Fitch Upgrades Total Longterm Care (CO) Revs to 'BBB+'; Outlook Remains Positive

NEW YORK--()--Fitch Ratings has upgraded to 'BBB+' from 'BBB' the rating on the following revenue bonds issued by Colorado Health Facilities Authority on behalf of Total Longterm Care, d/b/a InnovAge Greater Colorado PACE (IGCP):

--$6,785,000 series 2011 fixed rate bonds;

--$26,770,000 series 2010A fixed rate bonds.

The Rating Outlook is Positive.

SECURITY

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

EXCELLENT FINANCIAL METRICS: The upgrade to 'BBB+' from 'BBB' is driven by continued financial strengthening despite heightened capital and operating expenditures in the fiscal year ended (FYE) June 30, 2014. Nearly all key metrics exceeded Fitch's 'BBB' hospital medians in 2014, providing cushion at the higher rating during a period of expansion.

EXPANSION PLANS IN PROGRESS: Operations in San Bernardino, CA, began in April 2014, behind the initial December 2013 opening date due to legislative delays. Partly driven by the unique requirement that the site be fully staffed before receiving its license, IGCP incurred significant losses during the initial months. However, the losses at San Bernardino did not impede overall profitability for IGCP. Another facility in Loveland, CO is currently under construction and should be complete in the next year.

SIZABLE CAPITAL PLAN: Capital spending is expected to increase in 2015, with updates planned at Chambers and Pueblo centers and sizable investments remaining for Loveland. Strong cash flows should continue to support IGCP's capital expenditures.

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. In addition to strong case protocol and utilization management, the organization has internal restricted financial reserves ($18.6 million at FYE 2014) as a hedge against catastrophic events.

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.

RATING SENSITIVITIES

REVENUE GROWTH ANTICIPATED: The Positive Outlook reflects the expectation of continued revenue growth and regional diversification as IGCP ramps up its San Bernardino operations. Successful execution of strategic plans leading to further cash accumulation and increased revenue diversification will lead to further positive rating action.

CREDIT PROFILE

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 produced total operating revenues of $154.5 million in FYE June 30, 2014 (draft audit).

Solid Operating and Financial Profile

Financial metrics continue to outperform Fitch's 'BBB' medians, reflecting management's ability to manage utilization and costs through meticulous monitoring of census, staffing, and coding. Despite its relatively small 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 area. Other providers of long-term care providers 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.

Excellent Profitability

Profitability metrics are excellent, with operating and operating EBITDA margins of 9.8% and 13.6%, respectively, in fiscal 2014. Robust profitability was achieved despite a $9 million revenue shortfall from start-up operations in San Bernardino resulting in a $4.8 million related loss (versus $2.8 million loss budgeted). Fitch believes that these results are reflective of IGCP's flexible expense structure, the program's low capital requirements as well as management's ability to respond to negative variances.

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. 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 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.

Expansion Plans in Progress

Operations in San Bernardino, CA began in April 2014, behind the initial opening date of December 2013 due to delays in receiving necessary government licenses. Combined with the unique requirement that the site be fully staffed before receiving its license, California operations generated a loss of $4.8 million in fiscal 2014. However, the losses were comfortably absorbed within IGCP's overall financial profile and did not materially impact overall fiscal 2014 results. Enrollment has been ramping up, and management expects 400-500 participants in the first full year, which would rise to 2,000 in five years. The facility is designed to accommodate up to 4,000 participants.

Construction in Loveland, CO is scheduled to begin this month with a target completion date of fall 2015. Expected census is 275 participants at its peak. Fitch views these expansion plans as positive as long as the success of the existing programs can be replicated.

Heightened Capital Plans

Robust capital plans continue, with capital spending budgeted at $14.9 million in 2015, over twice the spend in 2014. Approximately $2.5 million is budgeted for routine capital, $4.9 million for the project at Loveland, and to update Chambers and Pueblo centers. The large capital plan funds the organization's expansion efforts and routine maintenance, which has historically been accretive to IGCP. Fitch believes IGCP's historically strong cash flows should continue to support capital needs without materially affecting liquidity.

Ample Liquidity

Unrestricted cash and investments totaled $55.9 million at June 30, 2014, up from $50.1 million the prior year. Liquidity metrics of 150.6 days cash on hand, 17.9x cushion ratio, and 143.4% cash to debt, compared favorably against Fitch's medians of 145 days, 10.5x, and 93.6%, respectively. This includes $18.6 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 101 days, 11.9x, and 95.8%. Fitch notes that unrestricted cash and investment balance is somewhat understated at FYE 2014 due to reimbursement processing challenges at the state level in Colorado, which has resulted in a spike in receivables to $18.1 million from $6.9 million at FYE 2013. The state is working to resolve its IT system issues, and IGCP anticipates over $10 million of receipts by the end of this calendar year.

Low Debt Burden

Debt load is light with 1.7x debt to EBITDA and 27% debt to capitalization at FYE 2014 compared to Fitch's hospital medians of 3.9x and 44.9%, respectively. Coverage of maximum annual debt service (MADS) by EBITDA is excellent, at 7.1x in 2014 and 5.9x in 2013, compared to the 'BBB' median of 2.6x.

DEBT PROFILE

As of June 30, 2014, IGCP had $39 million in long-term debt outstanding, consisting of $33.6 million in fixed rate bonds, a $4 million mortgage, and capital leases. IGCP does not have any swaps outstanding.

DISCLOSURE

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 16, 2014;

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014;

--'Nonprofit Nursing Home Rating Criteria', Oct. 3, 2014;

--'U.S. Nonprofit Institutions Rating Criteria', May 29, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Nonprofit Nursing Home Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=782388

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=914395

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Associate Director
+1 212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Associate Director
+1 212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com