Fitch Affirms BRRH Corporation and Affiliates, FL's Revs at 'BBB-'; Outlook Revised to Positive

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by Palm Beach County Health Facilities Authority (FL), on behalf of BRRH Corporation and Affiliates (BRRH):

--$78,240,000 hospital revenue and refunding bonds, series 2001;
--$19,430,000 hospital improvement revenue bonds, series 1999A.

The Rating Outlook is revised to Positive from Stable.

SECURITY:

Debt payments are secured by a general obligation of the Corporation. Bonds are not secured by a mortgage on or security interest in any revenues, property or assets of the hospital. The corporation is the sole member of the obligated group and the hospital and the foundation are named as designated affiliates under the master trust indenture. Fitch views this security as weak at the current rating level.

KEY RATING DRIVERS:

IMPROVING FINANCIAL PROFILE: BRRH current financial profile is characterized by improved operations, growing liquidity, and a manageable debt burden. In fiscal 2013 (June 30 year end), BRRH posted a positive operating margin for the first time since 2006, and operating improvements were sustained through the first quarter of 2014, as net patient service revenue grew a solid 8.3% year over year.

STRONG PHYSICIAN RECRUITMENT: BRRH has had a net gain of 27 physicians since 2012, including physicians in key service lines such as orthopedics, neurology, urology, and cardiology. The strong recruitment has helped grow volumes, with most volume figures increasing year over year through the first quarter of fiscal 2014, including inpatient volumes, which were up 5.3%.

PHILANTHROPIC SUPPORT A CREDIT STRENGTH: BRRH continues to receive excellent community support. In fiscal 2013, BRRH received approximately 6,500 donations totaling $14.8 million. Moreover, BRRH is able to fundraise for most major capital expenditures, which has enabled BRRH to undertake sizable capital projects, such as its neuroscience center, while keeping its debt load manageable.

LARGE SENIOR PATIENT BASE: BRRH has seasonal volume swings due to a mostly senior patient base that winters in Boca Raton and results in high levels of Medicare (nearly 68% of gross patient revenue in fiscal 2013). BRRH has managed this high Medicare level, for example, absorbing the Medicare sequestration cuts while improving its operating performance and has a strategy to reach privately insured, year round residents; however, the large senior patient base does challenge operations.

RATING SENSITIVITIES

SUSTAINING OPERATING PERFORMANCE: Sustaining the current levels of operating performance is a key for BRRH. Should BRRH end fiscal 2014 with another year of positive operations, an upgrade would be likely.

CREDIT PROFILE

BRRH is an acute care hospital located in Boca Raton, FL, with 380 staffed beds. In fiscal 2013, BRRH reported total operating revenue of approximately $346.4 million.

IMPROVING FINANCIAL PROFILE

The Positive Outlook reflects the improved financial profile of BRRH. In fiscal 2013, BRRH posted a positive operation margin for the first time since 2006 and maximum annual debt service (MADS; including capital leases) was 3.4 time (x), above Fitch's 'BBB' category median of 3.1x.

Operationally, BRRH continues to distance itself from fiscal 2008, when it posted a $65 million operating loss and had its unrestricted cash and investments drop from a high of approximately $225 million in fiscal 2007 to a low of $85 million by fiscal 2010. BRRH's current CEO and COO were part of a consultant team that was brought in to initiate an operational and strategic turnaround in 2008.

Since then, BRRH has improved profitability and refocused its strategic priorities. BRRH has undertaken a number of strategic initiatives, both for growth and efficiency, including investing in information technology, pursuing an outpatient strategy, strengthening certain clinical services and physician recruitment. Interim first quarter 2014 results show most major utilization figures up, including inpatient admissions, outpatient surgeries, and emergency department visits.

Through the 1Q of fiscal 2014, BRRH posted a negative 2.9% operating margin which improved from the prior year's negative 2.2% operating margin) when $6 million of one time items are excluded. Operations have continued to trend in a positive direction in fiscal 2014 as BRRH pulled to near breakeven at the five month interim period, which is the beginning of its busiest time of year. Given the seasonality of BRRH's patient volumes and its high Medicare levels, BRRH will have to continue to focus on operational improvements to sustain its performance.

