Fitch Rates Mount Sinai Med Center of Florida (FL) 2014 Revs 'BBB'; Outlook Positive

SAN FRANCISCO--()--Fitch Ratings has assigned a 'BBB' rating to the following hospital revenue and refunding bonds issued through the Miami Beach Health Facilities Authority on behalf of Mount Sinai Medical Center of Florida (MSMC):

--$165.6 million series 2014.

Additionally, Fitch affirms its 'BBB' rating on MSMC's outstanding debt (series 2012 and series 2004).

The series 2014 bonds are expected to be fixed rate and will fund $100 million of capital costs and refund its series 2004 bonds as well as pay costs of issuance. The bonds are expected to price the week of Aug. 18, 2014.

The Rating Outlook remains Positive.

SECURITY

Debt service payments are secured by a pledge of gross revenues, a first mortgage on all of the Medical Center's property, and a debt service reserve account on the series 2012 bonds only. In addition, the Mount Sinai Medical Center Foundation (the Foundation) has provided an unconditional guaranty on debt issued by MSMC.

KEY RATING DRIVERS

SUSTAINED FINANCIAL IMPROVEMENT: MSMC has sustained its positive trend in financial performance with a vastly improved financial profile since fiscal 2007 when the organization had a 'BB+' credit rating. The organization earned $41.6 million in operating income in fiscal 2013 (Dec. 31, 2013; audited), which translated to an 8% operating margin and 15.3% operating EBITDA margin compared to Fitch's 'BBB' category medians of 1.8% and 9%, respectively. Although this level of profitability is not expected to be sustained, a continued trend in strong operating performance for the rating category over the next 12-24 months could likely result in positive rating movement despite its large capital project.

REPLACEMENT TOWER PROJECT: MSMC intends to build a new replacement inpatient tower (144 replacement beds), 12 operating rooms, a new 18-22 bed observation unit, and emergency department replacement, which will more than double the capacity to 37,000 square feet from 16,000 square feet. Total project costs are expected be a maximum of $205 million, and will be funded from $100 million of series 2014 bond proceeds, $45 million from Foundation cash, $50 million from a capital campaign, and $15 million from the City of Miami Beach. Overall, Fitch views the strategy behind the project favorably, as the replacement tower will supplant the current tower that was originally constructed in 1960.

HIGH BUT MODERATING DEBT BURDEN: Pro forma maximum annual debt service (MADS) equated to a high 5.1% of total revenues in 2013 compared against Fitch's 'BBB' category median of 3.5%. However, MADS as a percentage of revenue has been on a four-year declining trend from fiscal 2010's 5.6%. Despite MSMC's strong operating profitability, MSMC's historical debt service coverage of MADS by EBITDA and operating EBITDA was just adequate at 3.1x and 3x, respectively, in 2013.

SUPPORT OF FOUNDATION: MSMC continues to benefit from its relationship with the Foundation, which has a consistent fundraising track record. Since 2001, the Foundation has raised an average annual of $13.6 million and has transferred funds to MSMC to support operations. Additionally, the Foundation is expected to contribute approximately $95 million in funding for MSMC's upcoming replacement hospital tower project (from transfers and capital campaign). Overall, Fitch views MSMC's strong community support as a key credit strength.

RATING SENSITIVITIES

POSITIVE RATING OUTLOOK: The Positive Outlook reflects MSMC's continued financial improvement and upward rating movement may be warranted with sustained successful financial results that continue to produce improved liquidity metrics and debt service coverage while absorbing the cost of the new replacement tower.

CONSTRUCTION PROJECT RISK: MSMC plans to build a new replacement tower in late 2014, which will be partially financed by the series 2014 bonds. Fitch notes the inherent risks with such a project that includes construction delay and cost overruns. MSMC will have a guaranteed maximum price contract in place, which mitigates some risk.

CREDIT PROFILE

Mount Sinai Medical Center, a teaching hospital operated on two campuses in Miami Beach, Florida, is licensed for 672 beds of which 613 are staffed. The medical center offers a wide range of services including tertiary level services in oncology and cardiology. MSMC also operates three satellite primary care centers in Key Biscayne, Hialeah, and Coral Gables, a satellite outpatient diagnostic center and a free standing emergency room in Aventura. In 2013 (audited), MSMC had total operating revenues of $519.6 million. The Foundation is a separate entity that had $29 million of unrestricted net assets and $87 million of temporarily restricted net assets as of Dec. 31, 2013.

POSITIVE RATING OUTLOOK

The Positive Outlook reflects MSMC's sustained financial improvement, which resulted in the organization earning approximately $41.6 million in fiscal 2013 (Dec. 31, 2013; audited). MSMC's 8% operating margin and 15.3% operating EBITDA margin compared favorably against Fitch's 'BBB' category medians of 1.8% and 9%, respectively and marked the organization's highest profit ever. Management primarily attributes the strong year to increasing volumes in admissions, inpatient, and outpatient surgeries - among other service lines, and vigilant expense management efforts.

Over the past four years MSMC has averaged a 4.1% operating margin and 12.1% operating EBITDA, which Fitch views favorably. MSMC's improved profitability has led to enhanced liquidity. Specifically, at June 30, 2014, unrestricted cash and investments totaled $244.3 million, which translated into 187.8 days cash on hand, 9.2x pro forma cushion ratio, and 104% cash to debt. Including the Foundation, days cash on hand was 204 at June 30, 2014.

Fitch's main credit concern is MSMC's debt service coverage, which is even more pressured with the additional debt issuance. MADS coverage is somewhat light at 2.4x by EBITDA, compared to the 'BBB' category median of 3.1x. However, Fitch expects that the benefits of the project will be accretive and debt service coverage should improve once the project is complete.

Fitch believes with continued strong operating performance over the next 12-24 months, positive rating movement may be warranted especially if pro forma MADS coverage improves. Pro forma MADS of $26.4 million is expected to drop to approximately $21.6 million in 2017.

CONSERVATIVE DEBT PROFILE

Fitch views MSMC's debt profile as conservative as its debt profile is 100% fixed-rate with no outstanding swaps.

DISCLOSURE

MSMC covenants to provide annual and quarterly disclosure to bondholders. Quarterly disclosure is excellent, and includes management discussion and analysis, a balance sheet, income statement, cash flow statement, and utilization statistics. MSMC also conducts regular quarterly conference calls for investors, which Fitch views favorably.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841767

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-415-659-5470
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director

Sharing

Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1-415-659-5470
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director