NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating on the following series of bonds being issued by the City of Jacksonville, FL on behalf of Brooks Rehabilitation (BR):
--$50.1 million series 2015A;
--$67.6 million series 2015B.
Additionally, Fitch affirms its 'A-' rating on the following bonds issued by Jacksonville Health Facilities Authority:
--$90.5 million series 2007.
The Rating Outlook is Stable.
The series 2015A and 2015B are expected to be issued as fixed rate. Proceeds of the series 2015A will be used to fund acquisition of a home health agency, refinance a $4.5 million existing line of credit and fund a number of capital projects of the system. A debt service reserve fund (DSRF) will not be funded in connection with the 2015 bonds. The series 2015 will be structured with a 30-year final maturity, wrapped around existing debt service with principal payments due in 2036-2045.
The proceeds of the 2015B series will advance refund a portion of the currently outstanding $90.5 million Jacksonville Health Facilities Authority Health Care Facilities Revenues Bonds series 2007. Sources will include a release of a portion of the series 2007 DSRF. The 2015B bonds will have a 2035 final maturity and will be issued subject to achieving minimum net present value savings.
Pro forma maximum annual debt service (MADS) of $16.5 million was provided by the underwriters and assumes the savings from the refunding. The bonds are expected to sell the week of Aug. 1 via negotiation.
The bonds are secured by a pledge of gross revenues of the obligated group and a mortgage on Brooks Rehabilitation Hospital.
KEY RATING DRIVERS
ADEQUATE LIQUIDITY: Despite the addition of approximately $45 million of new money in the 2015 issuance, BR's liquidity metrics remain adequate for Fitch's lower 'A' rating category. Unrestricted cash and investments of $297.7 million at May 31, 2015 equated to 751.6 days cash on hand (DCOH), 18x cushion ratio, and 114% cash-to-pro forma debt, with liquidity relative to expenses exceeding Fitch's median by a large margin. BR draws on several lines of credit, totaling $35.8 million at May 31, 2015, were included in total long-term debt for Fitch's analysis.
INCREASED DEBT BURDEN: Driven by BR's significant investment in expansion of its programs, geographic footprint and diversification of revenues over the last several years, the system's debt burden has increased. Pro forma MADS represents a very high 11.7% of 2014 total revenues. Despite strong EBITDA generation, historical coverage of pro forma MADS was relatively light at 2.2x in 2014 and 1.9x through the 2015 interim period.
LEADING MARKET POSITION: BR has a dominant 95% market share of inpatient rehabilitation services in the North Florida and Southeast Georgia market, a large network of outpatient clinics, home health agency, a skilled nursing facility and assisted living. In addition, BR is in the process of constructing a 111-bed SNF adjacent to Brooks Rehabilitation Hospital, as well as 10,000 square foot flagship outpatient facility. A planned acquisition of a sizeable home health operation will further increase BR's presence in the post-acute services sector.
WEAK BUT IMPROVING OPERATING RESULTS: Historically Fitch has viewed the significant liquidity as a mitigant against operating losses. However, operating performance has slowly been improving, operating loss was reduced to $5.9 million in fiscal 2014 (negative 4.2% operating margin) from $9.3 million in the prior year (8.1% operating margin). Further improvement is reported for the five months 2015 interim period with an operating loss reduced to $0.6 million, equal to negative operating margin of 0.9%. Expenses include a large amount of community benefits, which are discretionary. BR includes investment income in other operating revenues; for purposes of Fitch metrics, it is reclassifies as non-operating income.
STRENGTHENING OF CORE OPERATIONS: Given Brooks Rehabilitation's aggressive investment portfolio and weakening of liquidity metrics from historical levels, Fitch expects Brooks Rehabilitation to produce stronger core operating results to reduce its reliance on investment returns to enhance EBITDA. Fitch expects successful execution of Brooks Rehabilitation's ongoing projects to be accretive to their core financial profile over the medium term.
LIMITED DEBT CAPACITY: Brooks Rehabilitation has limited debt capacity at the current rating level and any further deterioration of balance sheet metrics, without an improvement in core operations, may pressure the rating.
BR is located in Jacksonville, Florida and consists of Brooks Rehabilitation Hospital (BRH, 157 beds); Bartram Crossing, a 100-bed SNF; Bartram Lake, a 61-room assisted living facility with two memory units; 28 outpatient centers; Brooks Health Development, Brooks Health Foundation, Brooks Home Care Advantage, a comprehensive home health service; and BH Holdings.
