SAN FRANCISCO--(BUSINESS WIRE)--
Fitch Ratings affirms the AA-/F1+ rating on the following City of Hope's
--$350,000,000 City of Hope Direct Obligation Notes series 2013
(taxable) at 'AA-';
--$234,600,000California Health Facilities Financing Authority, revenue
bonds (City of Hope) series 2012A at 'AA-';
--$65,000,000California Health Facilities Financing Authority, variable
rate revenue bonds (City of Hope) series 2012B and 2012C at 'AA-/F1+'.
The Rating Outlook is Stable.
Gross receivables of the obligated group, excluding royalty receivables.
The obligated group includes City of Hope, City of Hope National Medical
Center, The Beckman Research Institute, and City of Hope Medical
Foundation. The obligated group accounted for over 99% of total assets
and over 97% of total revenue of the consolidated entity.
KEY RATING DRIVERS
HIGHLY SPECIALIZED SERVICES: City of Hope is nationally known for its
cancer care and its position in a highly competitive market is
differentiated by its focus on translational research. The organization
has been successful in capitalizing its intellectual property with the
receipt of a significant stream of royalty income. City of Hope is the
market leader in three inpatient cancer service lines - hematology,
prostate and ENT, and has a dominant market share in bone marrow
STRONG BALANCE SHEET AND PROFITABILITY: City of Hope's balance sheet has
grown significantly over the last five years and liquidity ratios are
favorable for the rating level. Profitability has also been strong due
to good volume growth, receipt of royalty revenue, ongoing fundraising
and focus on expense management. The debt burden is somewhat high for
the rating level due to the issuance of additional debt in 2013. Future
debt capacity is likely limited at the current rating level.
IMPLEMENTATION OF STRATEGIC PLAN: The organization implemented a new
10-year strategic plan in 2012 that seeks to sustain City of Hope's
current financial performance over the next decade. Key plan components
include expansion of community and ambulatory capabilities, enhancement
of clinical service lines, and cost reduction of clinical and research
activities. Fitch views the strategic plan favorably as it addresses the
backfill of the expected reduction in royalty revenue with the 2018
expiration of its Cabilly patents. City of Hope has been successful in
the implementation of its plan over the first two years with the growth
of its hematologic and transplantation programs, expanded presence in
outlying southern California communities, continued growth of its
medical foundation and continued expense management.
SIZABLE CAPITAL PLAN: City of Hope's 10-year capital plan is sizable and
totals $921.4 million. The majority of capital spending addresses
community and ambulatory expansion initiatives ($421.4 million) and
investments in information technology systems ($319 million). Financing
sources include approximately $350 million from the 2013 bond issue and
the remaining from operating cash flow. Fitch expects City of Hope to
maintain strong cash flow generation to support its sizable capital
needs. The 10-year plan includes $87 million of capital expenditures
that were spent in fiscal 2013.
STRONG FUNDRAISING ABILITY: City of Hope recently completed a $1 billion
capital campaign and will announce another campaign shortly. Its
fundraising ability provides additional financial flexibility and the
organization is focused on enhancing its national reputation.
EXPIRATION OF LUCRATIVE PATENT: Fitch expects that City of Hope will
maintain current profitability and liquidity trends over the medium term
as it executes on its long-term strategic plan. Over the longer term
Fitch's main concern is the anticipated loss of royalty income (net of
approximately $170 million in fiscal 2013) beginning in fiscal 2019
compared to a current operating income of $135 million (fiscal 2013;
Sept. 30 year end). The execution of the strategic plan will be key to
maintaining the current rating.
City of Hope is a prominent and nationally recognized biomedical
research, treatment, and teaching institution dedicated to the
comprehensive treatment of cancer. The organization comprises the City
of Hope Medical Center, the City of Hope Medical Foundation, and the
Beckman Research Institute. The Medical Center owns and operates a
217-licensed bed acute care tertiary referral facility. The Medical
Foundation is aligned with the Medical Center, with over 200 affiliated
physicians employed by the City of Hope Medical Group and operates
various outpatient clinic facilities. The Beckman Research Institute
owns and operates a number of major research facilities on City of
Hope's main campus and conducts basic scientific research in support of
and in conjunction with the patient care activities of the Medical
Center and the Medical Foundation.
Strong Balance Sheet and Profitability
City of Hope has a strong balance sheet and sustained solid
profitability, which should provide the organization some flexibility as
it implements its strategic plan and prepares for the anticipated loss
of a royalty revenue stream from an expiring patent.
As of March 31, 2014, City of Hope had $1.8 billion unrestricted cash
and investments, which translated to 631.6 days cash on hand and 258%
cash-to-debt compared to Fitch's respective 'AA' category medians of
254.3 days, and 173.6%. The balance sheet has grown significantly from
$713 million unrestricted cash and investments at fiscal year-end 2009
due to strong profitability and good investment returns. In addition,
the proceeds from the $350 million taxable debt issuance in 2013 was
invested in City of Hope's long term investment portfolio and included
in unrestricted cash and investments.
Total operating revenue in 2013 includes $778 million net patient
service revenue (58% of total revenue), $248.5 million royalty income
(19%), $82 million research grants (6%), $86 million unrestricted
contributions and net assets released from restrictions (6%) and other
revenue. The royalty income stream has totaled over $1 billion since
2006 and 97% of the royalty stream is derived from the Cabilly patents.
