National Healthcare Corp. Real Client Managed Portfolio By Neha Saoji Martin Maurer Yifan Liu Prateek Baveja Presented April 30, 2015

Agenda Introduction Company Review Macroeconomic Conditions Industry Prospects Stock Market Performance Financial Analysis Financial Projections Valuation Recommendation

Introduction – Current Position May 14, 2014 Purchased 100 shares @ 55.25 Cost Basis: $5,525 April 27, 2015 Current price: 64.36 Market Value: $6,436 HPR = 16.5% P&L = $911 December 2, 2014 Hold 100 shares @$59.82 Stock Performance till date Position and Transaction History

Recent Stock Performance 20 day MA consistently above 200 day MA 30 day RSI  neither overbought or oversold Source: S&P Capital IQ

Recent Stock Performance Underperformed Small-Cap Health Care Services Index Source: S&P Capital IQ

Main Business Activities Business Overview Main Business Activities Skilled Nursing Care Rehabilitation Care Senior Living Services Home Health Care Services Provider of Long Term Care Services Other Business Activities Management, Insurance & Financial Services Hospice Services Long term care as it exists today is broad in its definition and generally refers to a range of services that support the daily needs of individuals with limited functioning or disability (Houser 2007). Limited functioning or disability is typically determined according to an individual’s ability to complete activities of daily living (ADLs) or instrumental activities of daily living (IADLs). Such activities include eating, bathing and dressing, as well as management of food, medication or house hold chores (Binstock, Cluff et al. 1996). The long term care population generally refers to the nearly 70% of the Americans age 65 or older who will require some type of long term care within their lifetime All these services require continuous health care but not hospital services. Care must be ordered by and under the direction of a physician Subacute care is comprehensive inpatient care designed for someone who has an acute illness, injury, or exacerbation of a disease process. It is goal oriented treatment rendered immediately after, or instead of, acute hospitalization to treat one or more specific active complex medical conditions or to administer one or more technically complex treatments, in the context of a person’s underlying long-term conditions and overall situation. Post acute care: Following a hospitalization for injury or illness, many patients require continued medical care, either at home or in a specialized facility. Post-acute care refers to a range of medical care services that support the individual’s continued recovery from illness or management of a chronic illness or disability. In our facilities, experienced medical professionals provide medical services prescribed by physicians. Registered nurses, licensed practical nurses and certified nursing assistants provide comprehensive, individualized nursing care 24 hours a day. In addition, our facilities provide licensed therapy services, quality nutrition services, social services, activities, and housekeeping and laundry services. We operate 74 skilled nursing facilities as of December 31, 2014. We manage eight facilities for third party owners. Revenues from the 66 facilities we own or lease are reported as net patient revenues in our financial statements. Management fee income is recorded as other revenues from the eight facilities that we manage. Source: 2014 10-k.

Business Overview Customers Sources of Revenues No individual customer or group of customers account for a significant portion of revenues Care must be ordered by a physician Patients receive funds to pay cost of care from the following sources Medicare Medicaid Private Pay Managed Care Medicare reimbursement rates were trimmed 11.1% in 2012. On April 1, 2013, the automatic 2% cuts (known as “sequestration”) begen for Medicare providers. The resulting decrease in revenue to NHC’s skilled nursing facilities was approximately $4,500,000 for the 2014 caldendar years, or 1,125 per quarter (2014 10K, p. 10) Source: 2014 10-K, p. 7

Business Overview – Facilities and Programs Skilled nursing & senior living facilities, and homecare programs 16 2 53 3 1 25 8 4 Alabama (3) Florida (8) Georgia (3) Kentucky (2) Massachusetts (4) Missouri (16) New Hampshire (3) South Carolina (25) Tennessee (53) Virginia (1) Source: NHC website: http://www.nhccare.com/locations.cfm

Management Management underperformed peers Source: Bloomberg

Strategic Objectives Growth in assisted living market Expand long-term care operations 24 new constructions or facility purchases since Sept. 2013 Source: 2014 10-K, p. 12 and p. 33

