Johns Hopkins Health System issued $148M in bonds a few months ago. As interest rates have risen, the new bonds have gone down. It is important to differentiate between the various Johns Hopkins institutions:
- Johns Hopkins University
- Johns Hopkins School of Medicine
- Johns Hopkins Hospital
- Johns Hopkins Health System
The latter three are grouped together under Johns Hopkins Medicine. The Hospital and Health System file separate form 990s.
Johns Hopkins Health System is the smallest of the four, by far. Johns Hopkins University issued $355M in new bonds this past February. Maryland Health and Higher Educational Authority also regularly issues municipal bonds for Johns Hopkins University. So far this year MHHEA issued $487M for the University.
Taxable Corporate Bonds vs. Muni Bonds
MuniOS shows MHHEA issued $508M for Johns Hopkins Health System between 2007 and 2010. MHHEA issued an additional $678M since 2011.
These are the new taxable Johns Hopkins Health System bonds and one of the municipal bonds:
|Johns Hopkins Health Sys Corp 2.76% Tax Bd-2013 2023, Make Whole Call (cusip: 478111AB3)||Aa3/AA-||92.12||3.75%|
|Johns Hopkins Health Sys Corp 1.42% Tax Bd-2013 2018, Make Whole Call (cusip: 478111AA5)||Aa3/AA-||97.80||1.92%|
|Maryland St Health & Higher Ed 5% Rev Bds 2011A 2021, Johns Hopkins Health Sys, Extr Call (cusip: 574218DH3)||Aa3/AA-||115.705||2.70|
Keep in mind, muni bonds more frequently have sinking funds (some taxable corp. bonds do too.) The MHHEA bonds have an extraordinary call, and no listed sinking fund schedule.
The MHHEA Johns Hopkins Health System muni bonds was part of a $74.6M offering. MHHEA issued $4.3M of these particular bonds due in 2021. This one offering included bonds due every year between 2013 and 2026.
Here are a few of the amounts:
These are just a few of the muni bonds, in one offering. Notice some of the issues are very small, like $100k due in 2016, the only amount for that year. This structure builds up to the larger $6.7M issue due in 2018.
The large, complex MHHEA issue makes the two sets of Johns Hopkins Health System's bonds, totaling $148M, appear very simple. The offering memorandum for the new taxable Johns Hopkins Health System bonds mentions the MHHEA bonds:
Plan of Finance:
The Health System Corporation will use the proceeds of the Bonds for eligible corporate purposes of the Health System Corporation and its affiliates and to pay costs of issuance of the Bonds.
In addition, concurrent with, or shortly after, the issuance of the Bonds, the Authority (MHHEA) is expected to issue its $88,250,000 Revenue Bonds... to refund all or a portion of the Authority's outstanding Revenue Bonds.
The Johns Hopkins institutions are intricate and have earned decent credit ratings. However, the offering memorandum is nondescript in defining use of proceeds. The offering memorandum just says: "for eligible corporate purposes." Since the Hopkins institutions have proven themselves, the brevity in defining usage is acceptable.
Rooted In History
Johns Hopkins Portrait, (1853)
Johns Hopkins family ran a tobacco plantation. Johns was born in 1795, he was a merchant who, among other things, sold wagons in Virginia. Hopkins then invested in a successful railroad, the Baltimore & Ohio. The president of the railroad was good friends with an American banker in London, George Peabody, who built a school in Maryland in 1857.
The Peabody Institute is now housed within Johns Hopkins University. Between the two of them, Hopkins and Peabody were worth about 1/500th of the U.S. GDP between 1869 and 1873 when they died. So, in their lifetimes, they were quite wealthy.
Johns Hopkins ambitious last will was set into motion when he died, on Christmas Eve 1873. A couple months prior the Panic of 1873 (caused by a major railroad bankruptcy) led to the Long Depression that ended in 1879. The Long Depression negatively affected the economy through 1896. Despite such struggles Johns Hopkins' large gifts thrived.