The Cabilly patents expire in 2018 and the net impact on City of Hope's
income statement is approximately $170 million as a third of the royalty
stream belongs to the inventors (operating expense).
Profitability is strong with an operating income of $135 million in
fiscal 2013 (11.2% operating margin) and $117 million (10.4% operating
margin) in fiscal 2012. Operating performance remained strong through
the six months ended March 31, 2014 with a 6.1% operating margin.
Profitability has been driven by strong volume growth especially in BMT
cases, which have been above forecasted levels as well as the growth in
outpatient visits driven by its alignment with its physicians through a
medical foundation model. Profitability was also aided by the provider
fee, which accounted for a net benefit of $23 million in fiscal 2013 and
$49 million in fiscal 2012.
Expanding Clinical Reach
The market for highly specialized cancer care in City of Hope's primary
service area remains fragmented and competitive. City of Hope faces
strong competition for inpatient services from Cedars-Sinai Medical
Center (rated 'A+' by Fitch), Ronald Reagan UCLA Medical Center, Keck
Medical Center at USC and Hoag Memorial Medical Center. City of Hope has
a leading market share in hematology, prostate, and ENT inpatient
City of Hope has been successful in expanding its clinical reach by
partnering with various community hospitals and operating outpatient
facilities in outlying areas and providing access to City of Hope's
expertise to an expanded population. City of Hope has an arrangement
with Kaiser to perform Kaiser's transplant cases in Southern California.
In addition, City of Hope announced that it is in negotiation with
Providence Health Services to develop an oncology partnership in the
Southern California region. After a difficult start, the Medical
Foundation, now in its third year, has been instrumental in aligning
physicians with City of Hope and engaging more physicians at the
Proactive Strategic Plan
City of Hope's 10-year strategic plan adopted in 2012 was designed to
respond to operational and financial challenges related to healthcare
reform and an expiring royalty revenue stream. The plan focuses on
leveraging City of Hope's national reputation in key service lines to
expand both inpatient and outpatient operations, investing in
translational research capabilities, and prioritizing philanthropy.
On the clinical side, City of Hope will expand its signature programs in
hematology and bone marrow transplants, selectively invest in solid
tumor programs, and expand community sites in existing and new strategic
markets. Research strategies will focus on growing signature research
programs in diabetes and stem cell research, reinforcing translational
research infrastructures, and cultivating funding and philanthropic
support of cancer research.
The strategic plan also incorporates revenue enhancement and cost
reduction initiatives necessary to maintain financial performance. City
of Hope plans to add additional outpatient sites, in addition to
increasing inpatient capacity by reducing length of stay. Efforts are in
place to reduce expenses by 5% and 4% in 2014 and 2015, respectively,
and 1% each year thereafter.
In the second year of its strategic plan, City of Hope has exceeded its
volume projection in hematology and BMT, grown its presence in outlying
communities, maintained expenses below budgeted levels, moved the
recovery of BMT patients to a lower-cost setting, and prioritized its
pipeline of promising compounds that will receive a higher percentage of
investment and resources.
Conservative Debt Profile
Total debt outstanding at March 31, 2014 was $689 million and includes a
$42 million 10 year capital lease for office space. The bonded debt
portfolio is 90% underlying fixed rate and 10% underlying variable rate
demand bonds (VRDBs). The VRDBs are supported by City of Hope's
City of Hope has two floating to fixed rate swaps, which do not require
collateral posting at the current mark to market valuation. Including
its swaps, the debt profile is 100% fixed rate.
City of Hope issued $350 million of taxable bonds in 2013 to take
advantage of the current interest rate environment and unrestricted cash
and investments will be inflated over the next few years as bond
proceeds will be held on the balance sheet until spending on its capital
plan ramps up and a new ambulatory facility is expected to break ground
in 18 - 24 months.
The series 2013 taxable bonds are structured as one bullet maturity in
2043 and the MADS of $48.3 million incorporates the amortization of the
series 2013 bonds consistent with the treatment of balloon indebtedness
under the master trust indenture and also includes the debt service on
the capital lease.
City of Hope's debt burden is above average for its rating level as MADS
accounted for 4% of total revenue in fiscal 2013 compared to the AA
category median of 2.6%. Debt service coverage is solid at 5.6x in
fiscal 2013 compared to 4.8x in fiscal 2012 and was 4.3x for the six
months ended March 31, 2014.
Short-Term Rating Based on Self-Liquidity
The 'F1+' short-term rating is supported by the adequacy of City of
Hope's highly liquid resources available to fund any un-remarketed puts
on $65 million in weekly VRDBs. Based on Fitch's rating criteria on
self-liquidity; City of Hope has sufficient liquid resources to cover
the maximum tender exposure on any given date. City of Hope has
liquidation procedures in place detailing the process by which internal
funds would be liquidated to meet the tender obligations.
City of Hope covenants to provide an annual audit within 150 days of
fiscal year-end and quarterly disclosure within 60 days of quarter-end
for the first three quarters and within 75 days of fourth quarter-end
via the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria'(May 20, 2014);
--Rating U.S. Public Finance Short Term Debt' (Dec. 9, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Rating U.S. Public Finance Short-Term Debt
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Fitch Ratings, Inc.
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Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings