Methodist Hospitals of Dallas, Texas Methodist Richardson Medical Center; Hospital; Joint Criteria

Transcription

1 Methodist Hospitals of Dallas, Texas Methodist Richardson Medical Center; Hospital; Joint Criteria Primary Credit Analyst: J. Kevin K Holloran, Dallas (1) ; kevin_holloran@standardandpoors.com Secondary Contact: Karl Propst, Dallas (1) ; karl_propst@standardandpoors.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile Related Criteria And Research AUGUST 7,

2 Methodist Hospitals of Dallas, Texas Methodist Richardson Medical Center; Hospital; Joint Criteria Credit Profile Richardson Hosp Auth, Texas Richardson Methodist Med Ctr, Texas Richardson Hosp Auth (Richardson Methodist Med Ctr) ser 2004 Long Term Rating A+/Stable Upgraded Tarrant Cnty Cult Educ Facs Fin Corp, Texas Dallas Methodist Hosp, Texas Tarrant Cnty Cult Educ Facs Fin Corp (Dallas Methodist Hospitals) ser 2008A Unenhanced Rating AA-(SPUR)/Stable Upgraded Long Term Rating AAA/A-1 Current Tarrant Cnty Cult Educ Facs Fin Corp (Methodist Hospitals of Dallas) ser 2008B Unenhanced Rating AA-(SPUR)/Stable Upgraded Long Term Rating AAA/A-1 Current Rationale Standard & Poor's Ratings Services raised its underlying rating (SPUR) to 'AA-' from 'A+' on Tarrant County Cultural Education Facilities Finance Corp., Texas' $188.6 million series 2008A and 2008B variable-rate revenue bonds, issued for Methodist Hospitals of Dallas (doing business as Methodist Health System; Methodist). The outlook is stable. Standard & Poor's Ratings Services also raised its long term rating to 'A+' from 'A' on the Richardson Hospital Authority's series 2004 bonds, originally issued for Richardson Regional Medical Center (now doing business as Methodist Richardson Medical Center). The rating on Methodist Richardson Medical Center remains one notch lower than the rating on the Methodist Health System. The outlook on these bonds is also stable. Methodist's inpatient facilities consist of the 515-bed flagship Methodist Dallas Medical Center (Methodist Dallas) located immediately south of downtown Dallas; the 254-bed Methodist Charlton Medical Center (Methodist Charlton) facility located just southwest of downtown Dallas; and the 118-bed Methodist Mansfield Medical Center (Methodist Mansfield) located in Tarrant County, about 15 miles west of Methodist Charlton. Methodist also has 23 beds at Methodist McKinney, 40 beds at Methodist Hospital for Surgery in Addison, and as of Oct. 1, 2011, it purchased Methodist Richardson Medical Center after a prolonged lease relationship, extending Methodist's reach into the northern suburbs along the Interstate-75 corridor. Methodist Dallas offers a full range of tertiary services and is well known for its trauma program, transplant services, and high-risk obstetric and neonatal programs. The upgrade to 'AA-' reflects our view of Methodist's: AUGUST 7,

3 Continued improvement to operating and excess incomes, resulting in strong maximum annual debt service (MADS) coverage in fiscal 2011 (audited full year through Sept. 30, 2011) and fiscal 2012 year to date (unaudited nine-month figures through June 30, 2012); Significant balance sheet strength and operational liquidity, highlighted by 232 days' cash on hand as of fiscal 2012 year to date; and Solid market share of about 40% within its south Dallas primary service area, with growing admissions of more than 60,000 in fiscal Methodist has about $338.6 million in long-term bond debt secured by the gross revenues of the obligated group pursuant to a master trust indenture. This includes $150 million of Methodist's 1998 debt, which as of mid-2008 Methodist had purchased. Methodist continues to hold the series 1998 debt and is still assessing alternatives. This also includes about $69 million in series 2004 debt associated with its earlier acquisition of the Richardson facility. In addition, Methodist has about $117.8 million in loans/notes/leases associated with its McKinney facility and Hospital for Surgery. Outlook The outlook is stable and reflects our expectation that Methodist's solid operating performance will continue given its good volume growth and solid market position. With the recent upgrade, we do not expect to raise the rating again within the two year outlook period. We could lower the rating if there is a sizable decline in unrestricted liquidity or key balance sheet metrics, or significant deterioration in operations such that MADS coverage fell below 4.5x or cash to debt fell below 100% for a sustained period of time. Enterprise Profile Economic fundamentals Dallas, with about 1.2 million residents, serves as Dallas County's ('AAA' general obligation debt rating) seat and is the ninth-largest city in the nation. In the wake of the 2008 recession, the city and the metropolitan statistical area (MSA) have not been immune to increases in unemployment and commercial office vacancy rates or to declines in key revenue streams, such as the local-option sales tax although the unfavorable trends have been less pronounced for Dallas compared with many of its peers. The city's aging central business district continues to experience struggling office and retail occupancy rates due to closures and relocations; stability in other commercial hubs immediately surrounding the downtown area offsets much of this. The city also continues to invest in a number of projects with long-term economic development potential. The city's unemployment rate has historically remained below the national level and, as of February 2012, the unemployment rate declined to 7.9% from 8.5% in Given the economy's depth and breadth, the city is not dependent on any of its principal taxpayers. The favorable cost of living in the city offsets median household income levels of about 89% and 86% of state and national levels, respectively. AUGUST 7,

