NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the $50 million St. Luke's Episcopal-Presbyterian Hospitals Taxable Health Facilities Revenue Bonds series 2013.
In addition, Fitch affirms the 'A+' rating for St. Luke's Episcopal-Presbyterian Hospitals (St. Luke's) outstanding debt, listed at the end of this press release.
The series 2013 taxable fixed rate bonds will be used for general corporate purposes. The bonds are expected to price the week of August 19 via negotiation.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the gross revenues of the obligated group, consisting of the hospital and its parent, St. Luke's Health Corporation.
KEY RATING DRIVERS
SOLID OVERALL FINANCIAL PROFILE: Despite the additional debt issuance, St. Luke's overall financial profile is solid with good balance sheet metrics, adequate profitability, and sound debt service coverage. Profitability improved in fiscal 2013, however, was aided by meaningful use funds. St. Luke's expects to maintain operating margins around 3% going forward.
COMPETITIVE MARKET: Fitch's main credit concern is the competitive market with the presence of several large regional health systems. St. Luke's inpatient market share has slightly declined over the last several years. However, management is focused on its outpatient growth strategy, which has been the center of St. Luke's capital investments. In addition, outpatient activity (excluding the physician practices), account for 56% of total revenue in fiscal 2013 (June 30 year end).
STRONG OUTPATIENT GROWTH: St. Luke's has an extensive outpatient presence in its service area, which has a favorable payor mix. St. Luke's continues to enhance service offerings and expand the number of outpatient locations.
HIGHER CAPITAL SPENDING: Capital spending is projected to be higher over the next few years due to the construction of a medical office building (approximately $40 million) at its west campus, which has enhanced access due to completion of highway construction.
MAINTENANCE OF SOLID CASH FLOW: Given the higher level of capital spending, maintenance of solid operating cash flow will be a key factor in sustaining the current rating level. This debt issuance should also minimize the impact on days cash on hand.
St. Luke's Episcopal-Presbyterian Hospitals owns and operates an acute care general hospital with 493 licensed beds, a skilled nursing facility with a residential care services, St. Luke's Rehabilitation Hospital (a joint venture), and related healthcare facilities in Chesterfield, Missouri, a suburb of St. Louis. In fiscal year 2013 (draft audit), St. Luke's generated $458 million in total operating revenue.
Outpatient Growth Strategy
St. Luke's has continued its expansion of service lines in enhancing its capacity to provide a broader continuum of care. Since 2008, the organization has added an outpatient center, wellness center for adults with Down Syndrome, rehabilitation hospital, home health services, hospice services, cardiovascular step-down unit, private duty services, additional urgent care centers, renovated and expanded cancer center and convenient care center. St. Luke's Desloge Outpatient Center is across the street from the hospital (west campus) and has convenient access off Highway 141. Management will expand its presence on the west campus by adding a medical office building.
Fitch's main primary credit concern is the very competitive market. St. Luke's defined primary service area (PSA) consists primarily of St. Louis and St. Charles counties, which have above average personal income levels and favorable payor mix. In fiscal 2013, managed care contributed 42.3% to gross patient revenues, and Medicaid exposure was low at 3.4%.
The PSA only accounts for 64% of discharges and St. Luke's market share was 13.1% in 2012 compared to 13.6% in 2010. St. Luke's has two main competitors in the PSA, Mercy Hospital - St. Louis and Missouri Baptist Medical Center, which are both part of large regional systems (Mercy and BJC Healthcare, respectively). Mercy Hospital - St. Louis had 22% market share in the PSA in 2012 and Missouri Baptist had 10.6%. Market share for the entire metropolitan area is 4.9% for St. Luke's compared to 10.5% for Mercy Hospital - St. Louis and 6.8% for Missouri Baptist. Management indicated that they have been able to negotiate favorable managed care rates in the competitive environment due to the hospital's status as a low cost provider.
Return to Historical Profitability Aided By Non-Recurring Revenue
Operating profitability has been inconsistent over the last several years and fiscal 2013 ended with solid performance with a 3.7% operating margin compared to 2.5% in fiscal 2012 and 4.3% in fiscal 2011. Profitability in fiscal 2013 was aided by $4.3 million of meaningful use funds and without these funds; operating margin would have been 2.8%. Fitch believes physician employment will continue to pressure profitability as the medical group generated $5 million of losses in fiscal 2012 compared to $6.6 million in fiscal 2013. The medical group accounts for approximately 115 physicians and St. Luke's employs an additional 115 physicians as hospitalists, emergency, urgent care, house coverage and residents. Management has a long-term target of maintaining a 3% operating margin, which Fitch believes is necessary to maintain the current rating level. Operating EBITDA margins have remained solid in the 9 - 10% range.
Higher Levels of Capital Spending
Total capital spending is projected to be $44 million in fiscal 2014, $34 million fiscal 2015, $33 million in fiscal 2016 and $23 million in fiscal 2017. Capital spending includes the $40 million for the medical office building, $61 million for routine capital and equipment, $19 million for information technology as well as other strategic projects.
Strong Balance Sheet
St. Luke's balance sheet is strong and the additional debt issuance should allow for growth in liquidity despite higher capital spending. Unrestricted cash and investments totaled $219 million at June 30, 2013, up from $196.5 million the prior year, which translated to 192.5 days and 233.8% cash to debt compared to the A category median of 191 and 116.4%, respectively. Proforma cash to debt drops to 187.3%.
Conservative Debt Profile
St. Luke's debt burden is manageable despite the additional debt issuance with MADS accounting for 2.4% of total revenue compared to the A category median of 2.8%. Proforma debt service coverage by EBITDA is good at 4.2x in fiscal 2013 and 3.7x in fiscal 2012. Proforma debt service coverage by operating EBITDA compares more favorably with 4.1x coverage in fiscal 2013 and 3.6x in fiscal 2012 versus the A category median of 3.3x.
Total proforma debt is approximately $144 million and the debt profile is conservative at 100% fixed rate. St. Luke's does not have any swap exposure.
St. Luke's covenants to provide annual disclosure within 180 days after year end, and quarterly disclosure within 45 days of the quarter end through with the Municipal Securities Rulemaking Board.
--$38,030,000 Missouri Health & Educational Facilities Authority (MO) (St. Luke's Episcopal - Presbyterian Hospitals) health facilities revenue bonds series 2011;
--$55,781,000 Missouri Health & Educational Facilities Authority (MO) (St. Luke's Episcopal - Presbyterian Hospitals) health facilities revenue bonds series 2006.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information from BofA Merrill Lynch.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria