for at least $2 billion of net revenues and mid-single-digit EBITDA margin in the full year of 2017. These asset sales are expected to generate approximately $1.3 billion of gross proceeds for Community Health.
Overall, the company anticipates volumes to improve as a result of portfolio rationalization execution of core operational strategies. It expects these strategies along with its continuous focus on expense management to aid in driving improved same-store net revenues and EBIT growth over the next 6-12 months.
Moreover, the company gets paid by the government on Medicaid and Medicare accounts. Community Health mentioned that the Medicare and Medicaid environment has been more stable in contrast to full-year 2016 and 2017. It expects the environment to remain stable in 2019 as well. This is likely to remove its reimbursement pressure, as well as aid earnings from Medicaid and Medicare businesses.
Other multi pronged growth initiatives are formation of Accountable Care Organizations, investment in outpatient facilities and additional expense reduction efforts.
For full-year 2018, the company’s same-store adjusted admission growth guidance is anticipated to be down 1% to flat and net operating revenues less provision for doubtful accounts between $14 billion to $14.2 billion (translating into a year-over-year decline of 8%). Adjusted EBITDA is anticipated within $1.6-$1.65 billion, up 31% year over year.
Income from continuing operations per share is anticipated to be negative $2.25 to $2.10, based on the weighted average diluted shares of nearly 113 million. This is wider than the loss of $1.19 per share reported in 2017.
Though the guidance still does not point the company’s total reversal to profitability, yet we believe that the numerous growth initiatives will gradually help it recover.
Community Health currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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