Fitch Affirms Steere House, Rhode Island at 'BBB-'; Stable Outlook

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'BBB-' rating on the Rhode Island Health and Educational Building Corp.'s outstanding $3.8 million health facilities revenue bonds (Steere House Issue), series 1997. The Rating Outlook is Stable.

RATING RATIONALE:

--Steere House has excellent liquidity--421 days cash on hand (DCOH), 327% cash to debt, and a 22.1 times (x) cushion ratio as of July 31, 2010--which continues to offset operating challenges and concerns on the instability of reimbursement at the state level.

--Occupancy, which was 94.6% as of July 31, 2010 and has historically been in the mid to high 90% range, is a credit strength.

--Debt burden is light as reflected by maximum annual debt service (MADS) as a percentage of revenue of 5.6% and debt to capitalization of 20.5% (as of July 31, 2010).

--After volatility in the investment markets led to a negative excess margin in 2008, Steere House has returned to positive bottom lines with a 4.9% excess margin in 2009 and a 3.4% excess margin in the seven month interim period.

--Steere House continues to work to narrow operating losses by increasing its higher short term (Medicare and commercial payor) census and lowering its Medicaid census (Medicaid pays the lowest daily rate and is the payor source most tied to state funds). To this end, Steere House has been able to lower its Medicaid as a percentage of gross revenues to 54% as of July 31, 2010 from 67% at year end 2009.

KEY RATING DRIVERS:

--Fitch expects operating and liquidity to remain stable over the near term, with high occupancy and investment income continuing to support positive excess margins and adequate debt service coverage, which was 2.0x in 2009.

--Steere House has capital plans in support of its short term stay strategy. Plans are preliminary but initial estimates are for $4 million in renovations, with a possibility of additional debt. Although the debt versus equity mix has not been determined for the project, Fitch believes there is room at the current rating from some additional debt.

SECURITY:

Bonds are secured by a pledge of gross receipts and a first mortgage on all real property.

CREDIT SUMMARY:

The 'BBB-' affirmation reflects Steere House's strong liquidity (including foundation funds) and solid occupancy, which offset credit concerns related to Steere House's operating challenges and historical dependence on investment income to compensate for operating losses. At July 31, 2010, Steere House had 421 DCOH, 327% cash to debt, and a 22.1x cushion, which is excellent liquidity for the rating category and the main credit strength of Steere House. As of July 31, 2010, occupancy was approximately 95%, in line with historical figures.

Fiscal 2009 financial results marked an improvement over 2008, when Steere House failed to make its debt service coverage covenant of .90x, due in part to a $518,000 Other Than Temporary Impairment. Steere House has historically relied on investment income to supplement operations, but in 2009 began an effort to reduce its reliance on investment income. On the expense side, this included reducing full-time employees (FTEs), freezing salaries, and reducing overtime and agency use. Additionally, Steere House has outsourced its dining and environmental services to allow for a more reliable budgeted expense. Year over year, Steere House was able to lower its expenses by 4%, and as a result while operations were still negative at ($362,000), it was Steere House's strongest year operationally. Combined with investment income results that were closer to historical levels, Steere House posted a solid excess margin of 4.9% and generated debt service coverage of 2.0x. Through the seventh month interim period losses on operations was higher than last year due to increased staffing expenses related to the rollout of the federally mandated MDS 3.0 system. However, solid bottom line results have been sustained and Steere House is on budget, with an excess margin of 3.4% and coverage of 1.7x though the interim period.

On the revenue side, Steere House has continued an effort to reduce its Medicaid census. Steere House has refurbished its short term rehabilitation area for Medicare and managed care. As of July 31, 2010, Steere House lowered its Medicaid as a percentage of gross revenues to 54% from 67% at year end 2009. Steere House is in the process of planning for the building of a larger rehabilitation, transitional care unit. As the project is two years off, Fitch did not factor it into its current rating.

The rating and the Stable Rating Outlook take into account the fiscal distress of the state of Rhode Island (GO bonds rated 'AA', Outlook Negative by Fitch), which is pursuing multiple initiatives to lower spending including making reductions in its Medicaid program. Steere House's management has a strong history of being able to manage state reimbursement changes, and the organization's balance sheet provides a level of cushion to absorb the effect of any additional reductions, lending stability to Steere House's rating for the foreseeable future.

Located in Providence, RI, Steere House is a not-for-profit 120-bed nursing facility. In 2009, Steere House had total revenues of $11.5 million. Steere House covenants to disclose audited financial statements as well as certain operating statistics by no later than 150 days after end of each fiscal year. Steere House distributes its annual disclosure through EMMA.

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

In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by information from the Underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'Nonprofit Nursing Home Rating Criteria', dated Dec 30, 2009;

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Nonprofit Nursing Home Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493336

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

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CONTACT:

Fitch Ratings, New York
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Michael Burger, +1-212-908-0555
Associate Director
or
Committee Chairperson:
Jeff Schaub, +1-212-908-0680
Managing Director
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Media Relations:
Cindy Stoller, +1-212-908-0526
[email protected]

KEYWORDS:   United States  North America  New York  Rhode Island

INDUSTRY KEYWORDS:   Health  Hospitals

MEDIA:

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