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UGHS enters Dallas market with acquisition of second core hospital

Zacks Equity Research

UGHS enters Dallas market with acquisition of second core hospital

By Steven Ralston, CFA

Today University General Health System (UGHS) announced the acquisition of the South Hampton Community Hospital, a 111-bed, 270-physician facility located in Dallas, Texas. Of the $30 million purchase price, $28.5 million will be financed by Houston National Bank through a 4.25% 10-year installment promissory note. The transaction, which is expected to close by year-end 2012, is anticipated to add at least $40 million in revenue and $15 million in adjusted EBITDA in calendar 2013, implying only a two year payback on adjusted EBITDA.

To read our full research report on University General Health System, download it here: Zacks Reaffirms Recently Raised Price Target of $0.90

Entrance into Dallas Market: The acquisition marks University General’s entrance into the company’s second market and the further execution of management’s acquisition strategy with another core hospital. We expect the company to pursue the same strategy in Dallas as in Houston. The hospital will be upgraded with at least $1.0 million in capital improvements in order to enable the capability of providing concierge healthcare services. Importantly, South Hampton Community Hospital will be rebranded as University General Hospital – Dallas. The acquisition also includes a 22,000 square foot medical office building, which currently is approximately 55% occupied. Over time, University General should be able to improve the occupancy rate.

At some point, we expect the hospital serve as an anchor hub to several HOPDs (Hospital Out Patient Departments), which will enhance the offering of healthcare services and leverage the cost infrastructure of the Dallas system. In Houston market, University General has been extremely active in recent months by acquiring new facilities as HOPDs, namely 1960 Digital Imaging, three clinics at the Kingwood Diagnostic and Rehabilitation Center, the Robert Horry Center for Sports and Physical Rehabilitation Center and the sleep and imaging center in Baytown. Adding facilities as new HOPDs has multiple benefits, including driving incremental revenue growth, achieving economies of scale, boosting average daily inpatient census and often improving the company’s overall payer mix. Thus, the acquisition of South Hampton Community Hospital advances the company’s acquisition strategy by developing another system of healthcare facilities in a second metropolitan market and operating under the University General brand.

University General Expects To Turnaround South Hampton Community Hospital. The South Hampton Community Hospital has undergone two bankruptcies in the past decade and, according to University General’s management, has “had some challenges, multiple management companies that have failed.” South Hampton Community Hospital also received an “F” for safety from the Washington-based Leapfrog Group last week. Once the acquisition is consummated, University General plans to launch safety and quality improvements. South Hampton Community Hospital offers services similar to those at University General Hospital in Houston. The Dallas hospital specializes in orthopedic and cardiac surgery as well as urology, ear-nose-and-throat (:ENT), general medicine and bariatrics. In particular, University General Hospital in Houston has received national recognition for distinction in bariatric surgery from Blue Cross and Blue Shield of Texas. At the company’s initial core hospital in Houston, University General provides concierge service, and we would expect the company to bring that level of service to University General Hospital – Dallas.

We reaffirm our Outperform rating and price target of $0.90, which incorporates the significant positive revenue and EBITDA surprises into our valuation models, which are based on the company attaining first quartile valuation metrics of price-to-sales and enterprise value-to-EBITDA.

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