BRRH has also made progress in rebuilding its balance sheet. Unrestricted cash and investments at Sept. 30, 2013 was $110.9 million, up from the $85.2 million at fiscal year end 2010. BRRH's liquidity metrics now compare well with 'BBB' category medians, with days cash on hand of 132.3 days, a cushion ratio of 11.8x, and cash to debt of 103.3%. In addition, all of BRRH's debt is fixed rated and BRRH has no swaps, which adds further stability to its liquidity position.

STRATEGY AND NEW PARTNERSHIPS

Fitch views BRRH's strategic initiatives positively. To build its outpatient presence, BRRH has placed ambulatory care centers around its service area. BRRH seeks locations where it believes it can gain market share, as well as access a patient base that lives in the area year round and is privately insured. BRRH management attributes a portion of the recent growth in volume to gains it has made in the western part of its service area, where it has an ambulatory care center. BRRH is set to open a new care center in Broward County, which is in its southern service area. In addition, a newly renovated emergency room that opened in fiscal 2013 has been drawing patients from further out in the service area.

Fitch views two recently announced partnerships positively. In June of 2013, BRRH signed an agreement to partner with the H. Lee Moffitt Cancer Center (Moffitt), by joining its oncology network. Moffitt is the only National Cancer Institute Comprehensive Cancer Center based in Florida. BRRH's oncology physicians who participate will be credentialed as members of the Moffitt faculty and collaborate with Moffitt clinicians on patient care and research. The partnership will also give BRRH access to clinical trials, expanding the treatment options it can provide to oncology patients.

In January of 2014, BRRH signed a three year agreement with North Shore-Long Island Jewish Health System (NSLIJHS) (Fitch general revenue bonds rated 'A-', Positive Outlook). The long distance affiliation reflects a common patient base of people who live in the New York area and spend winters in Palm Beach and Broward counties. The affiliation will provide opportunities to collaborate on patient care, clinical program development and research and education, as well as access to other resources. Fitch believes the two agreements reflect the improved financial and market position of BRRH and that the partnerships have the opportunity to support further patient volume growth.

CAPITAL PLANS AND PHILANTHROPY

The Positive Outlook also incorporates BRRH's strong and consistent philanthropic support which remained strong even through its operating troubles in 2008. Over the last three years, BRRH's has received between $25.7 million and $41.7 million of annual support, including for capital projects. It's fundraising for capital projects has enabled BRRH to complete significant capital projects without having to incur additional debt or spend down its balance sheet. The ability to fundraise for capital projects also eases some of the pressure produced by BRRH's thinner operating margins, since cash flow is not as needed to fund capital.

Recent capital expenditures supported by philanthropy include the purchase of two DaVinci robots and the building of a state-of the-art hybrid operating room. Currently, BRRH is nearing completion of a neuroscience center, expected to open in April of 2014, which is being funded by philanthropy, including a lead gift of $25 million. The building will be contiguous to BRRH's main inpatient tower, and BRRH has made key physician recruits, including a head of the center. Fitch has concerns about the costs of operating the neuroscience center, especially as it ramps up. Mitigating some of this concern is the clinical focus of the neuroscience, including four new state-of the-art operating rooms (ORs). This will help with surgical capacity as BRRH's current ORs are operating near capacity.

Once the neuroscience building is completed, BRRH will build a new outpatient women's center, for which it already has a $10 million lead gift. Moving forward, BRRH does have to address its inpatient tower. BRRH will likely not build a new tower but renovate the current tower. Philanthropy would be expected to cover the majority of the cost of that project.

MANAGEABLE DEBT BURDEN

Due to the strong philanthropic support used for major capital projects, BRRH has been able to maintain a relatively modest leverage position. BRRH ended fiscal 2013 with most of its debt ratios in line with 'BBB' category medians. Even at the end of the first quarter, its weakest of the year, BRRH's debt to EBITDA was 4.3x, relative to a median of 3.8x and its debt service coverage of MADS (including capital leases) was adequate at 2x.

DISCLOSURE

BRRH covenants to provide annual audited financials and quarterly disclosure, which includes management discussion and analysis, utilization statistics, an income statement, a balance sheet, and cash flow statement.

Additional information is available at www.fitchratings.com.

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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820668
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Contacts

Fitch Ratings
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst:
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst:
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com