Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A. Addus Homecare (Nasdaq: ADUS) Highlights Addus’ top line growth continued as revenue in Q1 2024 increased 11.6% compared to Q1 2023. Despite continued revenue growth, ADUS’ profitability in Q1 2024 decreased slightly when compared to Q4 2023 – gross profit margin decreased ~2%, operating income margin decreased ~1.5%, and EBITDA margin decreased ~3%. This was due to “annual merit increases and the annual reset of payroll taxes as well as compression from certain collective bargaining negotiations”, Brian Poff, CFO. Comments on the final Medicaid access rule: Disappointed that the rule maintained the proposed 80% requirement. Welcomed that the implementation period increased from four to six years. Encouraged by the positive technical adjustments made – for example, training, mileage, and PPE will be deducted from total payments before calculating the 80% requirement. Compensation will also include PTO, retirement, insurance, workers’ compensation, and tuition. In Q1 2024, ADUS began using its new value-based care management system, which is expected to develop payor relationships and assist in reimbursement rate negotiations. Key Financial Figures M&A Activity ADUS expressed that the Medicaid access rule will lead to an active M&A market as it encourages scale and impacts small providers. Dirk Allison, CEO, expressed that “acquisitions will continue to be an important part of our growth strategy at Addus.” However, the acquisition strategy is different for the personal care and clinical segments: Personal care: Allison commented, “With the Medicaid access rule finalized, we are focused on opportunities that will help us obtain the needed scale in our current personal care markets to operate more efficiently.” Clinical: Allison mentioned “We are focused on home health opportunities, which operate in certain of our personal care states where we have the opportunity to continue our growth in value-based care and to complement existing hospice operations.” Guidance For 2024, excluding M&A, ADUS expects its gross margin percentage to remain stable and adjusted EBITDA margin to remain above 11%, consistent with 2023. Aveanna Healthcare (Nasdaq: AVAH) Highlights Revenue in Q1 2024 increased 5.2% in comparison to Q1 2023. Private Duty Services (PDS) was responsible for ~90% of this increase.  Gross profit margin decreased ~2%, however operating margin increased ~1% and EBITDA margin increased ~0.5%. AVAH grew revenue and EBITDA growth by focusing clinical capacity on preferred payers. Aveanna continues to work on its strategy to successfully negotiate reimbursement rate increases. For 2024, the goal is to improve rates in GA, MA, and CA, which represent ~15% of PDS revenue. In Q1 2024, Aveanna made progress on its goal to increase the number of PDS preferred payer agreements from 14 to 22 as it added four new preferred payer agreements.  AVAH introduced a new KPI called “PDS volume indicator”. The metric will report current PDS preferred payer volumes against the total MCO opportunity. This will define the opportunity for AVAH to continue shifting clinical capacity and efforts towards preferred payors. Currently, the 18 PDS preferred payors account for 40% of the total PDS MCO volumes. With regards to preferred payor agreements in home health, AVAH achieved its goal of having an episodic payor mix > 70% with an episodic payor mix in Q1 2024 of 75%. AVAH continued to highlight the fact that there is no demand problem for its services, and that top-line growth is constrained mostly by shortage of caregivers. That said, the company expects to increase its ability to attract caregivers over the next few quarters as it negotiates acceptable reimbursement rates. Key Financial Figures M&A Activity AVAH is not in a position to pursue a growth strategy through acquisitions as it has $1.48B of debt in its balance sheet. This is high relative to EBITDA (TTM Mar. 2024 EBITDA was $128M). On a positive note, no material portion of this debt will mature until July 2028, which gives AVAH a few more years to continue to positively shift operations and increase FCF. Guidance Based on Q1 2024 results, AVAH expects revenue to be greater than $1.97B, compared to the $1.96B – 1.98B range provided in Q4 2023 earnings call, and adjusted EBITDA to be greater than $150M, compared to the $146M – $150M range provided in Q4 2023. The Pennant Group, Inc. (Nasdaq: PNTG) Highlights PNTG reported revenue of $156.9M for Q1 2024; this represents a 24.1% or $30.5M increase over Q1 2023.  Adj. EBITDA of $11.2M grew $3.2 or 41.8% when comparing Q1 2024 to Q1 2023. Pennant reported on its strategy to focus on five key areas: leadership development, clinical excellence, employee experience, margin improvement, and growth. PNTG highlighted progress in the following: Leadership development: There are now 44 CEOs and 42 CCOs, or close to 50% progress towards the goal of developing 100 local CEOs and 100 CCOs. Clinical excellence: Q1 2024’s average CMS-reported home health star rating of 4.1 and acute rehospitalization rate of 13.4% are well ahead of national averages. Margin improvement: YoY adjusted EBITDA margin improved 90 basis points (6.4% to 7.3%). Growth: This is a two-front effort involving organic growth and strategic acquisitions. On the organic front, PNTG had double-digit percentage growth YoY in same-store home health admissions and hospice ADC. Acquisitions were responsible for ~14% segment revenue growth in hospice and home health. Key Financial Figures M&A Activity Home health and hospice segment: PNTG initiated Muir Home Health, a JV with John Muir Health on 1/1/2024. Acquired a home health license and a CON in King County, Washington on 4/12/2024. Acquired South Davis Home Health and Hospice in Bountiful, Utah on 5/1/2024. Senior living segment: Acquired Capitol Hill Senior Living, a 113-unit community in Salt Lake City, Utah, including the RE. Acquired Southgate Senior Living, a 75-unit community in St. George, Utah, including the RE. Acquired, through a long-term lease agreement, the operations of Veranda Senior Living at Paramount, a 73-unit assisted living and memory care community in the Boise area. Guidance Brent Guerisoli, CEO, said that Q1 2024 was a very strong quarter, which puts PNTG on pace for the top end of their guidance. As a reminder, PNTG guided 2024 full year revenue of $597M - $634M and adjusted EPS of $0.82 - $0.91. Enhabit Home Health & Hospice (Nasdaq: EHAB) Highlights “After the evaluation of a full range of strategic alternatives with the support of external financial and legal advisors, our strategic review process has concluded” said Barb Jacobsmeyer, CEO.  EHAB did not receive any formal proposals to acquire the company and will, therefore, remain a standalone entity. EHAB believes this was mainly due to macro headwinds, including uncertain regulatory developments such as Medicare reimbursement policies. Revenue of $262M in Q1 2024 decreased 1% when compared to Q1 2023. Q1 2024 adjusted EBITDA was in line with Q1 2023. The growth strategy in home health involves stabilizing Medicare admissions, progressing with the payor innovation strategy, and increasing the utilization of clinical resources.  Medicare admissions: EHAB’s Medicare mix has steadily declined over the last year. Medicare admissions declined 11.4% in Q1 2024 compared to Q1 2023. However, this decline should slow down as EHAB’s Medicare mix is now in line with its peers.  Payor innovation strategy: Shifting volume to preferred payors has been successful – admissions on historically lower-paying contracts declined from 42% of total admissions in Q1 2023 to 29% in Q1 2024.  Utilization of clinical resources: EHAB reported that patients have become more receptive and are beginning to understand the benefits of virtual encounters, which is why the company is exploring how implementing virtual care strategically can increase care efficiency. The main priority for hospice continues to be growing census to gain operating leverage against the fixed cost structure associated with the case management staffing mode. While EHAB did not report any material acquisitions, it did report progress on its de novo strategy with the opening of two hospice locations in Q1 2024. Additionally, EHAB is targeting ten more de novo locations for the remainder of 2024. Key Financial Figures M&A Activity EHAB did not provide any updates on its M&A efforts. Guidance Enhabit maintained the 2024 full year guidance provided in the last earnings call of: Net service revenue of $1.076B – $1.102B Adj. EBITDA of $98M – $110M (or an 8.8% – 10.2% margin) BrightSpring Health Services, Inc. (NASDAQ: BTSG) Highlights Revenue in Q1 2024 was $2.6B, a 27% increase over Q1 2023 and exceeded expectations.  