Ardent Health’s IPO: A Hospital Company with Unique Attributes

Ardent Health’s (ARDT, Ardent) recent IPO provides valuable insight into the valuation of hospitals. On July 19, 2024, the company raised $192 million by offering 12 million shares at $16 per share, significantly below its targeted range of $20 to $22. This pricing resulted in an equity value of approximately $2.3 billion.

ARDT is the fourth largest privately held, for-profit operator of hospitals, operating in eight growing mid-sized urban markets across the six states of Texas, Oklahoma, New Mexico, New Jersey, Idaho and Kansas. It operates either independently or through its well-established and differentiated joint venture (JV-model). Ardent leases twelve of its hospitals and eighteen of its medical office buildings (MOBs) from two real estate investment trusts (REITs), pursuant to long-term lease agreements. As a result, Ardent’s capital structure and financial presentation is different than many of their competitors.

By the Numbers – Adjusted EBITDAR Calculation

Adjusted earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) is a commonly used valuation measure used by the market to evaluate and compare the financial performance of different companies in the hospital industry. Ardent’s EBITDAR calculation is more complicated than its industry competitors due to adjustments for leased facilities and accounting effects of its joint ventures. According to Ardent’s S-1, the following table represents adjusted EBITDAR for the 1^st quarter 2024:

Ardent management provides investors with the above EBITDAR calculation because it can be used to enhance compatibility between companies. The large adjustments highlighted above are depreciation and amortization, rent expense payable and the non-controlling interest.

The Joint Venture (JV) Model

• Ardent’s portfolio consists of thirty acute care hospitals, eighteen of which are operated by JVs. Of the eighteen JVs, the nine hospitals associated with the UT Health East Texas JV are wholly owned by the JV’s members.
• For the year ended December 31, 2023, $1.6 billion (or approximately 30%) of Ardent’s total revenue of $5.4 billion was attributable to its JVs.
• The JV model enhances scale and unique opportunities with advantages such as expanded access points, clinical talent availability and local brand recognition. As the majority owner in these partnerships, Ardent strengthens clinical services, drives operating improvements and centrally manages operations.

Yes, But…

• While the JV Model creates strong hospitals with aligned incentives, accounting for pro-rata share of profits and related cash flow creates a challenge for the valuator.
• In addition, Ardent’s leased facility strategy (12 of 30 hospitals) creates accounting differences compared to its peers. Ardent leases the majority of the medical office buildings used by physicians and outpatient providers. As a result, Ardent’s capital structure is different than many competitors, especially those whose real estate portfolio is predominantly owned and not leased.
• For 2023, rent expense payable to REITs was $156.8 million. This escalating amount represents a significant portion of the company’s EBITDAR.

Health Care Valuation Takeaways

• The valuator should use caution when comparing Ardent to its competitors. Important differences exist that can affect the valuation metric utilized in the calculation of the valuation multiple. Differences include leased facilities (rather than owned) and the minority interests of joint venture partners.
• Adjusted EBITDAR does not reflect Ardent’s cash requirements for leasing commitments, so this financial measure should not be construed as a performance or liquidity measure.

The challenges of health care valuation can vary greatly on a case-by-case basis, and the circumstances of Ardent Health’s IPO only serve to underscore this diversity. If you need assistance in negotiating the industry landscape, Weaver is here to help. Contact us today to learn more.

Authored by Lauren Tollison and Sam Betsill

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