S W T O SWOT Analysis Many private payers (25%) Integrated business segments Decline in occupancy rates Dependence on third-party payers and reimbursement rates S W T O Aging population Increasing insurance coverage (Affordable Care Act) Wrongful death lawsuits Industry regulation

Macro Review – Industry Drivers Federal Funding for Medicaid & Medicare Aging Population 5.8% CAGR Medicare reimbursement rates were trimmed 11.1% in 2012. On April 1, 2013, the automatic 2% cuts (known as “sequestration”) begen for Medicare providers. The resulting decrease in revenue to NHC’s skilled nursing facilities was approximately $4,500,000 for the 2014 caldendar years, or 1,125 per quarter (2014 10K, p. 10) Source 1: “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. May 2014. Source 2: Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. July 2014.

Macro Review – Industry Drivers Increased Private Insurance Ownership “Number of people with private health insurance.“ IBISWorld Business Environment Profiles. IBISWorld. Oct.. 2014

Industry Analysis 58,500 long-term-care providers in U.S. in 2012 No dominant brand in the industry Intense competition in the South and West regions Depends on referrals from acute care hospitals, physicians & others Crop the chart and put the po 58,500 long-term-care providers in U.S. in 2012 NHC competes with hundreds of skilled nursing facilities in the states they operate in No single operator dominates the markets NHC depends on referrals from acute care hospitals, physicians, residential care facilities, church groups and other community organizations ints from the next slide 58,500 long-term-care providers in U.S. in 2012 Source: CDC/NCHS, National Study of Long-Term Care Providers and Table 1 in Appendix B.

Industry Analysis - Occupancy Rates Source: http://www.ahcancal.org/research_data/trends_statistics/Documents/Trend_PVNF_FINALRPT_March2015.pdf

Industry Outlook Despite favorable demographic trends, decreased government funding has hindered growth Annual Revenue Growth 2010 – 2015  2.9% Expected Annual Revenue Growth 2015 4.8% Expected Annual Revenue Growth 2015 – 2020 5.9% Favorable demographic trends will outweigh potential impediments to growth IBIS World Industry Report 62311: Nursing Care Facilities in the US; Jan. 2015

Porter’s Five Forces Industry Rivalry: Medium Bargaining power of suppliers: Medium Bargaining power of buyers: Low-Medium Threat of substitute: Low Threat of new entrants: Low Meet requirements of insurance/Medicare for payments Long-term relationship with drug providers Large capital requirement and long time horizon Accumulated word-of-mouth and reputation Left aligned Patients can choose from a number of healthcare facilities, but the number is very limited Barely no substitute can be found within the field New form of healthcare need time to be developed

Financial Ratios

Financial Ratios

Assumptions

WACC Calculation

DCF Valuation

Sensitivity Analysis

Valuation – Comparable Selection Company Business Focus Primary Payer Source Capital Structure (Liab./Assets) Profitability (EBIT-Margin) Size (No. of employees) Ensign Grp. Skilled Nursing Medicare (35%) 57.6% (1.7%) 25,000 Diversicare Skilled nursing Medicaid (67%) 90.9% 1.4% 5,150 LHC Group Home care services Medicare (75%) 32.3% 7% 8,628 Addus HomeCare Corp. Illinois Dept. of Aging (53%) 29.2% 6.1% 10.790 NHC Medicare (39%) 23.9% 8.1% 13,050 Company 10-K’s and S&P Capital IQ

Average Intrinsic Value Comparable Valuation Even though NHC is relatively cheap compared to the other firms (as evidence by the low multiples and the Greenblatt earnings yield, company management is not very efficient employing its resources Average Intrinsic Value $62.6

Comparable Valuation - $62.60 Recommendation DCF Valuation - $59.98 Comparable Valuation - $62.60 Market Value - $63.69 Stock just slightly overvalued based on our analysis Valuation New facilities have the potential to boost earnings as evident in the last year Growth Demographics are in our favor as discussed Other factors