Pharmacy Solutions accounted for $2B of the total revenue and increased 35% over Q1 2023. Growth in this segment was further broken into the infusion and specialty business ($1.5B), which grew 44% YoY in the quarter, and the home and community-based pharmacy business ($511M), which grew 15% YoY in the quarter.  Provider Services accounted for $600M of the total revenue and increased 7% over Q1 2023. Growth was driven by “strong home health care performance as well as continued strength in our rehab business” mentioned Jon Rousseau, President and CEO. Adj. EBITDA of $130.5M in Q1 2024 represented a 13.2% growth over Q1 2023. Pharmacy Solutions: Adj. EBITDA in Q1 2024 grew 7% YoY for Q1 2024. Provider Services: Adj. EBITDA in Q1 2024 grew 25% over Q1 2023 due to cost efficiencies, economies of scale, operational quality, and volume and revenue growth. From a quality standpoint, BrightSpring highlighted the following for each operating segment: Pharmacy Solutions: Net promoter scores greater than 90 in infusion and specialty, patient satisfaction scores of 95% in the infusion business, and Continue CareRX demonstrated a 73% reduction in hospitalizations when utilized together with home health. Provider Services: The home-based primary care team demonstrated an 84% reduction in readmission for IDD patients and seniors and dual patients experienced ~50% less hospitalization than the national average for similar patients. The rehab business received a 99% customer satisfaction score. The personal care business had a customer satisfaction score of 4.4 out of 5. The hospice business was rated in the country’s top 5% of all hospice providers. Key Financial Figures M&A Activity BTSG referenced two transactions in the prior earnings call. One closed in 12/31/2023 and the second one has not closed yet. Looking into Q2, Rousseau, CEO and President, said that the “M&A pipeline remains active” and that “we’ll have a few smaller deals that will close in Q2.” Guidance BTSG increased 2024 guidance provided in the previous earnings call: Revenue: Original guidance $9.35B – $9.5B compared to the revised guidance of $10.3 – $1.08B.  Adj. EBITDA: Original guidance $550M – $564M and the revised guidance is $555M – $570M. Option Care Health, Inc. (NASDAQ: OPCH) Highlights Revenue of $1,146B was 12% higher than Q1 2023. Newer chronic therapies launched over the last year played a large part in this increase. Patient satisfaction for Q1 2024 was 93%, and the Net Promoter Score was 76.2. On 3/14/2024, OPCH disclosed the potential impact from a Change Healthcare cybersecurity incident that occurred in late February. The incident meant teams had to find workarounds to continue operating, which has resulted in certain inefficiencies and incremental costs. However, at the time of the earnings call (4/23/2024), OPCH has been able to return to the traditional ways of doing business for the most part. The most significant impact on the financials from the cybersecurity attack was the inability to submit claims to payors (from the date of the attack to the end of Q1 2024, OPCH was unable to submit more than half of their claims). This has resulted in a detrimental impact on cash flow for the quarter, but the effect will be temporary, and OPCH has not changed 2024’s guidance on CF. Gross profit increased ~$10M, but the margin decreased by 2.7% in Q1 2024 compared to Q1 2023 due to three reasons: 1) inefficiencies related to the Change Healthcare cybersecurity incident, 2) supply chain disruptions for certain acute drugs compounding inputs that led to higher-than-expected therapy costs, and 3) revenue mix as a significant component of chronic therapy revenue growth was driven by newer therapies that carry lower initial gross margins that OPCH believes can expand upward over time. Key Financial Figures M&A Activity Due to the impact to cash flow from the Change Healthcare, particularly from the inability to submit claims, “preservation of liquidity or preservation of capital was an important aspect” when it comes to capital allocation decisions, mentioned” John Rademacher, President & CEO. Additionally, Rademacher commented “the ability for us to think about capital deployment as we had before, as we get through the disruption will be something that we'll continue to put in the mind space that Mike and I are spending time and looking at where the opportunities sit and where opportunities may exist to drive strategic and economic value for our shareholders.” Mike Shapiro, CFO, added “as we go forward, I think we go back to our capital allocation policy which we've been consistent with which is we think that there are a number of M&A opportunities… there are some opportunities that are being shaken out of the tree”. Guidance OPCH revised the lower range of their 2024 guidance: Revenue: Original guidance of $4.6B – $4.8B, and the revised guidance is $4.65B – $4.8B.  Adj. EBITDA: Original guidance of $425M – $450M compared to the revised of $430M – $450M. CFO guidance for the full year remained the same at $300M. To download the .pdf version of this report, click below.

2018 was a banner year for mergers & acquisitions in the home health, private duty home care, and hospice industries.  We saw more deals announced and closed than any year in recent history. Total transaction volume across all three sub-sectors increased substantially, from 82 transactions in 2017 to 110 in 2018 – a 34% increase. As we have seen over the past several years, home health led the way with 58 transactions closed.  However, private duty home care saw the greatest year-over-year gain, with 45 transactions in 2018 vs. 20 in 2017 – a 125% increase.  Hospice continues to gather strength as virtually all of the large, traditional home health operators vie to become the leaders in hospice as well, positioning themselves further for alternative payment models that emphasize care coordination, and enhancing their margins at the same time.  There were 38 hospice transactions completed, compared to 28 in 2017. Home Health Home health transaction volume increased again 2018, with 58 transactions closed vs. 44 in 2017.  While most of the transaction volume was dominated by the public companies and large private equity-backed providers, the biggest news was the acquisition of Kindred at Home by the consortium of Humana, TPG Capital, and Welsh, Carson, Anderson & Stowe in the first of its kind transaction combining a major payor, a provider and private equity. Another monumental transaction was the closing of the LHC Group/Almost Family merger.  The deal, which closed on April 1, combined two publicly traded entities with a combined value (at the time of transaction) of $2.4 billion on revenue of nearly $2 billion.  In addition to the combined revenue and geographic footprint (from servicing 35% of the population to 60%), the deal brought significant synergies.  Josh Proffitt, LHC Group’s Chief Financial Officer, said, “In addition to the immediate benefits from the merger to the patients, families, communities and partners we are blessed to serve, we also are excited about the double-digit accretion that we will recognize in 2018. We are confident in achieving the $25 million in pre-tax synergies by the end of 2019 and look forward to additional accretion in 2019 and beyond as we continue to capture additional synergies.” Encompass Health continued its torrid deal pace, adding 23 home health locations and 22 hospice locations in 2018. Mark Tarr, President, and CEO of Encompass Health told Bailey Bryant, as was reported in Home Health Care News earlier this year, that Encompass plans to spend tens of millions of dollars to further bolster those areas in 2019. Hospice Hospice M&A was hot in 2018, with 38 transactions closed vs. 28 in 2017 — a 36% increase.  The consortium of Humana and private equity groups TPG Capital, and WCAS again made the biggest splash, announcing its $1.4 billion acquisition of Curo Health Services.  Curo is a hospice provider with 245 locations in 22 states. In October, Amedisys announced a deal to acquire Compassionate Care Hospice for $340 million. This growth by acquisition strategy would make the third-largest U.S. hospice provider.  President and CEO Paul Kusserow told investors during a third-quarter 2018 conference call that Amedisys is continuing its plan to add to its hospice business because of the segment’s more favorable reimbursement environment. The numbers clearly show that hospice care has gained a solid foothold within the overall continuum of care. In 2006, there were just over 3,000 hospices in operation across the United States.  