ADEQUATE LIQUIDITY POSITION
While cash to debt will be mildly diluted by the issuance of the series 2015 new money, Fitch views BR's capital investment as accretive to revenues, and its liquidity position continues to be a credit strength. At May 31, 2015 (the interim period), BR reported unrestricted cash and investments of $297.7 million, translating to a solid 751.6 DCOH, significantly exceeding Fitch's 'A' category median of 199.2 DCOH. Cushion ratio (based on pro forma MADS) of 18x is consistent with the 'A category median but cash to pro forma debt of 114%, is weaker than the 'A' category median of 131%. Moreover, Fitch views BR's investment allocation as somewhat aggressive, with 72% invested in equities, 10% in fixed income and 18% in alternative investments.
LEADING MARKET POSITION
BR holds a leading market share of 95% of the inpatient rehabilitation admissions within a 60-mile radius around Jacksonville and is the dominant provider of rehabilitation services in North Florida and Southeast Georgia. Inpatient admissions to Brooks Rehabilitation Hospital increased every year over the last four fiscal years. Year to date admission were slightly lower by 2.3%, but the decline was offset by better payor mix and higher acuity. BR continues to see strong demand for its outpatient services through its operation of 28 clinics in a wide geographic area. Outpatient visits have been growing steadily over the entire historical period with an 8.9% increase last year and a 5.1% increase year-over-year through the five-month interim period. BR has faced very limited competition for rehab services in its market. An HCA-owned facility is planning to open a 20-bed rehab unit at one of its hospitals 20 miles from BR, which management is not expecting to have a major impact on BR volumes given BR's established brand name in the market and increasing geographic draw.
BR is also implementing a strategy of being a provider of a comprehensive spectrum of post-acute services. Brooks Bartram Crossing, the 100-bed SNF, opened in July 2013 in a favorable location across the street from Baptist Medical Center South in Jacksonville and is connected to a new 61-bed assisted living facility on the same campus, which includes two 12-bed memory care units. BR also operates a 40-bed rehab unit at Halifax Health (rated 'BBB+ ', Stable by Fitch) as a joint venture and operates a 35-bed SNF at St. Vincent's Southside Hospital, which is focused on the treatment of joint replacement.
BR is constructing University Crossing, an 111-bed SNF facility, next to the BR's main campus. The majority of the approximately $25 million cost of the facility was funded with a portion of the proceeds of a $35 million private-placement loan which was issued in 2013. Construction is expected to be completed by the summer of 2016. University Crossing will have two specialty units - a 10-bed low-level brain injury unit and a 12-bed ventilation unit. Additionally, part of the 2015A series will fund the construction of a large, 10,000 square foot flagship outpatient facility in Orange Park, which will include a neuro recovery unit. Completion of the $4 million facility is anticipated in December of 2015. BR is also purchasing land in the Orange Park area for future development.
As part of expanding its post-acute services continuum, BR is acquiring a large home health company, AmeriCare Home Health, which services 23 counties in Northeast Florida. The transaction is expected to close at the end of July and will nearly double BR's home health revenues to approximately $21 million. As BRH expands the geographic draw for inpatients, BR decided to build a 40-unit housing facility to accommodate families of patients who have traveled long distances to receive their care at BRH.
ELEVATED LEVERAGE POSITION
Fitch views BR's elevated debt load as a main credit concern. Pro forma MADS as a percent of revenues represented a very high 11.7% of 2014 revenues, significantly higher than the 'A' category median of 3.6%. EBITDA coverage of pro forma debt, including the $35.8 million of draws on several lines of credit and the $45 million of new money, was 2.2x in fiscal 2014 and 1.9x though the interim period, weaker than Fitch's 'A' category median of 3.8x. Fitch views the expansion strategy favorably and it should over time be accretive to operations.
In addition to the series 2007 bonds, BR has one fixed rate and two variable rate private placement loans with maturities ranging from 2025 to 2033. Excluding swaps, BR's debt composition is 44% variable and 56% fixed rate. BR has swaps on its outstanding series 2007, 2010 and 2011 long-term debt with a notional par of $150 million. The mark-to-market valuation at May 31, 2015 was a negative $3.6 million and there is no collateral posting requirement on the largest $90.5 million basis swap on the series 2007 bonds. The other variable-to-fixed-rate swaps have collateral posting at $10 million; posting is currently not required.
WEAK OPERATING RESULTS
BR's revenues have been steadily growing, increasing to $141.4 million in 2014, a 32% increase since 2011. Operating performance has slowly improved, operating loss in 2014 was essentially half of that in the prior year and year to date performance is close to breakeven, reporting only a small $0.6 million loss from operations. The home health acquisition is expected to be accretive to operations, estimated to add $2.2 million to EBITDA. BR participates in a Medicare Bundled Payment Program for certain diagnoses since 2013 and to date the experience has been positive, with savings to date estimated at approximately $4.6 million.
BR has covenanted to provide quarterly disclosure within 45 days of each fiscal quarter-end and audited financial statements within 120 days of each fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
(pub. 24 Jul 2014)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form