This week, Durig reviews one of the largest publicly traded hospital companies in the United States. Community Health Systems (NYSE:CYH) has spent the past few years paring down its portfolio of hospitals with an eye to retain those locations that are most profitable. The results of these divestitures are starting to be seen and the company has now put up two consecutive quarters of positive growth. In its most recent quarter results, one can see that same-store metrics tell a compelling story, especially in the competitive healthcare sector.
- Q3 same-store net operating revenues were up 4.1% year-over-year.
- YTD (as of September 30, 2019) same store operating revenues were also up by 4.3% over the same period in 2018.
- Same-store inpatient admissions increased 2.4% over Q3 2018.
CYH has also been investing in outpatient services, which now represents 54% of the company’s net operating revenues. In addition, recently the company has successfully improved its debt profile through an exchange offer which will give the company a longer runway to continue improving cash flow and reducing debt. Unlike many industries, healthcare is not a cyclical industry, but an essential service for every country and culture. Durig has previously invested in these bonds, and given CYH’s recent performance and the yield to maturity of about 17%, these bonds are an excellent choice for additional weighting in Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
Third Quarter 2019 Results
After spending the past few years focused on portfolio rationalization, Community Health Systems has now put up two solid quarters, especially in their same store metrics. Highlights from the company’s third quarter (three months ended September 30, 2019) include:
- On a same-store basis, net operating revenues increased $124 million or 4.1% over Q3 2018.
- Same-store inpatient admissions increased 2.4% over Q3 2018.
- For Q3, adjusted EBITDA totaled $388 million as compared to $372 million in Q3 2018.
- For the nine months ending September 30, 2019, same-store net operating revenues increased $400 million or 4.3%.
Community Health Systems CEO Wayne Smith is pleased with the company’s results in the third quarter as well as year-to-date. “Through our quality, growth and operating efficiency programs combined with the completion of our divestitures, our focus is on growing margin and free cash flow and we believe we are well positioned to drive enhanced growth moving forward.”
Community Health Systems Exchange Offer
CYH recently reported that it has issued an exchange offer for all of its outstanding 6.875% senior unsecured notes due 2022. The early results from this exchange offer indicates that 91.2% of the outstanding notes have been validly tendered. The results of this exchange offer have helped improve CYH’s maturity profile as follows.
About the Issuer
Community Health Systems (NYSE: CYH) is one of the largest publicly traded hospital companies
in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. The company provides healthcare services through the hospitals that it owns and operates and affiliated businesses in non-urban and selected urban markets throughout the United States. It generates revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which it is located. CYH currently owns or leases 102 hospitals in 18 states across the nation. The company generates revenues through the payments it receives for its services to its patients. These payments come from governmental agencies (Medicare and Medicaid) private insurers, and directly from the patients served.
Paring Down for Growth
Community Health Systems has spent the past few years rationalizing its portfolio of hospitals. And while this has meant the company losing revenues due to the sale of some of its hospitals, it has also translated into a portfolio of hospitals that are performing well and exhibiting growth. This slide from the company’s recent presentation at the Bank of America Merrill Lynch 2019 Leveraged Finance Conference shows how Community Health Systems same store metrics are faring for both Q3 2019 and YTD 2019.
Trends in Healthcare – The Move Toward Outpatient Care
One of the trends that continues to shape the healthcare landscape is the move toward increased outpatient care and decreasing inpatient care. A 2018 Deloitte Center for Health Solutions report revealed that outpatient visits, which include urgent care centers, ambulatory surgery centers and retail clinics, increased by 14% between 2005 and 2015. In addition, gross hospital outpatient revenues increased by 45% from 2010 to 2015, from $1,352 per visit to $1,962 per visit. And while that might sound pricey, consider the alternative.
The University of Washington recently completed an analysis on the cost difference between inpatient and outpatient care. The results are eye popping. The average inpatient stay cost over $22,000 in 2016, while outpatient costs averaged about $500. From this vantage point, it’s easy to see why consumers prefer outpatient care. But consumers also cited convenience, shorter wait times and personalized care as reasons to seek care in an outpatient setting. So how are hospital companies like Community Health Systems responding to this trend? Like many other hospital systems across the nation, they are increasing their presence in the outpatient sphere. Here is a quick look at the company’s care locations by type.
For its most recent quarter, 54% of the company’s net operating revenues came from outpatient services. Also, by investing in outpatient type facilities and services, CYH is able to direct acute healthcare needs to its own hospitals, which provides a continuum of care for the patient.
Interest Coverage and Liquidity
Interest coverage in an indicator for investors as to an issuer’s current ability to service its existing debt. Liquidity is also important, as it helps a company to smooth out variations in cash flow from quarter to quarter. For its most recent quarter, Community Health Systems had operating income (without the effect of non-cash depreciation) of $335 million and interest expense of $259 million, for an interest coverage of 1.3x. In terms of liquidity, as of September 30, 2019 the company had cash and cash equivalents totaling $157 million.
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The risk for bondholders is whether Community Health Systems can indeed continue to improve its operating results while continuing to address its debt load. The most recent quarter builds on Q2’s solid performance, with same store metrics continuing to show year-over-year improvements. Also, the most recent exchange offer has greatly improved CYH’s debt maturity profile. These developments make these remaining 2022 bonds a solid addition to an investor’s diversified income portfolio
Currently, Medicare / Medicaid payments make up 40% of CYH revenues. These revenues remain subject to reimbursement risk, especially as an aging population continues to drive up healthcare costs which places additional fiscal burdens on federal and state budgets. In addition, there are complex regulations involved in Medicare and Medicaid billing that companies must abide by and any breach of these regulations could pose significant financial risk for CYH.
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 face of healthcare continues to change, Community Health Systems is changing as well. The company has pared down its portfolio of hospitals while adding outpatient sites so that patients can conveniently access its continuum of care. Same store metrics continue to look good and the company has successfully improved its debt maturity profile. Healthcare is an essential service. People will continue to require care for injury and disease. And these CYH 2022 bonds, yielding about 17% to maturity, provide investors with a fantastic opportunity to participate in the healthcare sector. With this in mind, these 2022 bonds are ideal for additional weighting in Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio.
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Issuer: Community Health Systems
Bond Coupon: 6.875%
Rating: C / CCC-
Price: ~ 83.0
Yield to Maturity: ~ 17.0%
Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services.
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Disclosure: Durig Capital and certain clients may hold positions in Community Health Systems February 2022 bonds.
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Randy Durig, Durig Capital, Inc.
A Registered Investment Advisor