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SPAC Investing: $ATIP - A Tip for a Post-COVID Healthcare Winner

Looking for "a tip." Consider $ATIP.


There are 207.7MM shares outstanding, equating to a $2.3BN market cap. The stock trades ~$20MM per day. Lazard has been piling into this, buying up 11% of the float. Glenview, a healthcare focused hedge fund, has also acquired ~10% of the float.


EXECUTIVE SUMMARY

  • OVERVIEW: ATIP is the largest single-branded physical therapy provider in the U.S, with 875-owned clinics across 25 states.

  • SET-UP: $ATIP has yet to receive any meaningful sell-side coverage, but has already received descent institutional support in its trading debut. Benchmark has initiated with a $14 target, as has Barrington. Bulge bracket initiations should drive meaningful interest into the shares. Given the size of the Company, trends in market, and attractive outlook, the shares should receive favorable coverage in the coming weeks. ATIP was priced at a meaningful valuation discount vs. peers (14x 2022 EBITDA vs. peers at ~22x).

  • The investment opportunity exists b/c $ATIP found itself over-indebted because of its PE sponsor (Advent - they like to run hot...), which unfortunately intersected with the realities of COVID. The uses of the recent financing proceeds were to repay debt and de-lever the capital structure

  • BACKING: $ATIP has strong sponsors. The company was owned by Advent, which has an unbelievable PE track record. They are rolling 100% of their equity. Fortress is deferring 100% of its founder shares and invested $75MM into the Company while existing management rolled over 100% of their equity

  • MARKET TREND: The $34BN PT market is growing at 5-6% per year. With 45% of the market addressed by independents, there is a large runway for continued consolidation and share gains by the large operators, supplemented by strong secular tailwinds. ATIP is on the right side of healthcare trends

  • LARGE GROWTH RUNWAY: $ATIP points to a current identified roadmap of 931 potential new locations in states where $ATIP currently operates (more than doubling the current footprint) over the next 10-years, providing visibility for continued growth. M&A provides an attractive path to supplement growth, given the large base of fragmented operators. $ATIP is able to buy clinics at ~5x EBITDA (vs. an expected 20x trading multiple), which provides highly accretive growth. $ATIP has a current pipeline of ~1,200 clinics for M&A consideration

  • STRONG FINANCIAL PERFORMANCE: Prior to COVID, $ATIP had demonstrated its ability to capitalize on the strong secular trends benefiting the Physical Therapy market. In 2019, revenue grew from $739MM to $785MM (6%), with EBITDA surging 35% (good to have Advent involved - strong operational contributions)

  • PATH TO UPSIDE: As the market leader, $ATIP should trade at a premium multiple to its closest comparable. With a clearly path to $200MM run-rate EBITDA by 2022, at 25x EBITDA multiple translates to a $5bn EV. With ~$370MM of debt and 207MM shares, this equates to ~$22 per share. This is not a price target, but just an illustration of how other investors could value the shares


OVERVIEW

  • $ATIP is the largest single-branded physical therapy provider in the U.S, with 875-owned clinics across 25 states. 51% of revenues comes from commercial payors, 25% from government payors, 17% worker's compensation, and 8% other

  • Scale matters; $ATIP has great relationships with payors and is in-network, which helps the Company optimize volumes against rates. The Company is also able to enter into value-based arrangements across Commercial, Medicare, and Medicaid programs

  • Growth comes from same store sales ("SSS"), new locations, as well as M&A opportunities to consolidate a large, fragmented market. The Company expects that it can achieve 10% organic growth, with additional upside from M&A. 3-4% of growth will come from SSS improvements, while 7% will come from new organic location growth. $ATIP had been on a pace to open ~70 new units per year before COVID

  • With scale comes improved go-to-market (customer acquisition). $ATIP gets patients from doctor referrals, direct marketing, and direct to employer relationships. As a large corporate provider, $ATIP should have advantaged customer acquisition to drive location economics and margins

MARKET TREND

  • Outpatient PT clinics benefit from a strong secular trend as well as a strong value proposition vs. hospital-based PT, where rates are 2.5 - 3.0x higher

  • Let's start with the highest level trend to make sure we are on the right side of broader macro trends. I like to start with Google trends as a nice measure of which way the tide is going. Physical therapy, in general, has been steadily increasing over time, but had an obvious exogenous shock due to COVID. As the economy reopens AND as people feel safe going to see medical care, we see the prior trend rapidly getting restored

  • The PT market is LARGE and relevant, falling just behind the dental market.

