ACHC | Forego Top- Line Opportunity or Break From Historical Margins
Background
When we added Acadia Healthcare (ACHC) as a Best Idea Short on December 14, 2021, we highlighted the significant opportunity for mental health services in a post-pandemic world while also pointing out the potential headwinds for legacy providers. The favorable demand backdrop has encouraged a number of new market entrants which compete either directly or indirectly with acute care facilities for patients and labor; from lower acuity options like BetterHelp and Talkspace, to higher acuity options like our Best Idea Long, Lifestance (LFST). We think ACHC’s well-regarded commitment to margin stability is likely to become a headwind as they are forced to choose between managing costs against growth and margins.
Since our Black Book, ACHC announced 2 additional joint ventures and the acquisition of CentrePoint Behavioral Health (which includes 14 additional facilities that will be financially accretive immediately). The company’s presentation at JPM stated their labor costs were not out of control. Also, the Hedgeye Macro outlook shifted from Quad 1/Shallow Quad 4 in 1Q22 to a full Hedgeye Macro Quad 4 which carries a positive factor list of Low Beta/Quality/Value/Defensive and a negative factor list of Secular Growth/Cyclical/Leverage/High Beta. We believe ACHC is better matched with the negative factors of Macro Quad 4.
Thesis
Alongside reports of Health Care labor fatigue, burnout, and moral injury, newly released data from the Bureau of Labor Statistics (BLS) shows the labor situation continues to deteriorate through December 2021. In contrast to acute care hospitals, psychiatric and substance abuse hospitals don’t have the tailwind of rising acuity and its related reimbursement to help offset wage growth in the high single digits. In the macro data for psychiatric and substance abuse hospitals, we see this trend in the -5.5% decline in aggregate weekly hours combined with wage growth of +12.8% YoY, a trend that almost certainly is leading to simultaneous revenue and margin pressure.
Given the set-up here, ACHC has two options in the near- term. Either pay higher wages to retain and attract talent in order to capitalize on the incremental revenue opportunity in mental health, therefore breaking from their historical discipline in maintaining SWB margin and missing on EBITDA. Alternatively, management could elect to delay capex spending on scheduled projects, as they did in 4Q21, to maintain SWB margins and historical staffing ratios, therefore forfeiting the top- line opportunity in the near- term.
In order to better anticipate which strategy they choose to employ, we have developed a locations tracker for ACHC’s US behavioral healthcare facilities from their filings and our own proprietary databases. Utilizing the ACHC Provider Tracker, we can not only map and measure ACHC’s facilities (regardless of acquisition, new build, or JV) by type and services provided, but also follow the number of providers listing their work address at these locations. We plan to run this tracker monthly and back test our results against company reported quarterly results with an expectation that headcount and turnover in the ACHC Provider Tracker will correlate to revenue and cost trends.
From the tracker's first iteration, we can see that the company added approximately 100 providers in 4Q21, the majority of which are counselors and the states with the largest number of net additions were in Pennsylvania, Massachusetts, and Wisconsin. From the company’s intentions (noted in their press releases) to ramp the existing Tower Behavior Health Facility to 144 beds and the estimated open date of a 192-bed facility in conjunction with Geisinger Health, we believe the tracker is working correctly. Additionally, the reported bed count of approximately 10,500 beds from their presentation and the 3,440 employees from our data would seem to indicate that ACHC has chosen to defer expansion in lieu of keeping wages “manageable” as they stated at JPM.
Lastly, we believe the acquisition of CentrePoint, which closed on January 3, 2022, but is marked as December 31, 2021, in their presentation may be an indication that our forecast algorithm for ACHC’s US Same Facility Admissions will experience a sequential decline YoY in 4Q21.
Valuation
Following client pushback on the pre- divestiture multiple paired with the company’s additional metrics provided in their JPM presentation, we have fully scrubbed both the company’s press releases and our own data. Noting the discrepancy of the CentrePoint acquisition and subsequently mapping out the company’s “strong growth trajectory” strategy, we have modeled 2021 revenue in-line with the midpoint of their implied guidance at $2.304B versus $2.305B.
Drilling down on ACHC’s hiring to this point, as well as the continued worsening trends in labor inflation, we are expecting a miss in 2022 revenue of $2.434B versus consensus of $2.481B. Despite the favorable impact of the CentrePoint acquisition and 1H22 openings of the Chicago, IL, and Indio, CA, facilities, we expect 20%-35% downside from the current price with potential for further downside in the out years following poor performance in the near-term.
Catalysts
- FY21 Earnings & Behavioral Health Read- Throughs | When ACHC reports in February of 2022, we will have a significantly better understanding of their recent M&A activity, guide for 2022 metrics, and potential disruption in staffing. Before this release, the company will not be forced to report the tailwinds or headwinds they are experiencing. Commentary from additional behavioral health names during the earnings season should provide insights into these numbers.
- ACHC Behavioral Healthcare Facilities Tracker | Utilizing this tool, we can better anticipate which strategy they choose to employ. From the tracker's first iteration, we can see that the company has added approximately 100 providers in 4Q21, the majority of which are counselors. The states with the largest number of net additions were Pennsylvania, Massachusetts, and Wisconsin.
- Forecast Algorithm for US Same Facility Admissions | When we updated our forecast algorithm for ACHC’s US Same Facility Admissions, we found a sequential improvement of slightly more than 150bps in both our Top Model (previously +1.63% YoY) and Top 50 Model (previously 2.22% YoY) Forecasts. Despite the improvement from last update, our algorithm forecasts a sequential decline in the YoY metric.
- HC Macro Data for ACHC- Type Facilities | In contrast to acute care hospitals, psychiatric and substance abuse hospitals don’t have the tailwind of rising acuity and its related reimbursement to help offset wage growth in the high single digits. In the macro data for psychiatric and substance abuse hospitals, we see this trend in the -5.5% decline in aggregate weekly hours combined with wage growth of +12.8% YoY, a trend that almost certainly is leading to simultaneous revenue and margin pressure.
Risks
- Additional M&A To Offset Organic Weakness | Similar to the acquisition of CentrePoint, ACHC has a number of attractive M&A opportunities that could be used to quickly offset gaps in organic volume or volume “missed” due to capex deferrals. These facility acquisitions can be quickly onboarded and have a material impact given their existing facilities and staff. Going forward, these acquisitions become a part of the company’s base and beds can be added to the existing entity over time.
- Solutions for Labor Headwinds (Scarcity, Outages) | As noted above, ACHC has a disciplined approach to not only their capital allocation strategy, but also their hiring process, evidenced by the company’s historical SWB Margin and below-industry-standard % of agency labor. Should the company be able to effectively avert the labor headwinds others are facing, that would be contradictory to our thesis.
Key Slides
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Thomas Tobin
Managing Director
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