By 2016, that figure jumped to more than 4,300. During that same period, Medicare spending for hospice care increased 81% to $16.7 billion in 2016. Additionally, the number of Medicare beneficiaries on hospice care grew from about 930,000 to 1.4 million. Home Care Home care M&A saw the largest year-over-year gain from 2017 and was fueled by seven (7) private equity platform investments, several add-ons, and the emergence of a publicly-traded private duty home care company. KKR’s acquisition of Brightspring Health Services (formerly ResCare) for $190 million highlights the largest provider acquisition of 2018.   Bain Capital acquired and combined Arosa and LivHOME out of its Double Impact fund in another multi-state transaction of 2018.  Additionally, Apax Partners invested in franchisor Homewatch Caregivers. With growth-driven private equity groups as their investors, it will be interesting to see if Homewatch follows Comfort Keepers’ and Brightstar’s path from strictly franchisor into home care operator. We also saw the emergence of a small, Canadian-based, publicly-traded (TSXV: NLH) company – Nova Leap Health.  Nova Leap completed five transactions in 2018, with a concentration in New England.  The company announced plans to acquire up to four additional agencies in 2019. The Buyer Universe Across the board, private equity groups, public companies, and other post-acute providers stepped up their involvement in acquiring agencies, with a private equity of one type or another taking the lion’s share of activity.  What is notable is the number of private equity platform investments, increasing from 11 transactions in 2017 to 24 in 2018, a 218% increase.  While relatively small in absolute numbers compared to public company and PEG add-ons, it signals several years of deal activity ahead, as nearly all of these groups intend to grow by acquisition over the next 3-7 years. 2019 Outlook We expect 2019 will be another active year for M&A. However, most of the growth will come from hospice and private duty home care, and for similar reasons.  Both have seen a jump in private equity platform investments in 2018, which will spur on add-on investments.  Both are also fairly under-regulated, at least compared to home health.  And both are targets of the well-funded traditional home health-dominant operators, all looking to offer a coordinated care-in-the-home solution to the senior populations they serve. The uncertainty around PDGM reimbursement, and specifically the 6.4% behavioral adjustment, planned by CMS, but finding significant opposition, could make 2019 a more challenging year for home health M&A.  Reimbursement uncertainty tends to create valuation gaps between buyers and sellers, with buyers inclined to take a conservative approach to financial modeling, while sellers are holding out hope the behavioral adjustment will go away before it takes effect.  The fluidity of this issue makes it difficult to predict when we’ll start to see more alignment with valuation prior to locking in the final rule in November. Paul Kusserow, President and CEO of Amedisys, told Robert Holly in an interview reported in the January 16, 2019 issue of Home Health Care News: “I still think M&A is going to continue to be largely driven by private equity. I think the pricing of M&A is going to continue to be high, particularly in hospice. I don’t see it in home health until after PDGM hits. After PDGM hits, I think there will be a lot of activity from a PE perspective.” While we see challenges on the road for home health, they can be negotiated, and will be somewhat mitigated by a promising signal from CMS – the sector’s first payment increase (2.2%) in several years in 2019.  There will continue to be significant activity in-home health M&A.  Whether it continues to grow at its recent pace, or that of private duty home care and hospice, or finds other drivers of activity, will make the year interesting to watch.

Behavioral Health Care Stocks Up – 1.9% in May The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) – was up slightly after a down month, gaining 1.9% of its value in May. The S&P 500, by comparison, grew at the same 1.9%. Stocks were mixed, but the strength of Acadia’s Q1 2018 earnings, which produced a 12.3% return for the month, drove the composite higher. “BHC stock performance for the month is a bit misleading. While the overall composite was up ‘modestly’, if you look at ACHC and AAC, throughout the month, there were some interesting storylines.”, said Cory Mertz, Managing Partner. May means earnings season and brought mixed results among the public companies. Diving in… Acadia Healthcare – ACHC (­ ↑ 12.3% ) rebounded on strong earnings, offsetting a 7.2% loss in April (on the announcement of a class-action lawsuit). The company reported Q1 2018 adjusted earnings of 52 cents per share, which beat the consensus estimates by 8.33% and the prior year by 13%. ACHC generated Q1 revenue of $742MM, beating prior year Q1 by 9.3% and estimates by 1.89%. The growth can be attributed to the addition of more than 57 new beds to the existing facilities. The company expects to add more than 800 beds to existing and new facilities in 2018. “You’re going to see us continue to build our own beds through the joint ventures, and I think in the last six months of this year you will see an acquisition”, commented Joey Jacobs, Acadia’s Chairman, and CEO. It appears US operations are performing well and that things are getting turned around in the UK due to several factors, including increased patient volume and reduction in agency costs. American Addiction Centers – AAC ( ­ ↓ 6.5% ) was up 5% through May 22 before closing down 6.5% for the month. What caused the drop? That’s hard to pinpoint as there was no news. However, it’s worth noting Michael Cartwright sold (a relatively modest) 100,000 shares between May 21 and May 23, which seems to have precipitated the fall. While Q1 2018 revenue and Adjusted EBITDA increased by 18% and 20% respectively (adjusted EBITDA was $15.1MM) the company posted a net loss of $0.2MM. The adjustment was due mainly due to a one-time payout from AAC’s settlement with its shareholders complaining the company and some of its executives made false or misleading statements, and for not disclosing information related to the 2010 death of a California patient at a facility company had since acquired. Universal Health Services – UHS ( 0.0% ) held steady throughout the month on a mixed Q1 earnings release. The company reported Q1 2018 adjusted earnings of $2.45 per share, missing consensus estimates by 5.4%. However, the bottom line grew 17% year over year. Net revenues increased 2.9% year over year to $2.7Bn. However, the top line lagged consensus estimates by 2%. For the behavioral hospital segment, on the same facility basis, adjusted admissions increased 1.6% while adjusted patient days declined 0.4%, on a year-over-year basis. Net revenues increased 3% during the quarter under review on the same facility basis. For the last twelve months (LTM), the BHC greatly surpassed the S&P 500 at a 23.2% gain relative to the S&P’s gain of 12.2%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 5/31/18 AAC $10.76 ACHC $40.19 UHS $114.98 Enterprise Value/EBITDA Company 5/31/16 5/31/17 5/31/18 AAC 20.75x 12.11x 12.82x ACHC 20.03x 11.77x 11.43x UHS 9.84x 8.75x 8.64x Enterprise Value/Revenue Company 5/31/16 5/31/17 5/31/18 AAC 2.96x 1.26x 1.92x ACHC 4.25x 2.40x 2.33x UHS 1.80x 1.50x 1.41x M&A News May 14, 2018 – Fulcrum Equity Partners acquires Liberation Way, a drug and alcohol addiction treatment facility, with participation from Vocap Investment Partners. Liberation Way has three locations in Pennsylvania currently and is targeting several geographies for expansion in the future. May 15, 2018 – Halifax Partners acquires ChanceLight Behavioral Health, Therapy & Education, a leading provider of behavioral health, therapy, and education solutions for children and young adults. ChanceLight, headquartered in Nashville, Tenn., serves nearly 19,000 clients and students each year at more than 150 locations in more than 20 states. The Company serves those with autism spectrum and other behavioral disorders. May 16, 2018 – Webster Capital acquires Behavior Development Group, a provider of Applied Behavior Analysis to children with Autism Spectrum Disorder in the southeast. They work with children with the aim of helping them achieve their maximum potential. May 23, 2018 – Elements Behavioral Health, a family of behavioral health programs located throughout the U.S., announced that it will execute an asset purchase agreement with a group of its First Lien Lenders under chapter 11 of the United States Bankruptcy Code in the District of Delaware. The business will continue uninterrupted, and operations will be supported by debtor-in-possession (DIP) financing provided by the company’s lenders. The company anticipates the transaction will move swiftly with the sale approval occurring within 4-6 weeks of the bankruptcy filing and closing to occur thereafter, subject to certain regulatory approvals.

