Encompass Health : BofA Securities 2025 Healthcare Conference Transcript

Published: 2025-05-13 16:32:15 ET EHC

Published on 05/13/2025 at 16:32

13-May-2025

Encompass Health Corp. (EHC)

Bank of America Global Healthcare Conference

Douglas E. Coltharp

Chief Financial Officer & Executive Vice President, Encompass Health Corp.

Brad Kennedy

Group President-South Central Region, Encompass Health Corp.

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Joanna Gajuk

Analyst, BofA Securities, Inc.

Joanna Gajuk

Analyst, BofA Securities, Inc.

Hi. Sounds like we are ready to start. Good morning, everyone. My name is Joanna Gajuk. I'm a Bank of America healthcare facilities and managed care analyst. Thank you so much for joining the conference and thanks for joining this session. So, it's my pleasure now to host the next 30 minutes with Encompass Health, who's the largest operator of inpatient rehab facilities in the US. And today, with us, we have Doug, who's going to introduce Brad. But Doug is the CFO of the company. And Brad, I guess, maybe you introduce yourself, too.

Douglas E. Coltharp

Chief Financial Officer & Executive Vice President, Encompass Health Corp.

I'll introduce Brad very quickly, if I may, Joanna. First of all, good morning everyone. Thanks for your time and consideration this morning. Brad Kennedy is our Group President at Encompass Health. Brad started with Encompass Health 15 years ago. He was a physical therapist, but by the time he joined Encompass Health, he had risen to a hospital CEO. As Group President, Brad now oversees three of our eight geographical regions and is responsible for 60 of our 167 hospitals. So, very pleased to have Brad up here, a voice that perhaps many of you in this room don't get to hear from too often.

Joanna Gajuk

Analyst, BofA Securities, Inc.

Great. Thank you so much. So, I guess, we'd go right into the Q&A.

Joanna Gajuk

Analyst, BofA Securities, Inc.

The topic of the quarter was volumes in the quarter were very, very good. So, maybe walk us through how we should think about this translating to the rest of the year and going forward? I guess, you do have your long-term guidance for volumes, 6% to 8% organically. And how much, I guess, is coming from bed additions and de novos and such? And how we should think about this translating 2026 and forward?

Douglas E. Coltharp

Chief Financial Officer & Executive Vice President, Encompass Health Corp.

Yeah. So for a period of time, we've had a long-range target of discharge growth of 6% to 8%. That is a multiyear CAGR, so we anticipate that there will be fluctuations from quarter to quarter based on things like what our comparable from the prior year is and also when new capacity is being added and the ramp up of that new capacity. Having said that, we've been pretty steady. For the last 11 quarters, we've had total discharge growth that exceeded 6%. And for the same 11 quarters, our same-store growth has exceeded 4%. We were very pleased with our growth in the first quarter, because we were up against a very difficult comp from last year.

Last year in the first quarter, our total discharge growth was 10%, and that was aided by two factors. First, and it does make a difference, is the first quarter of last year included an extra day because of leap year. And the second is the first quarter of 2024 ended on Easter Sunday. And we have observed historically is when you have the quarter end on a holiday, which is rare, but sometimes Easter comes into play, it has the effect of pulling forward discharges that might otherwise have occurred in the first week of the second quarter into the first quarter.

We continue to hold to that long-term discharge growth pattern. Again, it will fluctuate based on when capacity is coming on board. If you just do a comparison of 2025 to 2024, our capacity additions for this year are heavily weighted towards the back end of the year. We're opening up seven de novo hospitals in 2025, and five of those openings are occurring after September, whereas in 2024, we had many more of those openings occurring in the spring. But generally speaking, we would expect the breakdown between new store and same-store discharge growth to be about two-thirds same-store and the balance in new store.

Joanna Gajuk

Analyst, BofA Securities, Inc.

And talking about the new store, right, so you - recently you raised your targets in terms of the bed additions for this year and also the next two years. So, maybe you can remind the audience in terms of the economics, the returns you target for bed additions versus de novos.

Douglas E. Coltharp

Chief Financial Officer & Executive Vice President, Encompass Health Corp.

Yeah. So, first, the real why in terms of why we increased the bed expansion activity is that our occupancy rate has been going up pretty rapidly. So, in the first quarter, our occupancy rate was at 78.8%, and that's the highest it has ever been. That was an increase of 210 basis points over an already high occupancy rate that was observed in the first quarter of 2024. It's important to note that we have been systematically increasing the

theoretical occupancy rate of the company by increasing the portion of our overall portfolio that is comprised of private versus semi-private rooms.

As a point of comparison, if you go back as recently as the end of 2020, about 40% of our overall portfolio was comprised of private rooms and the balance was in semi-private rooms. And the breakdown between those two is important, because your occupancy level is always going to be higher if you've got more private rooms, and that is due to the fact that you don't have to account for issues of gender or germ compatibility.

It's also the case that just given the conditions that we're treating in our hospitals, a high percentage of our patients come to us with some form of cognitive impairment, and that can require patient isolation as well. As a result of really three initiatives, one is the fact that all of our de novo activity is comprised of private rooms -almost all of our bed expansion opportunity is comprised of private rooms. And when we are doing remodels of older hospitals, which have semi-private rooms, which was a convention as recently as 10 years ago, we try to take the opportunity to convert some of those into private rooms.