  • The market is growing 5-6% per year, indicative of a healthy secular trend. 45% of the industry is currently independent, leaving a large fragmented base to be addressed by the scale players as they take increasing market share

  • $ATIP is the scale player among an industry with a very long right tail of smaller players


UNIT ECONOMICS

  • For any location-based business, we first want to test our economic assumptions. A good place to start is just to see what other industry participants earn. Is this generally a good business? Are ROE's healthy? We want to be in 'good neighborhoods,' not just be a good house in a bad neighborhood. So starting off, we see that $USPH has a healthy ROE of 15%, which is pretty close to the Company's ROIC (to account for leverage)


  • Revenues are largely due from insurance payments - commercial private insurance, Medicare, Medicaid, etc. Very little is out of pocket. Thus, this is a fee-for-service business where SCALE matters. When reimbursement is set by the government, it's crucial to be a scale operator in order to earn attractive margins. The government can't set a price that bankrupts the left tail of all providers, so for the scale players, there is a chance to over-earn

  • For any business, we want to see good cohort performance. $ATIP provides details on how its new locations perform. It's important to see that new units generate SSS growth, and thus add to an ever-increasing base of revenues. In the chart below, you want to see each color bar increasing from year to year - positive SSS serves as a sling-shot for future growth


  • New locations are 3,100 square feet and cost $300k. With contribution margin at maturity of ~$150k, the units have payback of 2 years or a 50% ROIC. This is the same as the economics of $WING restaurants. $ATIP notes that payback is from 12-18 months, which is attractive. Again, cohort performance matters. Here the Company provides more detail around cohort performance


COVID IMPACT

  • The impact from COVID was severe, but both ATIP and its peer US Physical Therapy ($USPH) have quickly had volume levels surge back to pre-pandemic levels. In the lead-up to the deal, however, $ATIP had experienced a significant reduction in patient visits (average daily visits declined from 25k to 19k)

  • $ATIP is already seeing volumes recover to 83% of pre-COVID levels as of April

VALUATION FRAMEWORK

  • Key drivers for the business include unit economics of locations, same-store-sales, which then are set against expectations for future unit growth (holding economics constant). From there, these businesses are generally valued against an EV/EBITDA or P/E multiple

  • For comparison, USPH is valued at ~20x EBITDA and 40x P/E, which are solid multiples for a business with good secular trends and stable revenues

  • ATIP has shown an ability to generate strong SSS. Given the value of organic growth (due to operating leverage), superior SSS metrics should support a PREMIUM valuation. As shown below, ATIP has shown strong SSS growth than it's closest competitor, USPH

  • Which profile would you rather buy? ATIP has great growth and margin metrics relative to comparables, yet trades at a discounted multiple

  • $ATIP has the potential to make impact acquisitions. As disclosed in the proxy, $ATIP had been close to completing $700MM acquisition during the time of the deal discussion. Such transformative M&A, in light of the compelling market opportunity, could generate meaningful accretion to shareholders


INSTITUTIONAL SUPPORT

  • The leading PT operator will receive significant institutional support. For one, we can look at USPH and see the 'right' types of owners. For a $1.5bn company, USPH has assembled the gold list roster of shareholders.

  • Why does this matter? ATIP is larger with a platinum sponsor (Advent). As ATIP seasons, the Company will likely see a strong uptake of interest by long only funds, not to mention future index inclusion. This dynamic will support the shares (decrease whippy volatility) and cause the valuation gap to close

  • With Citigroup, Deutsche Bank, Bank of America, and Barclays as placement agents in the PIPE, there is a strong expectation of bulge bracket research initiation in the coming weeks or months

RISKS

  • Aside from COVID 2.0, key risks relate to reimbursement rates. Ultimately, ATIP is a price taker. Thus, having best in class, scaled operations is key to ensuring the Company's success

  • ATIP is ~2-3x levered, which represents the potential for financing risks, although the steady, high-margin EBITDA provides significant credit support

Disclosure: I own 50,000 shares with a cost basis of $10.01.






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