Behavioral Healthcare Stocks up 0.5% in February The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) – was up 0.5% for the month of February. The S&P 500, by comparison, was up 2.9% during the same period. February was a fairly quiet month across the board. American Addiction Centers – AAC ( ↑4.5% ) was up slightly for the month of February.  No significant news to report. Acadia Healthcare – ACHC ( ↓5.3% ) was down likely due to investor anticipation of the company missing Q4 and full-year 2018 earnings expectations.  ACHC released its fourth quarter and year‑end 2018 earnings on February 28, 2019, after the close of the market. Universal Health Services – UHS ( ↑2.4% ) was up after positive Q4 and year-end 2018 results, which were delivered on February 27th.   EPS for Q4 came in at $2.37 while expectations were $2.34.  Revenue came in at $2.75 billion compared to estimates of $2.74 billion.  For the Behavioral Health segment, on the same facility basis, adjusted admissions rose 4.5% while adjusted patient days dipped 1.2%, both on a year-over-year basis. Net revenues were up 2% in Q4 due to higher admissions. For the last twelve months (LTM), the BHC is well behind the S&P 500 at a 27.5% loss relative to the S&P’s gain of 2.6%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS.  The valuations provide a relative barometer for what smaller companies can expect.  Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 2/28/19 AAC $2.55 ACHC $26.29 UHS $138.83 Enterprise Value/EBITDA Company 2/28/17 2/28/18 2/28/19 AAC 13.26x 10.98x 11.75x ACHC 12.35x 11.27x 9.61x UHS 9.61x 8.56x 9.86x Enterprise Value/Revenue Company 2/28/17 2/28/18 2/28/19 AAC 1.52x 1.51x 1.16x ACHC 2.55x 2.31x 1.82x UHS 1.67x 1.42x 1.54x M&A News March 1, 2019 – Perimeter Healthcare, a network of mental and behavioral health treatment centers backed by Ridgemont Equity Partners, announced the acquisition of Lake Pines Hospital, a 36-bed behavioral healthcare facility, and the St. Theresa Hospital building that houses the program in Kenner, La.  Perimeter plans to add 40 to 45 beds to the inpatient facility over the next eight months as part of a renovation project. The facility will be renamed Perimeter Behavioral Hospital of New Orleans. February 22, 2019 – Family Counseling Services of Cortland County and Family & Children’s Society announced the merger between the two services.  The renamed Family & Children’s Counseling Services will serve as a joint urban-rural agency focused on essential behavioral healthcare services throughout the Oneida, NY region. February 19, 2019 – Ryan Chapman, who grew and sold a nationwide service company, Premier Parking, before age 35, purchased Integrative Life Center (ILC), a provider of residential and outpatient treatment for substance abuse, eating disorders, and mental health disorders.  The company was founded in 2010 and has two facilities in the Nashville, TN area.  Ryan Chapman is now the majority shareholder and CEO. February 6, 2019 – Ideal Option, a provider of Medication-Assisted Treatment (MAT) and behavioral counseling services for individuals suffering from Opioid Use Disorder (OUD), announced today a strategic minority investment by BlueCross BlueShield Venture Partners (BCBSVP). BCBSVP invests on behalf of 33 BlueCross BlueShield entities in healthcare companies of strategic relevance to BlueCross BlueShield Plans. January 24, 2019 – Pharos Capital Group-backed Beacon Specialized Living Services acquired Owakihi, Inc., which provides home and community-based support services to individuals with intellectual and developmental disabilities.  Headquartered in Saint Paul, MN, Owakihi serves over 200 individuals across 14 sites in the seven counties surrounding Minneapolis and Saint Paul.

Behavioral Healthcare Stocks Up 4.3% in July The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) – was up 4.3% for the month of July. The S&P 500, by comparison, was up 3.3%. “It was another volatile month for the behavioral stocks, as these companies continue to grow in the face of ever-changing payor dynamics and the complexities of an expanding international presence”, said Cory Mertz, Managing Partner with Mertz Taggart. July was earnings month… Acadia Healthcare – ACHC ( ↓4.4% ) was down on news of lowered 2018 revenue projections. In its Q2’18 earnings release after the market closed on July 30th, the company lowered its previous 2018 revenue guidance from approximately $3.06Bn to $3.04Bn. Acadia also lowered its earnings per diluted share projections from a range of $2.60 to $2.54. In its earnings call Acadia Chairman and CEO Joey Jacobs blamed higher interest rates and a lower exchange rate between British pounds and the dollar for the lower guidance. They continue to add beds, mostly to existing facilities, adding 276 new beds through Q2, with plans to add a total of 800 new beds in 2018. When asked what they plan to do with their growing cash stockpile, Jacobs commented, “The pipeline is very active, and we would just continue to hold the cash. I expect that by the time we talk to you again at the end of October, that we would have spent some of this cash on an acquisition.” American Addiction Centers – AAC ( ­↑7.3% ) stock began a run-up from July 25th to July 30th. We suspect this was due to expectations of a strong earnings release for Q2’18. However, AAC missed its Q2 EPS by 50%, coming in at $0.09 per share versus consensus estimates of $0.18 per share. We will provide more detail on the earnings in the August newsletter. Universal Health Services – UHS ( ↑10.0% ) was up on strong earnings. On July 25th, UHS announced that its net income was $226.1MM, or $2.39 per diluted share, during the Q2’18 as compared to $185.4MM, or $1.91 per diluted share, during the comparable quarter of 2017. Net revenues increased 2.6% to $2.68Bn during Q2’18 as compared to $2.61Bn during Q2’17. In addition, on July 31st, UHS announced the acquisition of The Danshell Group (“Danshell”) through its UK subsidiary Cygnet Health Care. Danshell owns and operates 25 facilities with a total of 288 beds in the UK. The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services, and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio. For the last twelve months (LTM), the BHC was behind the S&P 500 at a 0.2% gain relative to the S&P’s gain of 14.0%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 7/31/18 AAC $10.39 ACHC $39.48 UHS $122.10 Enterprise Value/EBITDA Company 7/31/16 7/31/17 7/31/18 AAC 21.65x 12.10x 12.61x ACHC 17.20x 13.69x 11.21x UHS 9.55x 8.67x 9.12x Enterprise Value/Revenue Company 7/31/16 7/31/17 7/31/18 AAC 3.09x 1.25x 1.89x ACHC 3.65x 2.78x 2.26x UHS 1.72x 1.47x 1.47x M&A News July 9, 2018 – Pennsylvania-based Pyramid Healthcare announced today it has entered into an agreement to purchase WaldenSierra, a system of substance abuse and behavioral health treatment programs serving southern Maryland since 1973. Pyramid Healthcare currently operates around 80 behavioral health facilities and six autism schools in Pennsylvania, New Jersey, and North Carolina. This will be Pyramid’s first expansion into Maryland. July 10, 2018 – Northstar Academy, a series of leading adolescent treatment centers specializing in mental health, trauma, eating disorders, and substance abuse, acquired all the assets of NorthStar Academy Adolescent Treatment Center, which will formally become a part of Newport Academy’s growing network across the country—including locations in California, Connecticut, and Pennsylvania. July 11, 2018 – Rosecrance, a Midwest behavioral health organization, announced that it has agreed to a merger with Iowa-based Jackson Recovery Centers that are expected to be finalized in mid-2019. Combined revenue would be over $100MM. The planned merger with Jackson Recovery Centers would result in an organization with nearly 60 locations across the Midwest. July 11, 2018 – Taft, Tennessee-based Magnolia Ranch Recovery, which offers inpatient rehabilitation, announced the merger with Murfreesboro, Tennessee-based Tulip Hill Recovery, which provides intensive outpatient and aftercare services with case management. July 18, 2018 – Delphi Behavioral Health Group, a nationwide provider of addiction and detox treatment programs, announced today the acquisition of Family Recovery Specialists (FRS), located in Miami, Florida. Family Recovery Specialists is an outpatient program that provides comprehensive evaluations and treatment for adults and adolescents suffering from substance use and mental health disorders. July 18, 2018 – Refresh Mental Health acquires Memphis, Tennessee-based Fairhaven Treatment Center. Fairhaven offers a full continuum of care for adult and adolescent women with eating disorders. Refresh’s portfolio includes practices across the U.S., which provide services that include: individual, couples, and group therapy; substance abuse and addiction services; psychiatry and medication management; eating disorder treatment; and outpatient, intensive outpatient, in-home, and residential care. July 31, 2018 – Century Park Capital Partners acquires Dominion Youth Services (“DYS”). Headquartered in Richmond, Virginia, DYS is a leading provider of behavioral health services to children and young adults across Virginia. RGA Private Debt & Equity provided the debt financing for the transaction. July 31, 2018 (mentioned earlier) – UHS announced the acquisition of The Danshell Group (“Danshell”) through its UK subsidiary Cygnet Health Care. Danshell owns and operates 25 facilities with a total of 288 beds in the UK. The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services, and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio. Also Read Behavioral Health Composite – October 2018

As a business owner… Some of these statistics might surprise you! Don't Be Another Statistic With so much uncertainty in today’s market, being prepared for what the future may hold is imperative. Fill out the form below to get your confidential valuation. Know where you stand in the marketplace today to better prepare your business for tomorrow. The average business owner has approximately 80% of their net worth tied up in their business; 75% of business sellers regret the deal they’ve made; Only 2 out of every 10 businesses that go to market actually sell; Most business owners do not know what their business is worth. Get a Valuation! Our team of healthcare M&A professionals has almost 75 years of healthcare and M&A experience. As business owners who have been through the sales process ourselves, we have a first-person perspective on this process. With almost over 100 completed healthcare transactions, we can walk you through the selling process with your particular needs in mind. Contact Us and One of Our M&A Professionals will Contact You!