We've lifted the percentage of our portfolio that is comprised of private beds at the end of the first quarter to 56%. So, a very substantial increase. Even with that, it's a high class problem at a 70% occupancy rate, and it's not evenly distributed across all of our hospitals. We identified some opportunities based on sustained growth that we've been realizing over several years to pull forward some bed expansions that were otherwise likely to occur in 2027 or 2028 into 2026, and that'll increase our overall capacity.

The returns on bed expansions are the highest return that we get on a deployment of capital. And that is because we are building into a market where the demand is already known, just justifying the bed expansion, to begin with. We are leveraging components of the fixed infrastructure and the administrative staff. We already have payer contracts and referral sources in place. So, it's not infrequent that we will see a return on a bed expansion with an IRR that is north of 30%. So, basically, we'll take all of those opportunities that we can get.

We've increased the targeted number of beds that we'll be adding to existing hospitals for each of 2026 and 2027 to about 120 each. And again, look forward to additional opportunities to be able to do that.

Joanna Gajuk

Analyst, BofA Securities, Inc.

And so, you said 30% on the beds, and could you compare it to de novos when you build completely new facility, how are the returns on those?

Douglas E. Coltharp

Chief Financial Officer & Executive Vice President, Encompass Health Corp.

So, we look at the de novo returns a couple of ways. The first is that we want the ROIC by the end of year three of a de novo opening to exceed our weighted average cost of capital. When we're looking at the IRR on those, it's typically in the 12% to 15% range. And we've got a pretty good track record of being able to exceed those targets.

Joanna Gajuk

Analyst, BofA Securities, Inc.

Right. No, these are very attractive numbers, and I guess, explain why you're feeling strongly about the ability or the reason why you're going to accelerate, like you said, the bed expansions and such. So maybe, Brad, you can talk about - it sounds like you oversee a good chunk of the company. So, maybe kind of walk us through the

plans in your regions in terms of the de novos and also maybe give us some examples of the success stories or how you're kind of looking at how, I guess, the strategy is playing in real life.

Brad Kennedy

Group President-South Central Region, Encompass Health Corp.

Absolutely. So, I think what underpins this growth is the aging demographic, and we're experiencing those demographic tailwinds. One out of every five Americans will be over age 65 by the year 2030, and that's our

cohort, over age 65. In fact, our average age patient is 77. So, we are experiencing those demographic tailwinds. Additionally, when we identify a market that has the possibility for de novo, we take a very data driven approach to our due diligence. We look at what the competitive landscape is, the demographics of the market, the divergence of the supply and the demand in that particular market, how fast the age 65-plus population is aging in that market. We look at the Medicare Advantage penetration. We look at labor costs, land costs, what potential construction costs would be. We even look at the proximity to an existing hospital. And I want to share our success stories with that strategy in my region.

We have used that strategy in several of our larger markets such as Houston, St. Louis, Atlanta, some of our markets in Florida. And even here in Las Vegas, we have three hospitals proximate to each other. And we realize some economies of scale with that situation, because we're able to share staff freely, we're able to share medical staff freely. But also, importantly, two of these strategies were implemented along with two major joint venture partners, BJC HealthCare in St. Louis, and Piedmont in Georgia. We aligned ourselves each other with - or each other's growth strategy, and we determined that we could expand to align with our joint venture partners' footprint, so there would be overlap. That's been very successful in both markets. In St. Louis, we started with one hospital in 2001. Since 2017, we've opened an additional hospital and two additional satellites. In Georgia, we are now up to seven operating JV hospitals with Piedmont and one is under construction.

Joanna Gajuk

Analyst, BofA Securities, Inc.

And I guess, maybe just touch a little bit more on that JV strategy, right? Is there also some numerical thought process there kind of the returns on a JV/non-JV? Because it sounds like there's some benefits [ph] - clear benefits that you JV for (00:10:45).

Brad Kennedy

Group President-South Central Region, Encompass Health Corp.

There are. It's part of our due diligence when we are looking at a market, we look at how many acute care hospitals are in the market, what are the individual market shares for those acute care hospitals. We look at whether an acute care hospital has an in house inpatient rehabilitation unit. Is it operating well? Do they have opportunities with their length of stay in the acute care setting, readmission rate, things that we can help them

with, because we are a very attractive partner for acute care hospitals for different reasons. And typically, they actually come to us.

One reason may be they want to add IRF to augment their continuity of care, and they need a partner to help them do that. Another reason may be that they are operating an in house inpatient rehabilitation unit. It's either not operating well or they need that space for another service line. And so, they come to us to help them roll those beds out. We absorb the beds and roll them out into a freestanding hospital. So, JV partners are about 40% of our book of business, and we have a very robust pipeline. And in any typical moment, about 50% of our pipeline consists of potential JV partnerships. So, we see that as an upside.

Disclaimer

Encompass Health Corporation published this content on May 13, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 13, 2025 at 20:31 UTC.