On Separate Sides Of The World, Acadia Healthcare Runs Into Expansion Problems

|
About: Acadia Healthcare Co. (ACHC)
by: Penn Little
Summary

In Indio, California Acadia is facing fierce resident opposition of an 80-bed facility they plan to open.

In the U.K. Parliament. the Joint Committee on Human Rights is listening to alternatives after allegations about warehousing children have been exposed.

While seemingly unrelated, these two unique situations on opposite sides of the world highlight the trouble Acadia will have growing over the next few years.

I have spent the past 16 months researching and writing about the issues surrounding Acadia (Nasdaq: ACHC). We have discussed in length the details of how Acadia has gone about its expansion plan. This strategy was mostly predicated on using debt to acquire other facilities. But the company has opened locations on their own, and despite a few notable closures over the past 12 months, they need to keep expanding the number of facilities they have to keep revenue growing to keep investors happy. With an onerous debt load, Acadia desperately needs to keep growing revenues and expanding to keep Wall Street happy. Any stumble on their ability to execute would be devastating to the company.

Now - on separate sides of the world - Acadia is getting squeezed when it comes to those very expansion plans.

We covered the original Parliamentary hearings when myself and Katie Mikles travelled to the UK to highlight the plight of kids that were being held against their will in Acadia facilities. As our previous reports pointed out, Acadia entered the U.K. market with their $2.2 billion acquisition of Priory Group which closed in 2016. The U.K. Parliament requested input from experts on the state of the market. We are pleased to share the report, which you can read below, which we have delivered to the Parliament’s Joint Committee on Human Rights.

The real risk here is that the NHS turns off the spending faucet and puts the squeeze on Acadia/ Priory Group. With Acadia operating 371 facilities in the U.K. and getting over $750 million in revenue from the U.K. any pushback from the NHS on reimbursement would really harm the company. Remember Acadia is so highly levered that even a small decline in revenue could be severely detrimental to the equity.

On the other side of the World in Indio, California, Acadia is seeing the planned opening of a new 80-bed psychiatric facility, residents of Indio, California are putting up a fight to stop the facility from encroaching on their area. While it is an isolated issue, it is reflective of the growing sentiment against these facilities. According to the Desert Sun the residents of the community are particularly concerned about he patients that will be involuntarily committed. The City Council rejected the proposal last fall in a 3-1 vote.

https://www.gannett-cdn.com/-mm-/234f77dc3283b1cebcc3269c442a2dfa8b045834/c=99-0-729-474/local/-/media/2018/05/24/PalmSprings/PalmSprings/636627799227580288-IBHH-Site.jpg?width=540&height=405&fit=crop

The Proposed site in Indio, CA (above). Source: The Desert Sun.

There is another meeting occurring at this very moment of publishing, an appeal of the denial of special use permit. This supplication is being presented by Acadia's division-level leadership and has been spearheaded by the Corporate Chief Strategy Officer, Andy Hanner. The meeting is being covered live tonight by Ricardo Lopez of the Desert Sun, via his Twitter Feed (see below).

With the deal on the table; the council is also seeking feedback from the public as well. An Op-Ed published again in the Desert Sun expressed the desire for the Acadia facility to not be approved.

“Residents of the neighborhood adjacent to the facility site insist that regardless of how perfect the location might fit Acadia Healthcare’s vision, they’re not convinced there won’t be problems down the road. In addition, many say Indio and the east Coachella Valley already bear the brunt of hosting many public services – such as homeless shelters – that other wealthier cities reject.”

It is clear that Acadia’s public image is beginning to suffer, as is the entirety of the treatment industry. Years of underinvesting in good medical outcomes to pad the bottom line and caring more about pleasing Wall Street than the patient have led to horrendous outcomes for patients. After our 14-month investigation we highlighted these in our first article.

As the public image turns against these companies they could all have a much more difficult time expanding than is anticipated. When a company’s growth strategy is predicated on debt fueled acquisitions and they can no longer add to that debt load they will need to grow organically. It is clear that Acadia is facing pressure from residents of the neighborhoods they seek to expand in. One wonders if that is their actions have created this consequence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.