Introduction The Veterans Administration (VA) has long been considered a ‘payer of last resort’ for home care providers, offering below-market rates and slow pay for services to our veteran community that deserves better. As a result, this business line has often been viewed as important, but not desirable for home care operators, resulting in low M&A interest from industry consolidators. That changed in 2018 with the passage of the VA Mission Act of 2018 . This federal law aimed to enhance veterans' access to healthcare services within the VA system and through community care providers. Of particular interest to home-based care providers, the act replaced the Veterans Choice Program with the new Community Care Program . Community Care Program The new Community Care Program expanded the eligibility criteria for veterans, provided more stable funding, improved the program’s long-term sustainability, and standardized and streamlined access requirements to receive care. Additionally, the Act established the Community Care Network (CCN), which serves as the contract vehicle for the VA to “purchase” community care from community healthcare providers for veterans. The CCN established agreements with two third-party administrators (TPA), Optum Public Sector Solutions, Inc. (Optum), part of UnitedHealth Group, Inc. and TriWest Health Care Alliance (TriWest) and divided the country into five different regions: The TPAs are responsible for developing and administering the CCN within their assigned geography. Their scope of work includes the following: Provider Network Management: Establish and maintain networks of community healthcare providers, such as home care or home health providers. Appointment Scheduling: Help coordinate appointment scheduling for veterans. Claims Processing: Handle claims processing and payment from community healthcare providers. Authorization and Coordination : Assist in obtaining authorizations for medical services that veterans need from community providers and ensure necessary documentation is in place. Quality Assurance : Monitor the quality of care. Communication : Facilitate communication between the VA, veterans, and community healthcare providers. In order for a home-based care provider to provide services to veterans and get reimbursed for it, it needs to: Establish a contract with a TPA : This involves executing an agreement and going through certain credentialing. Build relationships with local VA representatives: This should be in the form of high-quality and timely care. Billing: Submit proper billing through established protocols and online portals Receive payment or follow up on unpaid claims: As with any payer, providers will need to follow up with TPAs on unpaid claims, but the majority of the time this will be due to minor and easy-to-fix issues Attractive Reimbursement In addition to the improved and more efficient Community Care Program, the VA also has attractive reimbursement rates for home-based care services: Personal Care Services: The rates for personal care services depend on the state/city/market serviced, but the majority will be in the low $30’s/hr. Home Health and Hospice Services: VA will reimburse at Medicare rates. Investor Interest Investors have caught wind of the improvements in the VA healthcare ecosystem and have developed a strong interest in home-based care providers that service veterans. Below are some of the reasons for the renewed investor interest: Payor Diversification : Increasing the number of payors reduces the risk that a certain payor will lower rates, stop reimbursement, change material terms in agreements, etc. High Reimbursement Rates: Current reimbursement rates are on the high end for home-based services. Uncertainty Other Payors: Private Pay: Concerns with the state of the economy could inhibit clients’ ability to pay high rates Medicaid: CMS’s proposed Medicaid Access Rule requiring providers to pass 80% of reimbursement to direct care workers jeopardizes the feasibility of the different state programs. Medicare: Looming proposed rate cuts increase risk Value-based Care Opportunities: An additional payor means an opportunity to care for more individuals, have more leverage when negotiating contracts, and capture higher-margin health services. “We are hearing more from strategic buyers interested in adding VA to their existing Medicaid home and community-based services business,” Mertz Taggart Managing Partner Cory Mertz said. “It’s a perfect complement to that business line. The models are very similar, payer diversity reduces risk, especially in light of the proposed 80/20 rule, and the current reimbursement rates are strong.” M&A Market For Home-Based Care Providers Servicing Veterans The strong investor interest in home-based care providers that service veterans and receive reimbursement through TPAs has increased the demand and value of these assets. Resources: VA Community Care Network VA Mission Act of 2018 VA Community Care Eligibility VA Community Care General Info VA Disability Calculator VA Disability Appeals Additional Veteran Resources As part of our commitment to supporting veterans and their families, we are pleased to share some valuable resources provided by Hill & Ponton , a law firm dedicated to advocating for veterans who have been denied benefits by the VA. These resources are designed to assist veterans in navigating the challenges they face, particularly in relation to mental and physical health issues. PTSD Guide :  A comprehensive resource tailored to assist veterans coping with post-traumatic stress disorder. 2024 Disability Calculator :  An up-to-date practical tool for evaluating disability compensation eligibility. Toxic Exposure Map :  A helpful tool designed to help veterans navigate potential exposure risks. Blue Water Navy Map :  An interactive Vietnam map for navigating exposure to Agent Orange. We believe these resources will be highly beneficial to our readers, offering practical tools and information to better manage the challenges that veterans often face.

