Mon 09/19/2022 11:12 AM
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Relevant Documents:
Investor Presentation (Sept. 15)
Quarterly Bond Reporting as of June 30 (Sept. 2)
Audited Financial Statements for 2021
Investor Call Notice
Official Statement (Series 2016)
Issue Details (Series 2016)

Rhode Island-based Lifespan Health System is ramping up a multiyear recovery plan after posting systemwide operating losses totaling $69.5 million through its fiscal year 2022 third quarter ended June 30, Executive Vice President and CFO David Kirshner said during a quarterly bond call on Thursday, Sept. 15.

Lifespan is the largest hospital system in Rhode Island. The not-for-profit health system, based in Providence, operates three teaching hospitals - Warren Alpert Medical School of Brown University, Rhode Island Hospital, or RIH, and RIH’s pediatric division, Hasbro Children’s Hospital. It also operates Miriam Hospital, Bradley Hospital, Newport Hospital, Gateway Healthcare, Lifespan Physician Group and Coastal Medical.

The system includes Rhode Island, Miriam and Newport hospital foundations. The Lifespan obligated group includes Rhode Island Hospital, Miriam Hospital and their respective foundations along with Emma Pendleton Bradley Hospital.

The system had revenue of $2.824 billion in fiscal 2021 (year-end Sept. 30, 2021), up 12% year over year, while the obligated group represented $2.375 billion of system revenue, according to the annual audited financial statements.

The system posted net operating income of $2.7 million for the third quarter, in part due to pandemic relief funds from the state and federal government, as it worked to mitigate losses driven by the omicron surge earlier in fiscal 2022. Meanwhile, the obligated group’s net operating income was $15.6 million for the third quarter, down 43% year over year. The obligated group reflected an operating loss of $57.4 million through the third quarter of fiscal 2022 compared with income from operations of $58.7 million for the same period a year earlier.

After a merger bid with Care New England, its closest competitor by market share in Rhode Island, fell apart earlier this year amid antitrust concerns, Lifespan has progressed on defining the road map for aligning its research enterprise with Brown University, according to the CFO. The organizations are starting with a new research governance structure, including defining the base operating and financial framework for research operating and capital commitments for an integrated budget.

Third-quarter free cash flow for the Lifespan obligated group amounted to $4.9 million. Obligated group net proceeds from purchases and sales of “assets limited as to use” amounted to $30.8 million.

The obligated group made $10 million of sinking fund payments on its 2021 bond issuance. Overall, cash increased by $16.7 million, to $129.3 million.

Assets limited as to use are shown below:

Free cash flow for Lifespan Corp. was negative $24.3 million.

Kirshner said the fiscal 2022 recovery plan generated $48 million in incremental margin through July and is “gaining momentum” toward a full-year target of $61.2 million. The CFO said fiscal 2023 would be a “pivotal” year in the multiyear plan with $177.5 million in net margin opportunity identified. He positioned Lifespan, which is searching for a CEO, at the “very beginning of a rebound to recovery.”

Turning to the fiscal 2023 budget, Kirshner cited an aim to develop a spending plan that is “challenging but achievable,” transparent to key stakeholders, and with baseline assumptions that reflect the constraints of the labor market. Advisor Alvarez & Marsal will perform a review and stress test of the recommended budget and underlying assumptions.

The CFO said fiscal 2023 is part of a multiyear recovery plan methodology that requires additional opportunities to be identified including revenue cycle transformation, research integration with Brown University, and potential clinical integration of Lifespan Physician Group with Brown Physicians Inc.

As of June 30, Lifespan had $403.26 million of outstanding long-term debt, net of current portion. The company’s audited financial statements for the year ended Sept. 30, 2021, provides the following breakdown of its long-term debt:

The 2016 bonds were issued through the state’s Rhode Island Health and Educational Building Corp. and are secured by a pledge of gross revenues of the obligated group and mortgages on certain property of the Lifespan obligated group. The obligated group is jointly and severally liable for repayment of the 2016 bonds, and the hospitals are required to satisfy certain measures of financial performance for as long as the bonds are outstanding.

The 2021 taxable senior secured notes issued by the operating group in a private placement are secured by a pledge of the gross receipts of the obligated group hospitals and by mortgage liens on the real property and all buildings, structures and improvements thereon of Rhode Island Hospital and Miriam Hospital.

The 2014 bonds were issued by the Rhode Island Health and Educational Building Corp. on behalf of Newport Hospital through a private placement and are secured by a pledge of the gross receipts of Newport Hospital.

The obligated group’s deficiency of revenue over expenses for the nine months ended June 30 was negative $115.9 million, compared with an excess of revenue over expenses of $112.9 million in the same period a year earlier, reflecting an operating loss of $57.4 million through the third quarter of fiscal 2022 compared with income from operations of $58.7 million for the same period a year earlier.

The year-over-year swing from positive to negative was due to the fact that total operating expenses rose 5%, driven by increased compensation expenses, and costs related to supplies, while revenue fell 1.6%.

The obligated group’s deficiency of revenue over expenses for the third quarter ended June 30 was $24.8 million compared with excess of revenue over expenses of $51 million for the same three-month period a year earlier. The operating group reflected operating income of $15.6 million for the quarter compared with operating income of $27.3 million a year earlier.

The bond call presentation includes the following graphic illustrating consolidated balance sheet ratios for Lifespan:

On Friday, Fitch Ratings revised its ratings outlook on Lifespan Corp. and the Rhode Island Health and Educational Building Corp. Series 2016 issued on behalf of Lifespan revenue refunding bonds to negative from stable while affirming its BBB+ issuer default rating on Lifespan and its BBB+ rating on the bonds.

Fitch said the downward revision in the outlook reflects the continued disruption of operations, with “notably weaker” operating results through the third quarter, noting that performance “was driven” by elevated labor cost and lower-than-expected volumes due to closed beds and staffing shortages as well as inflationary pressure for non-labor cost.

Fitch, which reports on Lifespan systemwide, said the rating affirmations reflect Lifespan’s “still sound liquidity position for the rating despite market losses and challenged operations,” pointing to cash to adjusted debt of 155% as of June 30 and its leading market position. The affirmations also incorporate management’s “detailed recovery plan, which has already gained momentum and is expected to support continued improvements in operations,” according to Fitch.
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