Fitch Affirms Yavapai Regional Medical Center (AZ) Rev Bonds 'BBB+'; Outlook to Positive
--$30.265 million fixed-rate bonds, series 2013A;
--$30 million fixed-rate bonds, series 2008B.
In addition, the Rating Outlook is revised to Positive from Stable.
YRMC's total debt outstanding is $103.3 million, and non-rated debt (series 2013B, 2002, 1997B) has been incorporated into the analysis.
Debt payments are secured by a pledge of the gross revenues of YRMC and a mortgage on YRMC's east campus.
KEY RATING DRIVERS
SUSTAINED TREND OF IMPROVED PERFORMANCE: The Rating Outlook is revised to Positive due to the continued trend in improved financial performance and decline in leverage. After YRMC posted its first operating loss in over 15 years in the fiscal year ended Dec. 31, 2013, profitability recovered in fiscal 2014 (2.3% operating margin) as expected and improved in fiscal 2015 (5.2% operating margin). Performance through the three months ended March 31, 2016 is at a much higher level (12.4% operating margin) as a result of the expansion of services and solid revenue growth. Debt service coverage has improved as maximum annual debt service (MADS) declined by $1 million in fiscal 2016.
DOMINANT MARKET POSITION: YRMC's market share has consistently been above 70% in its primary service area (PSA), which has good population growth trends especially in the over 60 age cohort. The strong market share reflects the absence of direct competitors in YRMC's vicinity, as the nearest acute care facility is over 40 miles away. However, Fitch believes its relatively small revenue size exposes the organization to volatility in performance, which has been evident in the past.
SOLID LIQUIDITY: At March 31, 2016, key liquidity metrics compare favorably to Fitch's BBB category medians with 199.3 days cash on hand and 137.2% cash to debt compared to the 'BBB' medians of 161.5 and 89.5%. Given manageable capital plans going forward, current liquidity levels are expected to be sustained for the foreseeable future. Fitch believes YRMC's solid liquidity position helps mitigate potential operating volatility.
SOUND DEBT METRICS: Leverage metrics have improved especially with the growth in YRMC's revenue base. In addition, the aggregate debt service schedule is frontloaded. MADS drops to $8.8 million in fiscal 2016 from $9.8 million the prior year. MADS coverage was solid at 4.2x in fiscal 2015 compared to 3.1x in fiscal 2014 and 1.7x in fiscal 2013. Due to the significant improvement in profitability through the three months ended March 31, 2016, MADS coverage improved to 6.7x.
LONGER TREND OF IMPROVED PERFORMANCE: The Positive Outlook reflects Fitch's expectation that upward rating movement is likely over the next one to two years if the improved financial performance is sustained. Given its smaller revenue base and high governmental payor mix exposure (73% of gross revenue from Medicare and Medicaid in fiscal 2015), Fitch expects further strengthening of liquidity ratios prior to upward rating movement.
Yavapai Regional Medical Center is a two-hospital system operating on two campuses - West Medical Center (in the city of Prescott, 100 miles northwest of Phoenix) and East Medical Center (in Prescott Valley, 85 miles northwest of Phoenix). YRMC operates a total of 206 licensed (186 staffed) beds. In fiscal 2015 (Dec. 31 year-end), YRMC reported $278.3 million in total operating revenue.
Sustained Trend of Improved Performance
Fiscal 2013 was affected by several one-time items including a breakdown in revenue-cycle process following an IT conversion, sequestration (YRMC's Medicare exposure nears 60%), and lower than budgeted volume. As expected, performance rebounded in fiscal 2014, further improved in fiscal 2015 and was very strong through the three months ended March 31, 2016. Strong profitability has mainly been driven by new and enhanced services, improvement in revenue cycle, and focus on productivity. In addition, other pressures such as Medicaid rate reductions that were expected during Fitch's last rating review never materialized.
Performance through the three months ended March 31, 2016 is very strong and much higher than the same prior year period and in excess of budget. Management expects to end fiscal 2016 with a bottom line of $22.3 million compared to $17 million in fiscal 2015 (6.1% excess margin). Management expects operating performance to be sustained at the fiscal 2016 level while additional opportunities include sole community hospital status that is expected to net $5 million in additional revenue.
Dominant Market Position
Fitch believes YRMC's operations continue to benefit from its position as the sole acute care provider in its primary service area, with the nearest competitor located 40 miles away. Inpatient market share was 75.6% in 2015 compared to 74.9% in 2014. Volume growth has been solid especially in outpatient surgeries. The service area is experiencing population growth, and given its distance to tertiary facilities, higher acuity services are offered at YRMC and the Medicare case mix index was 1.554 in fiscal 2015. Recent new expanded services include a hybrid operating room, electrophysiology, and transcatheter aortic valve replacement.
YRMC has applied for sole community hospital provider status, since it meets the criteria. One of the requirements is a single Medicare provider number and YRMC is in the process of consolidating its Medicare provider numbers for the West and East campus. The net benefit of sole community hospital status should be about $5 million a year.
YRMC is part of Arizona Care Together - a regional alliance of six comparable community hospitals in Arizona to share best practices and coordinate resources in order to be able to manage population health. YRMC is also currently participating in a Medicare-accountable care organization that has over 28,000 attributable lives.
At March 31, 2016, unrestricted cash and investments totaled $138.8 million, equating to 199.3 days cash on hand, 12.8x cushion ratio, and 137.2% cash to debt, comfortably exceeding respective medians of 161.5 days, 11.1x, and 89.5%. Liquidity ratios are expected to increase as capital needs are manageable and should result in excess cash flow. Capital needs total $20.3 million in fiscal 2016, $18.7 million in fiscal 2017, and $27.6 million in fiscal 2018 compared to EBITDA of $36.8 million in fiscal 2015. Major projects include a new medical office building and parking, expansion of cath lab and radiology at the west campus, and ambulatory surgery expansion at the east campus.
Total long-term debt was $103.3 million at Dec. 31, 2015 and the only variable-rate exposure is a direct bank placement with BMO Harris for its series 2013B bonds ($20.4 million), which are at an indexed floating rate with an initial term of 10 years.
Debt metrics have improved as a short-term loan for its EMR matures in 2016. MADS for fiscal 2016 is $8.8 million compared to $9.8 million the year before. MADS will continue to decline slightly post 2016. There are no additional debt plans.