4 Market position/strategy Dallas is a competitive market overall, with Baylor Health Care System (AA-) and Texas Health Resources (AA-) dominating the greater Dallas-Fort Worth metropolitan area. The market also has a healthy amount of for-profit competition and a large, well-known public hospital, Parkland Health and Hospital System, which is undergoing a full campus rebuild in its downtown market, but which has also been struggling with Centers for Medicare and Medicaid Services (CMS) condition of participation survey and the extensive associated fallout. Methodist, however, is by far the most dominant health care provider in the south Dallas market (with a market share of 40% and growing), located advantageously south of the Trinity River, which is an effective commuting barrier. Competition is lower in the primary service area south of the Trinity River and is evenly distributed among a handful of inpatient providers, with Methodist holding a competitive advantage in the Mansfield market as the first full-service inpatient facility in the area. System-wide inpatient discharges increased 7.1% in fiscal 2011 to more than 60,000 due to Methodist bringing additional facilities and beds online during the year. This trend is continuing in fiscal 2012 year to date, with discharges increasing by 3.1% compared with the same time last year. Management Methodist's management team is, in Standard & Poor's opinion, very stable and experienced in the greater Dallas County market and has been able to gradually grow the system's service footprint while simultaneously improving its balance sheet. Methodist's management team successfully managed a prolonged lease agreement with the former Richardson Regional Medical Center, now Methodist Richardson Medical Center (MRMC), actually accelerating a purchase of substantially all of the assets of the organization approximately one year ago. In addition, there was potential rating pressure in late calendar 2011 due to a CMS condition of participation survey, which Methodist's management team successfully resolved. Financial Profile Operations Methodist reported operating income for fiscal 2011 (audited fiscal year ended Sept. 30, 2011) of $90.0 million, or a 9.1% operating margin, and excess income (with certain adjustments by Standard & Poor's) of $74.9 million, or a 7.7% excess margin. Fiscal 2011 operating income improved over fiscal 2010's already very strong $84.4 million. Methodist's coverage on its $28.4 million MADS (which is fully inclusive of all aforementioned debt and significant leases, except for the 1998 series) remained a very solid 5.1x in fiscal In addition, Methodist's MADS as a percentage of total revenue was moderate at 2.9%. Interim financial results in fiscal 2012 (unaudited results for the nine months ended June 30, 2012), indicate that Methodist has sustained, and even improved, operating income at $60.6 million, or a 7.7% operating margin. Balance sheet Unrestricted cash and investments for fiscal 2011 increased in absolute terms to $514 million, equal to 223 days' cash on hand, which is an improvement from the prior year's 205 days' cash on hand. Methodist's cash to long-term debt has remained consistent at almost 1.8x, and Methodist's debt to capitalization, or AUGUST 7,

5 leverage ratio, is good at 28%. Unrestricted cash and investments in fiscal 2012 to date (unaudited results for the nine months ended June 30, 2012) increased to $580 million, equal to 232 days' cash on hand, and almost 1.7x cash to long-term debt. Methodist (excluding its foundation) has traditionally had its liquidity in 100% fixed income, both high-quality and short duration. More recently, Methodist amended its policy to allow a larger exposure to equity mutual funds (up to $50 million). Methodist has been evaluating MRMC's capital needs, both strategic (at the Bush/Renner campus) and tactical (at its older Campbell campus), and management has announced the decision to build a 125-bed inpatient facility at the Bush/Renner campus, with initial project discussions in the $120 million area. The existing Campbell road campus will likely be converted to more of a post acute care facility. In addition to new hospital construction at Bush/Renner, Methodist will continued with a planned addition and expansion of their emergency department, trauma, and critical care spaces, and Methodist could also add an additional patient tower at its Mansfield facility although no decisions have been made yet. Methodist is planning on approximately a $150 million bond issuance to fund a significant piece of its upcoming capital projects. It is Standard & Poor's understanding that Methodist has a variety of options regarding its upcoming financing; however, we view the most likely outcome as a new debt issuance of approximately $150 million, with Methodist also redeeming the MRMC series 2004 debt with cash. Standard & Poor's is estimating that ultimately Methodist's balance sheet and operations will be able to absorb the projected debt issuance and capital spending at the higher rating level, with Standard & Poor's projecting that cash to debt will level off at about 120% and debt to capitalization at about 33%, and that days' cash on hand will be maintained above 200. Methodist Hospitals of Dallas Doing Business As Methodist Health System Financial performance --Fiscal year ended Sept Nine month interim ended June 30, Net patient revenue ($000s) 777, , , ,938 Total operating revenue ($000s) 786, , , ,534 Total operating expenses ($000s) 725, , , ,499 Operating income ($000s) 60,588 90,000 84,386 60,035 Operating margin (%) Net non-operating income ($000s) 3,532 (15,058) 6,628 4,831 Excess income ($000s) 64,120 74,942 91,014 64,866 Excess margin (%) EBIDA margin (%) Net available for debt service ($000s) 121, , , ,037 Maximum annual debt service ($000s) 28,379 28,379 28,379 19,372 Maximum annual debt service coverage (x) Liquidity and financial flexibility Unrestricted cash and investments ($000s) 579, , , ,090 Unrestricted days' cash on hand AUGUST 7,

6 Methodist Hospitals of Dallas Doing Business As Methodist Health System (cont.) Unrestricted cash/total long-term debt (%) Average age of plant (years) Debt and liabilities Total long-term debt ($000s) 348, , , ,400 Long-term debt/capitalization (%) Debt burden (%) Related Criteria And Research USPF Criteria: Not-For-Profit Health Care, June 14, 2007 USPF Criteria: Municipal Applications For Joint Support Criteria, June 25, 2007 Glossary: Not-For-Profit Health Care Ratios, Oct. 26, AUGUST 7,

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