While everybody’s dollar amount differs, reaching financial freedom is a universally held goal. To have a good chance of reaching this goal, it is not enough to merely calculate the target number you need at exit . Most owners have three distinct needs they must meet to attain and maintain a financially happy life at exit and beyond. Fail to address any of these needs, and you may not be able to exit happily. Or, you might exit only to realize somewhere down the road that you regret the decision. Here are the three needs you must address to reach and maintain your financial goals: 1. Replace Earned Income After you exit, you will need to replace the income previously earned from your business with investment income sufficient to support your personal lifestyle. This need may seem straightforward, but owners are often surprised by the challenges involved. It is not unusual for your business to generate a higher level of annual income than a prudently invested portfolio can produce. Assume you enjoy an annual income of $X amount from the company, but your financial planning and forecasts indicate that, after you exit, your investment portfolio will only generate an annual income of less than $X. That is not exciting to contemplate. Taxes often worsen the picture. If you sell your company at the exit, you likely have to pay a significant amount of unrealized taxes at that time. This tax bill erodes how much you have to invest after exit, further reducing the income stream. Furthermore, most owners enjoy a portion of their lifestyle subsidized by their business. The business pays for some (or all) of the following: vehicles, cell phones, computers, meals, travel, insurance, taxes, etc. These company-paid expenses shift to personal expenses at the exit, thus increasing the amount of personal income required after exit to maintain the desired standard of living. Ultimately, if you cannot replace the income you receive from your business with a reliable stream of income from your investments post-exit, you may find yourself trapped in the company and unable to afford to exit. 2. Transition from Running a Company to Running a Portfolio The second need is less obvious but no less important for your exit happiness — you will need to make the transition from running a business to running a portfolio. There are certain skills and tactics that made you a successful business owner, and these may not be the same skills and tactics needed for investment portfolio management. Being a successful business owner does not necessarily translate into being a successful investor. For example, successful investing often involves patience, taking a disciplined approach, and not reacting too quickly when investment markets fluctuate in short-term movements. However, being a successful business owner and entrepreneur often demands that you be willing to react quickly to market opportunities as they present themselves. You will not feel financially secure as long as you are uncomfortable or unprepared with the steps and tactics required to manage your post-exit portfolio most effectively, regardless of how large it may be. 3. Manage Pre-Exit Risks The third need is to manage ownership risk before your actual exit. Many owners do not consider their company to be a risky asset because they lead it and largely control its activities. But if you are like most owners, then prior to exit, 50%-90% of your net worth is tied up in your company. It is undeniable that having the majority of one’s net worth tied up in any asset creates risk. If something happens to you or your company prior to your exit, your future financial freedom is at risk. For example, imagine you own three assets: A piece of real estate worth $5 million Cash account with $5 million A company worth $5 million All three assets are equally worth $5 million, yet the risks associated with owning the company are different and higher. If you became seriously ill or died prematurely, the real estate and cash likely maintain their value, but your company’s value may suffer a severe reduction without you. The same risk exists if something happens to your company rather than you. If a large customer leaves your company, the cash and real estate will still be worth the same amount, but the company value may depreciate. Therefore, to reach financial freedom at the exit, you must take the proper steps to address the inherent risks that come with owning a company. After all, you only have one shot at exit success. Reaching Financial Freedom These three needs will help you understand the to-do list as you migrate from current business owner to investor. You are beginning a major life transition. Up to this point, your primary source of income has been your business, and as the owner, you have been in a position to call the shots. But you only have one shot at exit success, so you need to get it right. As the saying goes, “You can get rich by investing in one company, but you can’t stay rich that way.” What to Do Next The most important next step is to sit down with experienced advisors, clearly define your financial and other exit goals, and develop the plan that will achieve those goals. To learn more about the steps necessary for a successful exit, contact Mertz Taggart for a free consultation .

For an agency owner, exiting their business can feel like abandoning a child. It is a very emotional but critical decision that should be conducted with great planning and sophistication to obtain the best outcome. There are many things to consider before an exit, but after 130+ successful healthcare services M&A transactions, we've narrowed the list down to the top five we recommend every agency owner should consider before their exit. Here they are: 1. Outline the goals and objectives of the exit strategy Determine what's most important to you and organize it in order of importance. Here are some questions to consider: How much money will I get after taxes? Will the legacy of the business be maintained? Will employees have a job, and will company culture remain? Do I want to stay with the business for a period that extends past a 'transitionary period'? 2. Distance yourself from the agency's day-to-day operations “Care-at-Home investors are highly sensitive to transition risk. In other words, risk that the business will deteriorate after a closing,” according to Cory Mertz, Managing Partner, “ And after the owner has received a substantial payout.” Delegating responsibilities can be extremely challenging. However, separating yourself from the agency's operations will add flexibility to your options upon exit and could add value to your agency. 3. Define your ideal buyer/investor profile Choosing the right buyer or investor with whom to partner — instead of simply selecting the highest offer — can provide many benefits throughout and after the transaction. A buyer who has experience with home care, home health, or hospice transactions, plenty of cash on hand, and a healthy credit line will have a higher certainty of closing the deal. The right buyer will strive to maintain or improve the service quality while caring for your employees. 4. Engage a professional, industry-experienced, and well-educated M&A advisory firm with a proven track record An M&A advisory firm that specializes in home care, home health, and hospice will guide and prepare you for a sale that maximizes value and fulfills your goals and objectives. Finding the right buyer and compelling them to make their highest offer can only be done through a well-run, competitive M&A process. Preparing the marketing materials, financial model, and information for due diligence is exceptionally time-consuming and taxing. An M&A advisory firm can provide the additional bandwidth necessary to prepare all the M&A materials while you keep growing your agency. We have listed some of the benefits of engaging a specialized M&A advisory firm here . 5. Ensure easy access to critical, common, diligence information such as accurate financials, operational metrics, licenses, etc. If you engage with an M&A firm to lead the process, most of the heavy lifting will be off your shoulders. However, you will need to provide the requested information for the M&A advisory firm to create all the necessary materials for a successful process and transaction. Therefore, assuring the data is clean, accurate, and accessible will put you ahead. Considering the five items listed above will better prepare every agency owner to plan and execute a successful exit strategy.

Mergers and acquisitions within the behavioral healthcare sector plummeted in the first quarter of 2023, with a confluence of factors driving activity down to a level not seen since the beginning of the COVID-19 pandemic. The 27 total deals announced in the first three months of 2023 were the fewest since the second quarter of 2020 — the start of the pandemic—however, it is a figure in line with pre-COVID quarterly numbers. The slowdown can be attributed to the following three factors: Reversion to the mean . Experiencing burnout and/or having concerns about the looming potential of an increase in the capital gains tax from 20% to as much as 40%, many within the field have been particularly motivated to sell over the past two years. “The tax issue is not in the forefront currently, but it could spring up again,” Mertz Taggart managing partner Kevin Taggart said. “This has been on the Biden administration’s agenda since before the election, and we wouldn’t be surprised if this gets worked into a bill before all is said and done.” Banking crisis . As previously noted in the Mertz Taggart report for the fourth quarter of 2022, venture capital firms have flocked to behavioral healthcare, taking a particular interest in mental health, and were responsible for much of the activity at the close of 2022. However, the recent collapse of Silicon Valley Bank — the biggest banker to venture capital firms — has slowed VC-backed deals significantly. Three of the four largest bank failures in US history have occurred over the last several months, so the lending environment is more difficult for buyers. This has caused delays and cancelations of transactions. While still attractive to buyers, mental health transactions have slowed . The COVID-19 pandemic enabled many mental healthcare providers to scale their operations with an increased demand for services