Fitch Upgrades Total Longterm Care (CO) Revs to 'A'; Outlook Revised to Stable
--$6,670,000 series 2011 fixed-rate bonds;
--$26,325,000 series 2010A fixed-rate bonds.
The Rating Outlook is revised to Stable from Positive.
Bondholders have a security interest in the gross revenues of the obligated group and first lien mortgages on certain assets of the obligated group. A debt service reserve fund provides additional security.
KEY RATING DRIVERS
FINANCIAL STRENGTHENING: The upgrade to 'A' from 'BBB+' is driven by the sustained growth in revenues and robust cash flows from continuing operations as well as the ramp-up of IGCP's San Bernardino facility. Operating and operating EBITDA margins were 9% and 12.5%, respectively, in the fiscal year ended (FYE) June 30, 2015 (draft audit), which is favorable even at the higher rating.
LIQUIDITY GROWTH: The rating upgrade also reflects the sharp improvement in unrestricted cash and investments with liquidity metrics that well exceed Fitch's 'A' category hospital medians. The liquidity growth reflects a combination of strong cash flows and collection of aged receivables from the state of Colorado. Liquidity metrics of 204 days cash on hand, 27.3x cushion ratio, and 217% cash-to-debt provides ample financial cushion for unforeseen operating variances.
CAPITATION RISK: As a fully capitated Program of All-Inclusive Care for the Elderly (PACE) provider, IGCP is at risk for all care associated with the elderly, 'dual eligible' members it serves, which is a key credit concern. However, IGCP has successfully managed this risk through strong case protocol and utilization management and has restricted internal financial reserves ($20.6 million at FYE 2015) as a hedge against catastrophic events.
CONTINUED CAPITAL INVESTMENTS: Capital spending is expected to remain elevated in 2016 at $11 million (277% of 2015 depreciation), as several existing facilities in Colorado are undergoing renovations. Fitch expects strong cash flows to support projected capital plans without an impact on liquidity.
HIGH MEDICARE AND MEDICAID EXPOSURE: Nearly all of IGCP's revenues are derived from governmental payor sources. While revenues are highly vulnerable to reduction in Medicaid and Medicare reimbursement rates, expenses can also be flexed in response to changes given the high portion of variable costs.
FURTHER GROWTH EXPECTED: The Stable Outlook reflects Fitch's expectation that Total Longterm Care (d/b/a InnovAge Greater Colorado PACE)'s San Bernardino, CA and Loveland, CO facilities will ramp up as planned, leading to continued revenue growth and diversification. Due to the inherent risks related to the fully capitated model and dependence on governmental payors unique to the PACE program, further positive rating movement is unlikely in the near term.
Total Longterm Care, Inc. (d/b/a InnovAge Greater Colorado PACE) operates PACE, a Medicare program and Medicaid state option that provides community-based care and services to people age 55 or older who otherwise would need a nursing home level of care. IGCP specializes in provision of care to the elderly through the PACE program, which is a multi-disciplinary approach to meet the healthcare needs of the frail elderly in a highly personalized and community based setting through five day center locations in Colorado and one location in California. IGCP serves over 2,300 participants, and produced total operating revenues of $171.6 million in fiscal 2015 (draft audit).
In April 2014, IGCP opened up its San Bernardino facility, the organization's first foray into the California market. Management reports that enrollment during the first year was slower than anticipated, as PACE was a brand-new concept to the region. Though behind initial projections, enrollment passed its breakeven point in under 12 months, and was over 200 as of Sept. 30, 2015. Management is targeting to reach 393 participants in fiscal 2016.
Expansion into Loveland, CO is also underway. Approximately $7.3 million of capital investments have been made, and construction is complete. The facility has received approval from Medicare & Medicaid to open, and anticipates beginning enrollment in November 2015. Fitch views these expansion plans as positive as long as the success of the existing programs can be replicated.