Johns Hopkins Hospital
(Johns Hopkins University) will possess the largest endowment of any college in the United States. The endowment of Harvard University is less than two and a half millions of dollars.
The Johns Hopkins Health System is a much newer, smaller organization. However, it is an important part of a very productive force, established nearly 140 years ago. Today many original structures at the hospital remain, in addition to many large, new buildings:
The Sheikh Zayed Tower is pictured at left and Charlotte Bloomberg Children's Center is on the right.
$10M in 1873, Less Buying Power Than $10M in 1913
When Johns Hopkins died he was worth about $10M. The Bureau of Labor & Statistics inflation calculator only goes back 100 years. In case you were wondering $10M in 1913 would have the buying power of $236M today. The CPI in 1913 was 29.7 versus 36 in 1873, however the method for determining CPI has changed over the years.
To figure out the buying power of $10M in 1873, in today's dollars we turn to the Minneapolis Fed. In order to figure out the effect of inflation, the dollar figure you wish to use is multiplied by today's CPI over the historical CPI, for the year you are comparing:
2013 Price = 1873 Price x (2013 CPI / 1873 CPI)
2013 Price = $10M x (701.5 / 36)
2013 Price = $194.86M
Wait a second, $10M in 1873 has less buying power today than $10M in 1913. From 1874 to 1879 the annual percentage change, of the rate of inflation, was negative. From 1881 to 1901 the annual percentage change was either 0% or negative, according to the Minneapolis Fed. Whereas the annual percentage change, of the rate of inflation, since 1993 has been 2.46% a year.
Now, let's look at some ballpark figures to see how the Johns Hopkins institutions have fared since the 1880s. These figures are from the most recent 990s, filed in 2012:
- Johns Hopkins University had $4.4B net assets and $4.7B in revenue
- Johns Hopkins Hospital had $1.2B net assets and $1.82B in revenue
- Johns Hopkins Health System, had $49M net assets and $247M in revenue.
Clearly Johns Hopkins' gifts were very effective. You can see how important it is to differentiate between the different entities. Also notice, the endowments have grown far more than the rate of inflation, over time. Also, realize the Johns Hopkins Health System, while the recipient of large municipal funds, is a small fraction of the overall group of institutions.
Johns Hopkins Health System
Johns Hopkins School of Medicine Founders: Four Doctors, John Singer Sargent (1906)
Johns Hopkins Health System is described in the 990 as:
... a support organization for the Johns Hopkins Hospital, Johns Hopkins Bayview Medical Center, Johns Hopkins Medical Services Corp. and Johns Hopkins Community Physicians...
Program service revenue was $49.8M, compensation for top personnel was $15.2M, other salaries totaled $51.3M and office expenses totaled $7.6M. Total functional expenses, including these figures rang in at $228M. Though the form 990 was filed in 2012, it covers 2010-2011.
Johns Hopkins Health System listed one disregarded entity, it had direct control over. HCGH OBGYN Associates had $10.7M total income and $3.4M total assets. From an investment standpoint it is nice to see Johns Hopkins branching out. The Form 990 lists 18 related tax-exempt organizations, 15 related taxable partnerships and 10 related taxable corporations or trusts.
Facade of new All Children's Hospital, St. Petersburg, FL
The related entities are in Maryland and Florida, including All Chlidren's Hospital in St. Petersburg, FL.
In April 2011, All Children's Hospital became the first U.S. hospital outside the Baltimore/Washington, D.C. region to join Johns Hopkins Medicine.
Johns Hopkins Health System's related organizations include All Children's Research Institute, which is controlled by All Children's Hospital, for instance. In my opinion moves like the integration of All Children's Hospital, in Florida, indicate a similar level of ambition to Johns Hopkins' own will.
It is additionally impressive to see Johns Hopkins continue to garner extraordinary philanthropic gifts, such as:
- Mayor Michael Bloomberg's $1B in contributions to his alma mater
- President of the United Arab Emirates, HH Sheikh Khalifa bin Zayed Al Nahyan, made a major donation to Johns Hopkins Medicine for the new Sheikh Zayed Tower
- Renowned philanthropist Sidney Kimmel, gave Johns Hopkins University $150M in 2001 for cancer research.