and the emergence of telehealth. Although demand for such services remains, it is possible that utilization has waned somewhat from pandemic-era levels. Another way M&A trends are reverting to the mean of pre-pandemic levels is the amount of activity — or lack thereof — from private equity firms. Just 10 platform transactions and 10 private equity-backed strategic add-on deals were announced in the first quarter of 2023. Combined, this was the fewest PE-involved transactions announced since the third quarter of 2020. “Although mergers and acquisitions have slowed over the last quarter, activity is still at very high levels. Deals are just taking longer to get completed,” Taggart said. “The remainder of the year will be stronger than Q1.” Addiction Treatment M&A Just four deals in the addiction treatment subsector were announced in the first quarter. That figure is one-third of the 12 reported in the prior three months and the lowest of any quarter on record since 2019. “There are fewer buyers and less demand in addiction treatment,” Taggart said. “The buyer landscape has shifted. Many traditional buyers have paused for various reasons, and those who are buying are being very disciplined in their acquisitions.” The following transactions were completed in Q1: Private equity firm Avesi Partners invested in Muir Wood , a provider of integrated, adolescent-focused services in a platform deal. Ascension Recovery Services acquired Wise Path Recovery Centers in West Virginia in a private equity-backed strategic deal. SimpleTherapy , a digital musculoskeletal pain recovery solution for employers and health plans, announced its acquisition of Halcyon Behaviora l, a behavioral health and wellness company. Lifepoint Health , a diversified healthcare delivery network, acquired Cornerstone Behavioral Health El Dorado in Arizona in a private equity-backed strategic deal. Lifepoint also acquired a majority ownership interest in national behavioral healthcare services provider Springstone . Mental Health M&A Although down from the prior quarter, deals involving providers of mental health services remained above average in Q1, with 23 transactions announced. Other deals involving mental healthcare organizations included the following: Backed by the private equity firm Thurston Group , ARC Health announced they acquired Wellington Counseling Group , the Colorado Center for Clinical Excellence and Lilac Center . Recovery Centers of America acquired mental health and addiction treatment provider Adolescent & Young Adult Advocates in Bryn Mawr, Pennsylvania. Middle market investment firm Patriot Capital partnered with Turnwell Mental Health Network in a private equity platform deal. Also announced in the first quarter: Scottsdale Mental Health & Wellness Institute joined the Turnwell Network. Behavioral health services platform Health Connect America completed its acquisition of North Star Counseling of Central Florida in a deal backed by Palladium Equity Partners . Irwin Naturals completed an acquisition of Serenity Health , a ketamine clinic based in Louisville, Kentucky. Mental Health Partnership raised $5 million in a deal reported by Open Minds . An investor was not identified. Meanwhile, Denver, Colorado-based provider The Collective Integrated Behavioral Health raised $11 million in its second funding round in as many years, according to Behavioral Health Business . GV , previously known as Google Ventures, invested $28 million in mental health-focused startup Firsthand , according to BH Business . NOCD , a Chicago-based behavioral healthcare technology firm, raised $34 million in a funding round led by Cigna Ventures . The Stepping Stones Group acquired Catalyst Speech Language Pathology in a private equity-backed strategic deal. Array Behavioral Care , formerly known as Insight Telepsychiatry, announced a $25 million funding round led by CVS Health . After seven years of managing Northside Behavioral Health Center in Tampa, Florida, BayCare Health System announced in January that it has acquired the not-for-profit community mental health center. Acadia Healthcare announced that it has acquired CenterPointe Behavioral Health System , a large provider based in St. Charles, Missouri. Cornerstone Montgomery acquired Southern Maryland Community Network in a deal between behavioral healthcare providers in Maryland. Autism Services and I/DD M&A Deals involving providers of autism and intellectual/developmental disabilities (I/DD) services remained slow, with four deals announced in Q1. Many of the consolidators who historically have been active within the subsector “have shifted toward more of a de novo strategy rather than paying a premium for an acquisition,” Taggart said. The following deals involving autism and I/DD treatment organizations were announced: Digital autism provider AnswersNow completed an $11 million Series A funding round led by Left Lane Capital , along with participation from American Family Institute for Social Impact , Blue Heron Capital , Difference Partners and former CEO Lani Fritts. Apara Autism Center , a portfolio company of private equity firm Havencrest Capital Management , completed its acquisitions of Autism Learning Collaborative , as well as the Missouri operations of Early Autism Services . Private equity firm MBF Partners acquired ABA Connect in a platform deal. In a deal between a pair of not-for-profit providers, Port Health became an affiliate of Easterseals UPC .

After a solid Q4 2023, home-based care transactions dropped significantly in Q1 2024.    Home health, home care and hospice saw just 13 total deals in the first quarter, representing a low point not seen in years. The breakdown was split evenly across the three service lines, with six home health care deals, seven home care deals and four hospice deals. (Note: While this appears to be 17 transactions, some transactions include more than one service line.)    The low deal volume can be attributed to many factors, including:   A reversion to the mean after a historically strong period of deals from late 2020 through 2022   Regulatory uncertainty  The current debt market  No service line (except perhaps private pay home care) has been immune to regulatory pressure. Home health’s proposed rule, due in June, almost always creates a level of uncertainty. Today it includes the looming ~$3.5 billion recoupment from CMS’ perceived overpayments in the early years of PDGM, which coincided with the COVID outbreak. Medicaid HCBS has had the proposed 80-20 rule (which was finalized on April 22) to deal with, and hospice’s enhanced oversight has made buyers and their lenders more cautious than ever about post-closing audit and review activity and resulting clawback risk.  Then there’s the Fed and interest rates. With inflation numbers remaining stubbornly high, optimism around a mid-year rate cut has dwindled.  “Deal volume is the lowest we’ve seen in years,” says Mertz. “But the reality is, and I’ve been doing home-based care M&A for 17 years, valuations remain strong. We’re not quite at the 2020-2022 levels, but I don’t think we’ll see those numbers again any time soon.” Health care services deals have historically traded between 5-7x EBITDA, however many home-based care companies continue to sell for higher than that, buoyed by the public companies, who are still trading at multiples in the mid-teens and higher. Home Health M&A The underlying motivation to invest remains strong. Private equity and the public market institutional investors understand the value home health provides to the healthcare system as a whole. In today’s value-based care movement, many believe skilled home health remains key to reducing overall costs.  But there are fewer sellers out there. And fewer that buyers are interested in. “There’s just a lack of quality agencies going to market,” says Mertz. Plus, home health providers and others are still waiting for the market to recover. While soon-to-be sellers are unlikely to match the multiples sellers received in 2020 - 2022, many are waiting for a rebound. “Deals are harder to close these days, and buyers have gotten more disciplined,” says Mertz. “Fewer buyers are willing and able to pay a premium right now, and if they do, it has to be the right deal for them and their strategy, with little transition risk.” But buyers – again – are still eager to find those deals worth pursuing . In the quarter, some of the noteworthy home health deals included:     The Dallas-based and Cimmaron Healthcare Capital-backed Frontpoint Health’s acquisition of High Plains Senior Care Hospice , a home health and hospice provider based in Texas. Nautic Partners ’ acquisition of Angels of Care Pediatric Home Health from Varsity Healthcare Partners . Lorient Capital-backed PurposeCare’s acquisition of Michiana Home Care . The Pennant Group (Nasdaq: PNTG) also entered into a joint venture with John Muir Health .    Two things to note for home health care and for the other service lines: more first-quarter deals will likely be reported in the coming weeks; and deal activity generally picks up toward year end. Home Care M&A While home care dealmaking has likely been slowed by the looming Medicaid Access rule, Q1 brought a big deal in the private-pay franchise world, with Waud Capital acquiring Senior Helpers from Advocate Health.   “We are very excited for our franchisee partners, teammates, caregivers and clients,” Peter Ross, CEO and co-founder of Senior Helpers, said in a statement. “The need for high-quality, in-home senior care has never been greater. We see opportunities to enhance our suite of senior services as part of the next phase of the company’s growth. Waud Capital brings deep expertise in supporting and successfully growing healthcare companies, a set of similar core values, and a shared vision for the future.”   