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

Fitch Ratings affirms the 'BBB-' rating on the Rhode Island Health and Educational Building Corp.'s outstanding $4.5 million health facilities revenue bonds (Steere House Issue), series 1997. The Rating Outlook is Stable.

The affirmation at 'BBB-' reflects Steere House's strong liquidity (including foundation funds) and demand indicators, which offset credit concerns related to Steere House's high Medicaid census and historical dependence on investment income to compensate for operating losses. At Aug. 31, 2009, Steere House had 426 days cash on hand, cash to debt of 290%, and a cushion ratio of 17.2 times (x). Fiscal 2009 year-to-date occupancy was approximately 98%, in line with historical figures.

In fiscal 2008, Steere House failed to make its debt service coverage covenant of .90x. Steere House historically relies on investment income to support debt service coverage. While Steere House's operational losses were in line with historical results in fiscal 2008, lower investment income combined with $518,000 in Other Than Temporary Impairment brought coverage below .90x, which is Steere House's covenanted debt service figure as long as it maintains at least 150% cash to debt, which it did in fiscal 2008. As per bond documents, Steere House called in a consultant, who issued a report, the results of which Steere House is following. For fiscal 2009 and beyond, Steere House is seeking to reduce its reliance on investment income. Steere House has cut expenses, 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. Interim results through Aug. 31, 2009 show an operating loss of $393,697, which is better than the budgeted amount of a $594,811 loss. Interim results show Steere House meeting its debt service requirement of .90x.

Steere House's large concentration of Medicaid, as in many skilled nursing facilities, remains a credit concern, although the facility has plans to reduce this dependence. Over the next few years, Steere House is looking to grow its Medicare and commercial short-stay service line to approximately 20% from 10%. Steere House recently hired a new marketing director with a focus on improving short-stay referrals and has begun to study the capital and staffing needs as part of this initiative.

The rating and the Stable Rating Outlook take into account the fiscal distress of the state of Rhode Island (GO bonds rated 'AA-' 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 should mitigate the impact of any additional reductions and provide stability for the foreseeable future.

Located in Providence, RI, Steere House is a not-for-profit 120-bed nursing facility. In 2008, Steere House had total revenues of $10.8 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 to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs).

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