Fitch Upgrades Holy Redeemer Health System, PA's Revs to 'BBB'; Outlook Stable
--$30,000,000 million series 2006A;
--$46,320,000 million series 2014A.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross receipts of the obligated group and a mortgage on the Holy Redeemer Hospital and Medical Center (HRHMC). Fitch bases its analysis on the consolidated system, which includes both obligated and non-obligated entities. In fiscal 2015 (draft audit, year-end June 30), the obligated group (OG) accounted for 91.4% of consolidated system assets and 78.7% of system operating revenues.
KEY RATING DRIVERS
IMPROVING CREDIT PROFILE: The upgrade to 'BBB' from 'BBB-' is based on the system exceeding its budgeted performance for the last two years, combined with improved liquidity metrics, which are better than Fitch's 'BBB' category medians and solid coverage metrics consistent with the category medians. In fiscal year (FY) 2015 (draft audit, year-end June 30), the consolidated system reported $5.5 million operating income, significantly better than the budgeted $0.6 million, equal to an operating margin of 1.5% and operating EBITDA margin of 8.2%.
LIQUIDITY GROWTH: The system has historically had very good liquidity metrics; cash and unrestricted investments were reported at $193.5 million at June 30, 2015, up from $154.3 million in 2012, translating to 202.6 days cash on hand (DCOH), 15.3x cushion ratio, and 162.7% cash to debt, all stronger than Fitch's 'BBB' rating category medians. Cash to debt, particularly, has shown significant improvement from 113.8% in 2012 and the system has a front loaded debt profile. However, the system has a relatively aggressive asset allocation, partially offset by a conservative debt structure with 95% of its debt in fixed rate mode.
REVENUE DIVERSIFICATION: HRHS continues to explore potential affiliations and Fitch views the system's diversified service lines, which include acute care, long-term care, and robust home care presence as a credit strength, providing an attractive platform for population based health care delivery.
MANAGEABLE DEBT BURDEN: The system had 3.2x coverage of maximum annual debt service (MADS) in 2015, better than the median and MADS at 3.4% of revenues is in line with the 'BBB' category median. Fitch uses MADS for the consolidated system; MADS coverage by EBITDA for the OG was higher at 4.3x.
CONSISTENT PERFORMANCE AT RATING LEVEL: Fitch expects Holy Redeemer Health System to generate positive operating performance, coverage consistent with the 'BBB' rating category and to maintain its balance sheet strength.
HRHS's obligated group consists of Holy Redeemer Hospital and Medical Center (HRHMC), a 250 licensed-bed acute care hospital in Meadowbrook, PA, approximately 20 miles from downtown Philadelphia), St. Joseph Manor (St. Joseph), a 66 unit assisted living and 296 skilled nursing facility (SNF) bed facility, Lafayette Redeemer (Lafayette), a Type C continuing care retirement community (CCRC) with 296 independent living units (ILUs) and 120 SNF beds, Home Care and Hospice, and HR Physician Services. The consolidated system includes a number of non-obligated entities, including home care agencies and senior living facilities. In fiscal 2015, the consolidated system had $373.7 million of revenues.
The upgrade to 'BBB' and the Stable Outlook is based on HRHS's solid coverage of consolidated system debt, strong liquidity position and revenue diversification, as well adequate profitability. These positive credit factors offset Fitch's concerns including the very competitive northeast Philadelphia service area, high exposure to governmental payers and a relatively aggressive asset allocation of its investment portfolio.
Improving Credit Profile
Following several years of slim operating margins, the consolidated system reported operating income of $5.5 million in fiscal 2015 (draft audit), more than double that in the prior year. Operating and operating EBITDA margins at 1.5% and 8.2% were better than the category medians of 0.6% and 7.7%, respectively. The better than budgeted performance was the results of several factors, including a 3.2% increase in operating revenues, reductions in pension expense, as well reduced subsidy to HR Physicians partially due to reduced professional liability insurance expense. Managements was also able to reduce the loss at the VNA Home Care of Mercer County (not in OG) and a further improvement in profitability is projected at that division based on improved marketing efforts. Profitability was also aided by good volume trend at HRHMC and an increase in case mix index to 1.43 from 1.34. Inpatient admissions declined by less than 1%, while observation days were up by over 20%. Surgery volumes were up both inpatient (5.7%) and outpatient (4.3%). Despite operating in the highly competitive north Philadelphia market, HRHMC was able to maintain its market share at a stable 11.4%.
The system budget for fiscal 2016 is for $1.3 million operating income, but the budgeted operating income does not include the impact of a recently signed five-year agreement with the Order of Grey Nuns (Order) to take occupancy of 27 units at Lafayette Redeemer ILU for the Sisters, which would add between $500,000-$600,000 to operating revenues. The Lafayette ILU occupancy historically was low and the agreement with the Order, as well as a longer term project underway to renovate 30-40 units per year and convert several of the ILUs into smaller, more affordable units, for which there is higher demand in the market, will be accretive to occupancy.
The system's relatively modest operating results partially stem from expenses related to continued physician recruitment and the investment in the integrated clinical network Innovative Wellness Alliance (IWA). IWA now includes approximately 80 physicians and works in conjunction with the Delaware Valley ACO, the region's largest ACO, jointly owned by Main Line Health (40%), Jefferson Health (40%), Doylestown Hospital (9%), Magee Rehabilitation (2%) and HRHS (9%).
HRHS continues to explore potential affiliations and has narrowed the field of potential partners. The service area is very over bedded and there are several consolidations taking place or proposed, the most recent being the merger of Jefferson Health and Abington Memorial Hospital. HRHS's platform, which includes the entire spectrum of inpatient and outpatient services, including long term care, home health and hospice care, makes it uniquely positioned as the delivery model moves closer to population health management. Three ambulatory centers either being constructed (Warminster) or planned to be leased (Bucks County) should further help solidify market share. HRHS joined Tandigm, a company which manages primary care practices with over 300 locations in southeast Pennsylvania. The relationship with Tandigm will increase HRHMC's access to Blue Cross products and enable HRHMC to participate in Tandigm's performance based contracts.
Manageable Debt Burden
Despite relatively thin profitability, the system has been generating solid coverage of MADS by EBITDA -3.2x in fiscal 2015. The $12.6 million pro forma MADS includes debt outside of the OG, some of which is non-recourse to HRHS. The OG had a higher - 4.3x coverage. MADS uses the Master Trust Indenture provisions for smoothing bullet maturities - $8.2 million due in 2017, outside of the OG, which is expected to be refinanced. The system's capital budget for 2016 is $40 million, approximately 200% of depreciation expense, which was $19.7 million in 2015.
Cash and unrestricted investments were reported at $193.5 million at June 30, 2015 and the liquidity metrics of 202.6 DCOH, 15.3x cushion ratio and cash to debt of 162.7% are all favorable to the 'BBB' category medians of 161.5 DCOH, 11.1x cushion and 89.5% cash to debt. The system's investment portfolio has an aggressive asset allocation with 40% in alternative investments and private equity.
Offsetting this concern is the system's conservative debt structure with very small variable rate exposure (5%, all outside of the obligated group) and no swaps. Furthermore, there is no life care or health care liability associated with St. Joseph's and Lafayette.
HRHS covenants to provide audited annual financial statements within 120 days of each fiscal year end and quarterly disclosure within 60 days of each fiscal quarter end. Quarterly disclosure consists of management discussion, balance sheet, income statement, cash flow statement, and utilization statistics.