Senior Helpers is just the latest large home care franchise to be acquired. Toward the end of last year, The Halifax Group also acquired Comfort Keepers from Sodexo. Other notable deals from the home care world in the first quarter included:   Capital Alignment Partners ’ formation of Avenues Home Care . PurposeCare ’s acquisition of Illinois-based A-Abiding Care . Pillar Health Group ’s acquisition of Grace Unlimited . Hospice M&A Hospice dealmaking has slowed considerably of late, primarily due to increased regulatory scrutiny. “Generally speaking, investors still love hospice. But increased regulatory oversight has made it harder for them to find the right deal to sink their teeth into,” Mertz said. “Fear of audits and resulting clawbacks have caused more hospice deals to fail diligence over the past 12 months than any period I can remember. Owners thinking about a sale should consider performing a billing audit, which can be done relatively inexpensively and may save them from having to suspend a sale process. ” This increased scrutiny, and investors’ preference for strong cash flow have dampened deal activity. Many hospices that sold over the past few years likely wouldn’t command those same premiums today, simply because the cash flow isn’t there.  To be clear, investors still love hospice. Buyer demand remains high. Regulators have taken a ‘if it ain’t broke’ position with the industry over the years, in terms of reimbursement, which is rare in healthcare services. And a mostly favorable proposed rule, with a 2.6% overall increase in 2025, along with the elimination of VBID has only helped reaffirm that interest. Transaction volume is driven primarily by a scarcity of quality opportunities. Of the notable deals in the quarter:    Kaltroco-backed New Day Healthcare ’s acquisition of Compassion Hospice . Another PurposeCare deal, this time for Queen City Skilled Care , based in Cincinnati. Legacy Care Partners acquired Superior Hospice & Home Health . On the overall deal market, “It’s hard to predict what transaction volume will look like over the next few quarters,” added Mertz. “ Buyers remain hungry for quality deals ,   but the standards around quality have changed, driven by regulatory pressures and the current debt environment.” If you are interested, you can also download the Q1 2024 Home-Based Care M&A Report via the following link:

Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A. Addus Homecare (Nasdaq: ADUS) Highlights Addus reiterated its position towards CMS's Proposed Medicaid Access Rule and expects a final rule to be published around late Q1 2024 and early Q2 2024. There is still uncertainty as to whether the 2,000+ comments that CMS received will cause a material change between the proposed and final rule. Addus grew significantly during Q3 2023 – revenue ($270.7M) and EBITDA ($27.6M) increased 12.6% and 21.1%%, respectively, over Q3 2022. The labor market continues to show signs of improvement. As a result, Addus increased hires per business day from 81 in Q2 2023 to 84 in Q3 2023. Although the company has had strong growth in its fundamentals in 2023, its stock price hasn't followed (-12.10%). This is because ~75% of Addus' revenue comes from the personal care segment, which is compromised by CMS's Proposed Medicaid Access Rule. If the final rule is materially different than the proposed rule, in a beneficial way, we should see the stock price rise in short order. Key Financial Figures M&A Activity Over the last two quarters Addus slowed down its acquisition activity due to uncertainty around the Home Health Proposed Rule for 2024 and the Proposed Medicaid Access Rule. Home health acquisitions might pick up after the final home health rule, published in 11/1/2023, was not a negative surprise .​ “Over the past few months, we have continued to see limited strategic opportunities in both personal care and home health due to the reimbursement uncertainty that exists in each of these segments. As we have more clarity around these particular issues, we believe that we will start to see increasing acquisition opportunities in these segments that will meet our strategic objectives.”​ - Dirk Allison, Chairman and Chief Executive Officer​ Guidance Addus expects continued growth across all operating segments for Q4 2023:​ “Looking ahead to the fourth quarter, we still expect our growth rate in personal care to most likely be above that 3% to 5% range” and “in the clinical services, we've talked about we've seen some sequential improvement from Q2 into Q3. I think we would expect and anticipate to see continued positive momentum there” ​- Brian Poff, CFO​ Aveanna Healthcare (Nasdaq: AVAH) Highlights Aveanna continued its positive growth trend during Q3 2023 – revenue increased 7.9%, gross profit 9.4%, and adjusted EBITDA 46.2% over the prior year period. This was mainly due to “the improved payer rate environment as well as cost reduction efforts” said Jeff Shaner, CEO.​ Strong demand for the company’s services remains, but the primary challenge in meeting that demand is still the labor market. However, Aveanna begins to see “early signs of improvement in the caregiver labor market”, said Shaner. We could see accelerated top-line growth over the next few quarters if the labor market continues to improve.​ YTD 2023, the company has successfully achieved reimbursement rate increases in 19 states of its private duty services (PDS) segment (eight of which have seen double-digit increases). Altogether, this represents 55% of the segment’s revenue or 44% of the company’s revenue for Q3 2023.​ In addition to rate increases, Aveanna has been successful at shifting care volumes towards preferred payers in its PDS and home health segments. YTD 2023 PDS preferred payer volumes increased from 10% to 17% and home health episodic payer mix increased from 63% to 75%.​ Overall, Aveanna has had a successful 2023 year, in which the company has also set strong foundational bases to continue to grow in 2024:​ “We are encouraged by our 2023 rate increases and subsequent recruiting results, and our business is beginning to demonstrate signs of recovery”​ - Jeff Shaner, CEO​ Key Financial Figures M&A Activity There are still no signs of a growth-through-acquisition strategy. This is likely due to the company’s high leverage ratio and the uncertainty around CMS’s proposed rules.​ Guidance Aveanna is increasing 2023’s initial guidance:​ “As it relates to our refreshed outlook for the year, based on the strength of our first 9 months results and the continued rate improvement, we are comfortably raising our full year revenue guidance to a range of $1.87 billion to $1.88 billion and an adjusted EBITDA guidance range of $134 million to $137 million”​ - Jeff Shaner, CEO​ The Pennant Group, Inc. (Nasdaq: PNTG) Highlights Pennant reported strong operational results for Q3 2023 – revenue increased $21.8 million or 18.5%, adjusted EBITDA increased $3.0 million or 37.8%, and adjusted earnings per share grew $0.06 or 42.9% all over Q2 2022.​ The company also experienced short-term growth over the previous quarter as each of the three operating segments increased revenue – hospice +10.3%, home health +5.4%, and senior living services +3.8%.​ The company attributes the growth to their “continued commitment to the five key focus areas (clinical excellence, enhanced employee experience, acquisitions and organic growth, and margin improvement) and their investment in leadership”, Brent Guerisoli, CEO.​ Key Financial Figures M&A Activity Pennant expects to remain highly acquisitive in the near future:​ “With momentum in our results and a 1.3x net debt to adjusted EBITDA leverage ratio, we are poised to pursue our disciplined acquisition strategy” – Brent Guerisoli, CEO & Director In addition, the company has seen an increase in acquisition targets: “Today, we are seeing more potential acquisitions that are consistent with our valuation expectations”, said Guerisoli.​ The company completed three acquisitions since the previous earnings call:​ Valor Hospice Care – locations in Sierra Vista and Green Valley (adds two new AZ geographies).​ Guardian Hospice – expands Pennant’s footprint in Northern Texas and Souther Oklahoma.​ Hospice license in Concord, California – will allow one the company’s most successful hospice agencies to expand its service area.​ Guidance Pennant expects to remain highly acquisitive in the near future:​ “Given our solid performance in both business segments, we are increasing our full year 2023 guidance to revenue of $526 million to $531 million, adjusted EBITDA of $394 million to $42.6 million, and adjusted EPS of $0.69 to $0.75.​" – Brent Guerisoli, CEO & Director Enhabit Home Health & Hospice (Nasdaq: EHAB) Highlights Over a year has passed since Enhabit Home Health & Hospice became a standalone company, but investors remain skeptical of the company’s ability to fulfill financial expectations. This is weighing in the stock price, down 57.4% since its public debut, and has set in motion a strategic review process. This said, if the strategic review process ends up in an investor favorably-viewed outcome, such as a sale to a larger strategic, the stock price could jolt upwards. ​ Along with the operating challenges from becoming a standalone company, Enhabit has suffered from the uncertainty and threat of CMS’s Home Health rule. Unlike the other public companies covered in this report, the home health segment makes up 81.6% of the company’s total revenue, which makes it more vulnerable to impacts from CMS’s rules.​ Operational performance continued to dwindle during Q3 2023 – revenue was down $7.4 million or 2.8% and adjusted EBITDA was down $8.5 million or 26.7% over Q3 2022. The majority of the decrease was caused by a shift in the company’s home health payor mix:​ “We estimate the continued shift to more non-episodic payors in home health, decreased revenue and adjusted EBITDA, approximately $8 million year-over-year.”​ - Crissy Carlisle, CFO ​ Enhabit has been actively working to amend their credit agreement, which includes a 5.25x leverage ratio covenant (the company’s current leverage ratio is 5.14 and growing). The company successfully obtained a waiver out of an abundance of caution for the Q3 2023 period and continue to work with their lenders to obtain additional cushion to the financial covenants for the future. Key Financial Figures M&A Activity There will likely be no acquisitions in the short-term as the strategic review process is underway and the outcome has not been determined. Guidance Enhabit revised their initial adjusted EBITDA guidance for 2023 of $125 - $140 million down to $93 -$98 million.​ The company expects volume growth for 2024: “In regards to volumes, we expect the success we've had with our payor innovation team and our recruitment and retention of clinical staff to drive volume growth in 2024”​ - Crissy Carlisle, CFO ​ To download the .pdf version of this report, click below.