This week’s bond review focuses on a company, Iasis Healthcare, delivering high-quality healthcare through its acute care hospital locations and its managed care healthcare platform. Iasis Healthcare has steadily increasing its revenues and currently has a substantial level of cash.
Q3 consolidated revenues were up 18.6%.
The company’s managed care business segment boasted revenue increases in Q3 of 53.6%.
Iasis has an outstanding level of cash of $318.2 million.
Q3 results showed growth in the number of lives covered by Iasis of 70.7%.
As the baby boomer generation ages, demand for healthcare will naturally increase. Savvy investors who take note of this fact can provide additional diversification for their portfolios through the addition of these May 2019 bonds from Iasis, which are couponed at 8.375% and currently priced about 88½, which equates to about a 14% yield to maturity. After reviewing these bonds, we believe that they offer superb cash flow and will make an excellent addition to both our FX1 and FX2 global high yield income portfolios.
Solid Revenue Growth
Over the last two quarters, Iasis Healthcare has registered outstanding revenue growth. For its quarter ended March 31, 2016, the company’s consolidated revenues totaled $821.3 million, an increase of 17.9%, compared to $696.8 million for prior year quarter. This increase was reflected in the revenue increases in both the company’s acute care and managed care segments, with acute care revenues ($499.2 million) up 6.0% year-over-year, and managed care revenues ($322.0 million) up an impressive 42.5% year-over-year. This growth continued into the company’s fiscal third quarter ended June 30, 2016.
For fiscal Q3, Iasis consolidated revenues were $814.0 million versus the prior year period of $646.0 million, an increase of $127.7 million, or 18.6%. Again, both the acute care and managed care segments contributed to this increase. Acute care revenues totaled $489.3 million representing a 3.0% increase over the prior year quarter and managed care revenue totaled $324.7 million representing a whopping year-over-year increase of 53.6%. For the nine months ending June 30, 2016, consolidated revenues totaled $2.44 billion, compared to $2.05 billion in the prior year period, an outstanding increase of 18.8%.
For the company’s fiscal year 2015 (ended September 30, 2015), revenues totaled $2.8 billion, an increase of 10.7%, compared to $2.5 billion for the prior year.
A key contributor to Iasis’ recent increasing revenues is its joint agreement to provide integrated acute and behavioral health services to residents residing in Northern Arizona. This joint venture, which began on October 1, 2015, greatly increased the number of covered lives under Iasis’ managed care operations. The total number of covered lives for Iasis’ managed care segment grew by 70.7% year-over-year in Q3, to a total of 665,700 lives.
About the Issuer
IASIS Healthcare is a healthcare services company that seeks to deliver high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that include acute care hospitals with related patient access points and a diversified managed care risk platform. With total annual revenue of approximately $2.9 billion, IASIS, headquartered in Franklin, Tennessee, owns and operates 17 acute care hospitals, one behavioral hospital and multiple other access points, including 146 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics. Iasis owned hospitals are located in the following areas: Arizona, Arkansas, Colorado, Louisiana, Texas and Utah. Health Choice, the Company’s managed care risk platform, delivers services to more than 665,700 covered lives through its multiple health plans, accountable care networks and agreements to serve as a management services organization (“MSO”) with third party insurers.
Healthcare – Consistent Revenues
Unlike many industries, such as oil and gas, retail, and housing, healthcare is not cyclical. There are always individuals needing and seeking out care for sickness or injury. In 2014, U.S. health care spending grew 5.3%, reaching $3.0 trillion or $9,523 per person. As a share of U.S. Gross Domestic Product, health spending accounted for 17.5%. While there is much debate about why the U.S. spends so much money on health care, virtually no one would argue that the need is constant and growing.
The aging baby boomer generation (those individuals born between 1946 and 1964) currently makes up between 20% to nearly 25% of the total U.S. population according to various estimates. And according to the U.S. Census Bureau, individuals aged 65 and older in the United States comprise the fastest growing segment of the population. This segment is expected to grow to more than 79 million individuals by 2035. This represents a 66% increase in the 65-and-older segment of the population over the next 20 years. As a result, over time, the number of patients and the volume of hospital admissions are expected to grow. The aging population and increasing life expectancy are driving increased demand for health care services.
The second demographic that is driving healthcare is the increase in obesity among the U.S. population. The U.S. population is getting heavier. In 2014, all 50 states reported having obesity prevalence rates of 20% or more, as reported by the Center for Disease Control and Prevention. With obesity comes the increased risk for many health condition including but not limited to heart disease, high blood pressure, diabetes, joint problems, and increased risk for certain types of cancer.
In addition to the solid revenue growth reviewed earlier, Iasis has also shown solid growth in its cash flows from operations. For fiscal year 2015, Iasis registered cash flow from operations of $170.5 million, compared to $58.9 million in the prior year, an astounding increase of 189%. For the nine months ended June 30, 2016, Iasis also had an impressive increase in cash flow from operations, with cash flows totaling $73.8 million versus $60.0 million from the prior year period, an increase of 23%.
Iasis, like a number of other health companies, has decided to exit the health insurance marketplace exchange business (initiated by the Affordable Care Act) due to losses it has experienced in its managed care division. It experienced significant losses in Q3 due to its marketplace exchange business (along with unfavorable prior period medical claims). The company reconciled these items that do not accurately represent its normal ongoing operations to calculate a normalized adjusted EBITDA. For the nine months ended June 30, 2016, Iasis recorded normalized adjusted EBITDA of $174.52 million, with associated interest expense for the same period of $99.47 million. This calculates to a normalized adjusted EBITDA / interest expense ratio of 1.75x.
As of June 30, 2016, Iasis had a large cash balance of $318.2 million. Combined with the company’s available revolving credit facility of $124 million, Iasis has a total liquidity of $442.2 million.
The default risk is Iasis’ ability to perform. The company has shown steady revenue increases and has made the wise decision to cease its insurance marketplace exchange business, where it incurred significant losses. Iasis provides valuable healthcare services to thousands of people in the geographical markets it serves. It has a healthy cash balance of $318 million with additional liquidity from its credit revolver. These 14% current yields on these 8.375% couponed bonds appear to significantly outweigh the risks we could identified here.
Iasis currently has a balance of approximately $970 million on a senior secured term loan facility which matures in May 2018. If Iasis were to have several quarters of challenging financial results, it may impact its ability to refinance this term loan facility, thereby affecting the company’s ability to repay its 2019 bonds.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
As the baby boomer population ages and obesity rates increase, the need for healthcare is also increasing. Iasis provides critical acute care in its hospitals as well as health coverage for individuals through its managed care operations. It has steadily increased revenues over the past few quarters as well as posted revenue gains in its last report fiscal year. The company has excellent liquidity, providing options for covering operating expenses or strategic acquisitions. Its managed care segment posted outstanding revenue increases in Q3 of 53%. With demand for healthcare increasing, Iasis revenue growth should continue. These 8.375% couponed bonds, maturing in a short 30 months and currently indicating a yield of about 14%, provides investors with excellent diversification in the healthcare sector. In consideration of these factors, we are targeting these bonds for addition to our Fixed-Income1.com and Fixed-Income2.com high yield global income portfolios.
Issuer: Iasis Capital / Iasis Healthcare
Ratings: Caa1 / CCC+
Yield to Maturity: ~13.82%
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Disclosure: Some Durig Capital clients may currently own Iasis Healthcare 2019 bonds.
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