Solid Operating and Financial Profiles
Financial metrics improved across the board in fiscal 2015 with ramp-up in California and consistently strong results across Colorado operations. Census grew 11.1% over the last year to 2,353 participants from 2,117. Fitch attributes continued success to management's ability to grow enrollment while managing utilization and costs through meticulous monitoring of census, staffing, and coding. Despite its moderate revenue base and reliance on governmental payors, stability is supported by the PACE model, where operators are granted exclusive rights to select zip codes. As a result, IGCP has no direct competitors in its service areas. Other providers of long-term care exist, such as hospitals, home health agencies, nursing homes, and assisted living facilities. However, IGCP's multi-disciplinary approach to providing services is unique and provides a competitive advantage in terms of quality, efficiency, and cost.
Profitability metrics are excellent, with operating and operating EBITDA margins of 9% and 12.5%, respectively, in fiscal 2015. Strong profitability reflects an improvement in San Bernardino, as increasing enrollment curbed losses to $1.6 million in 2015 compared to $4.8 million the prior year. As enrollment has reached a breakeven point, management expects California operations to generate positive net income in 2016 and on, which should further boost overall profitability. Fitch believes consistently strong overall profitability is reflective of IGCP's stable operating platform, flexible expense structure, the program's low capital requirements, as well as management's ability to respond to negative variances.
Heavy Reliance on Governmental Payors
A key credit concern is IGCP's very high concentration of Medicaid and Medicare revenue in its payor mix. As a specialized provider of healthcare for the frail elderly, IGCP receives Medicaid and Medicare capitated payments for its program enrollees and participants. These two revenue sources, which typically account for more than 95% of the organization's operating revenue, are highly susceptible to federal and state budgetary constraints and potential program modifications. However, Fitch believes the PACE program will become increasingly essential to delivery of healthcare, given the aging population, the goals of healthcare reform to provide coordinated low-cost quality care, and the program's excellent clinical outcomes. IGCP's increasing importance in meeting healthcare needs of its community somewhat mitigates concerns related to its exposure to governmental payors. Further, risks related to accounts receivable (AR) collectability are limited given the payor base, though timing of receipts may fluctuate.
Facility Updates Continue
A total of $11 million is budgeted for capital spending in fiscal 2016, $8.5 million of which is allocated to development projects. The majority of the funds will be spent on updating facilities at Chambers, Pueblo, and Cody locations. Fitch believes IGCP's historically strong cash flows should continue to support capital needs without materially affecting liquidity.
Strong Liquidity Growth
Unrestricted cash and investments grew to $85.2 million at June 30, 2015, up from $55.9 million one year prior. Part of the growth is attributable to a large payment received as a good faith payment from Colorado to offset AR processing issues. As a result, AR declined to $8.4 million at FYE 2015 from $18.2 million at FYE 2014. Fitch also notes reported and estimated claims payable are consistently at a manageable level, most recently reported at $5.8 million (FYE 2015).
Liquidity metrics are very good, with 204 days cash on hand, 27.3x cushion ratio, and 217% cash-to-debt against Fitch's respective 'A' medians of 205 days, 18.5x, and 144%. This includes $20.6 million in board-designated reserves set aside to meet any financial obligations arising from catastrophic events associated with its capitation program. Excluding these financial reserves, metrics fall to 155 days, 20.7x, and 165%.
Low Debt Burden
Debt load is light with 1.7x debt-to-EBITDA and 25.1% debt-to-capitalization at FYE 2015 compared to Fitch's hospital 'A' medians of 3x and 36.2%, respectively. Coverage of maximum annual debt service by EBITDA is excellent, at 7.2x in 2015.
As of June 30, 2015, IGCP had $39 million in long-term debt outstanding, consisting of $33 million in fixed-rate bonds, a $4 million mortgage, and capital leases. IGCP does not have any swaps outstanding.
InnovAge has covenanted to disseminate annual financial statements within 150 days of year-end and unaudited quarterly statements within 45 days of quarter-end through the Municipal Securities Rule Making Board's EMMA system. The system statements include consolidating statements detailing the financial position of the IGCP obligated group.