Today, the National Cancer Institute advanced comprehensive cancer center at Johns Hopkins is named for Mr. Kimmel.
To put the new Johns Hopkins Health System bonds into perspective let's look at a different health care organization. I searched for possible alternatives and Dignity Health bonds drew my attention.
Johns Hopkins Health Compared to Dignity Health
Dignity Health (formerly Catholic Healthcare West) is one of the nation's largest hospital networks. The system controls 40 hospitals, primarily in California, with a few in Arizona and Nevada. Dignity Health is rated lower than Johns Hopkins; therefore, their bonds currently yield more:
|Dignity Health 4.5% Tax Bd S-2012 2042, Make Whole Call (cusip; 254010AB7)||A3/A||85.16||5.53%|
|Dignity Health 3.12% Tax Bd S-2012 2022, Make Whole Call (cusip: 254010AA9)||A3/A||92.06||4.18%|
Notice these are taxable corporate bonds, not municipal bonds. Also notice these bonds are modestly under par, by today's standards.
The Dignity 2022 bonds yield 4.18% versus the Johns Hopkins Health System 2.76% coupon 2023 taxable bonds, which currently yield 3.75%. The Dignity 2022 bonds yield 11.5% more than the Johns Hopkins Health System 2023 bonds. Both sets of bonds are trading around $92.
Dignity Health carries a certain amount of drama, the organization recently severed formal ties with the Church. The system also operates non-Catholic hospitals, which the Church viewed unfavorably.
Johns Hopkins: Catalyst For Modern Medicine
Medicine is a tough field to invest in, and bond investors often look at different organizations than stock investors. Johns Hopkins institutions may be attractive, because they have a direct connection to education, health care and historic philanthropy.
The most important decision to make is whether 3.75% yield on Johns Hopkins 2023 or 1.92% on their 2018 bonds is sufficient. The 2023 bonds are more attractive, since they should keep up with inflation. If rates continue to climb, both sets of bonds should hit a point where they are worth considering.
Currently a couple Aaa/AAA rated options, in this field, have similar yields in 10-years and appealing yields in 20-year durations. Take Aaa/AAA rated Missouri State Health & Educational Facilities 3.53% Revenue Bonds 2012A, Washington Univ of St. Louis Taxable 2033 bonds (cusip: 60636AEC3), for instance. Priced at $88.98 they currently yield 4.38%, and provide an interesting counterpoint to the longer-term Dignity Health bonds and the 10-year Johns Hopkins Health System bonds.
Take a look at the combination I've just described:
|Johns Hopkins Health Sys (Taxable) 2.76% 2023 price: $92.12||Washington University of St. Louis (Taxable) 3.53% 2033 price: $88.98||Dignity Health 4.5% 2042 (Taxable) price: $85.16||total / average yield|
|1 of each bond||$921.20||$889.80||$851.60||$2,663 / 4.55%|
Investors could substitute the Dignity Health 10-year bonds for their 30-year bonds.
The values of these bonds will go down if rates go up. It is important to be prepared for well-rated 10-year corporate bond yields to approach 4% and not be surprised if they go up further. This is especially important, as it appears quantitative easing is drawing to an end.
The total income generated by this grouping is only $108 annually. The return is not impressive, though could have a place in a developed bond ladder.
I view investments in health systems, hospitals and medical education to be worthwhile. They certainly provide diversification from run-of-the-mill consumer businesses. The institutions are also focused on increasing quality of life in their communities. Johns Hopkins Health System is attractive, and different from many by association with a history of success. Whereas some hospitals with major endowments have dwindled and shut their doors; clearly the leadership at Johns Hopkins has been excellent.
If you have any thoughts on Johns Hopkins bonds, or the aforementioned strategy, please leave a comment below.