CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the following bonds issued by the Industrial Development Authority of St. Joseph, Missouri on behalf of Heartland Regional Medical Center (HRMC).
--$35,600,000 revenue bonds, series 2001A*;
--$15,100,000 revenue bonds, series 2001B*;
--$32,450,000 revenue bonds, series 2001D*;
--$4,050,000 revenue refunding bonds, series 2003E*;
--$69,625,000 variable rate demand revenue bonds, series 2009A**.
In addition, Fitch affirms the 'A+' rating on the following bonds issued by the Missouri Health and Educational Facilities Authority on behalf of HRMC:
--$50,000,000 revenue bonds, series 2012.
*Bonds are insured by Ambac Assurance Corp. (Insurer Financial Strength is not rated by Fitch)
**Bonds are supported by a direct-pay letter of credit provided by BMO (Issuer Default Rating of 'AA-/F1+' by Fitch).
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group and a first mortgage on HRMC. As of June 30, 2012 HRMC has satisfied the mortgage release provisions of the master trust indenture but has chosen to keep the mortgage in place at this time.
KEY RATING DRIVERS
CONTINUED SOLID FINANCIAL PROFILE: HRMC's financial profile is solid with good operating profitability, excellent debt service coverage and healthy liquidity. The majority of HRMC's financial metrics well exceed the 'A' category medians. Profitability is somewhat compressed at March 31, 2014, reflecting significant investment in its clinical expansion into the northern part of the Greater Metropolitan Kansas service area. Financial performance is driven by strong management practices focusing on an integrated physician operating platform.
STRATEGIC INVESTMENT PROGRESS: HRMC is pursuing a variety of strategic initiatives focused on providing care in the right setting, quality and efficiency, managing populations and physician alignment, including the construction of seven new clinics in the Kansas City market, participating in three accountable care organizations (ACOs), collaborating with Mayo Clinic (not rated by Fitch) on best practices and evidence-based medicine and executing a dyad structure of management.
EXCELLENT DEBT SERVICE COVERAGE: HRMC's strong cash flow has led to excellent debt service coverage ratios. Debt service coverage by EBITDA was 5.6x for fiscal 2013 and 7.1x for the nine months ended March 31, 2014. In addition, debt to EBITDA and debt to capitalization ratios remain favorably low and below Fitch's medians for the 'A' category.
STRONG MARKET POSITION: As a designated sole community hospital, HRMC has a dominant 81.3% market share in its primary service area as of fiscal 2013. Its clinical expansion into the northern part of the Greater Metropolitan Kansas City service area is expected to further develop its regional footprint. In addition, HRMC remains a low cost provider, resulting in favorable commercial payment arrangements.
MAINTENANCE OF STRONG FINANCIAL PROFILE: Fitch expects HRMC to continue to maintain its strong operating cash flow, solid liquidity and debt service metrics. Profitability is expected to rebound as the system executes on its strategic initiatives and clinical expansion into the Greater Metropolitan Kansas City market.
Heartland Health is composed of Heartland Regional Medical Center (HRMC), a 352-operated bed hospital located in St. Joseph, Missouri; Community Health Plan; Community Health Insurance Company; Midwestern Health Management & Subsidiary; and HHS Properties. Total revenue in fiscal 2013 was $550.3 million.
The 'A+' rating is supported by strong financial metrics and strategic initiatives of HRMC, including the addition of seven clinics in the Kansas City metropolitan area consisting of five primary care offices and two hospital outpatient service locations. These expansion initiatives represent a development of the hospital's current market and will contribute to an ACO framework for improved population health management. The Parkville, Missouri urgent care facility and the Burlington Creek, Kansas City, Missouri radiology center opened in July 2012. In August, HRMC opened physician clinics in Shoal Creek, Highland Plaza, Gladstone, Smithville and Excelsior Springs, Missouri. The clinics operate under the name Mosaic Life Care.
GOOD OPERATING PROFITABILITY
HRMC's financial profile has remained very strong for the rating category for more than five years since fundamentally changing operations in its quest for the Malcolm Baldridge award, which the system won in 2009. Operating margin and operating EBITDA margin in fiscal 2013 were very strong at 5.2% and 11.7%, respectively, compared to the 'A' category medians of 2.5% and 9.5%. For the nine-month interim period ended March 31, 2014, operating profitability was below historical norms with operating margin of 2.5% and operating EBITDA of 9.6%, mostly because of costs associated with the clinical expansion into the Kansas City service area. Management is expecting the clinics to cash flow positive in fiscal 2016 and become profitable in fiscal 2018. Management has implemented a 3-year, $35 million expense reduction initiative and budgeted at 4.5% operating ratio for fiscal 2015, which Fitch believes is achievable. HRMC continues to focus on cost control (HRMC remains a low-cost provider) and Fitch expects it to meet its fiscal 2015 budgeted operating margin of 4.5%.
Strong profitability is also supported by its relationship with Mayo Clinic, which provides clinical support, its employed physician model, employing 173 physicians as of March 2014, resulting in a strong referral network. HRMC also has a dyad clinical leadership structure, in which physician leaders are paired with administrative leaders to make key operational, strategic, and financial decisions together, further enhancing physician alignment. HRMC participates in three accountable care organizations (ACOs), linking incentives to quality.
MANAGEABLE DEBT BURDEN; ROBUST DEBT SERVICE COVERAGE
HRMC's debt burden is moderate with MADS at 2.6% of fiscal 2013 revenue. MADS coverage by EBITDA of 5.6x in fiscal 2013 and 7.1x at March 31, 2014 (nine month interim) is very strong against the 'A' category of 3.8x. Debt to EBITDA and debt to capitalization were 2.3x and 32.8%, respectively, at March 31, 2014, favorable against the 'A' category medians of 3.6x and 36.3%. No additional debt is planned in the near term and routine capital spending is estimated at about $39 million in fiscal 2015 and will be focused around outpatient facilities, technology and investment in downtown St. Joseph.
HRMC has approximately $225 million of long-term debt outstanding, which is about 31% underlying fixed rate and about 69% variable rate. HRMC's treasury is exposed to market variations as it has two floating- to fixed-rate swaps. The aggregate market valuation of these swaps was negative $9.9 million as of July 2014. Since the threshold level for collateral posting is $15 million, there is no collateral posted at this time.
At March 31, 2014 (nine month interim) HRMC's unrestricted cash and investments totaled approximately $389.8 million, which equates to 298.1 days cash on hand, 27.7x cushion ratio and 171% cash to debt; all ratios are significantly above the respective 'A' category medians of 199.2 days, 17x and 131.2% and provide some cushion for the inherent risk associated with the variable rate debt.
The rating is also supported by HRMC's designation as a sole community hospital, which has contributed to its position as the market leader in a stable service area. As of 2013, HRMC controlled 81.3% of the market share in the primary service area and had 19.6% in the secondary service area, for a combined market share of 45.3%. While HRMC's dominant market share position in St Joseph is viewed positively, the demographic profile and payor mix in the primary service area are challenging. With an aging population with little expected growth and governmental payors accounting for 62.9% of gross revenues in fiscal 2013, Fitch believes successful execution of its expansion strategy into the north Kansas City metropolitan area is important as that service area has demonstrated significant population growth and a more favorable payor mix. Market share in the PSA declined slightly, but HRMC's presence in its secondary service area has led to a steady growth in share in this service area.
HRMC agrees to provide for annual and quarterly disclosure to bondholders and the Municipal Securities Rulemaking Board's EMMA system. Quarterly disclosure includes a balance sheet, income statement and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' dated May 30, 2014;
--'Revenue-Supported Rating Criteria', dated June 16, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria