SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following revenue and refunding bonds issued through the Miami Beach Health Facilities Authority on behalf of Mount Sinai Medical Center of Florida (MSMC) to 'BBB+' from 'BBB':
--$180.9 million series 2014;
--$125.9 million series 2012.
The Rating Outlook has been revised to Stable from 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; total net assets of $138.9 million as of Dec. 31, 2014) has provided an unconditional guaranty on debt issued by MSMC.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The rating upgrade to 'BBB+' from 'BBB' reflects MSMC's continued solid performance in fiscal 2014 resulting in another year of sound operating profitability and unrestricted liquidity growth. In fiscal 2014 (Dec. 31, 2014; audited), MSMC earned $16.5 million in operating income, although significantly less than the prior year's all-time high of $41.7 million gain, was consistent relative to historical performance and in line with budgeted expectations. Fiscal 2014's profit translated to an operating margin and operating EBITDA margin of 3.1% and 10.2%, which compared favorably to the 'BBB' medians of 1.1% and 7.9%, respectively. Profitability for fiscal 2015, as of March 31, 2015 (three-months; unaudited), continues to be good and is ahead of the same period last year (operating margin and operating EBITDA margin of 4.8% and 12.5%, respectively). Additionally, MSMC's sound profitability has helped bolster unrestricted liquidity reserves, which Fitch views favorably.
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 - $14 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.
REPLACEMENT TOWER PROJECT: MSMC is building a new replacement inpatient tower (154 replacement beds), 12 operating rooms, a new 18 - 22 bed observation unit, and emergency department replacement, which will more than double its current capacity. Overall, Fitch views the strategy behind the project favorably, as the replacement tower will supplant the current tower that was originally constructed in 1960. Fitch notes that new project construction is not expected to impact current performance and project risk is further mitigated by an secured construction guaranteed maximum price contract.
HIGH BUT MODERATING DEBT BURDEN: Maximum annual debt service (MADS) equated to a high 5.1% of total revenues in 2014 compared against Fitch's 'BBB' category median of 3.6%. However, MADS as a percentage of revenue has been on a four-year declining trend from fiscal 2011's 5.6%. Additionally, MADS is will decline to $21.8 million in fiscal 2020. Despite MSMC's sound operating profitability, MSMC's historical debt service coverage of MADS by EBITDA and operating EBITDA was low for the rating level at 2.1x and 2x, respectively, in 2014.
EXPANDING MARKET FOOTPRINT: Despite MSMC operating in a relatively competitive environment in the Miami-Dade County market, the organization has been successful in expanding its reach through its ambulatory development strategy as well as clinical excellence in certain service lines such as cardiology. In fiscal 2014, approximately 21.5% of MSMC's revenue came from cardiac services.
RATING SENSITIVITIES
CONTINUED PERFORMANCE EXPECTED: Fitch expects operating cash flow to remain consistent resulting in continued unrestricted liquidity growth and adequate debt service coverage, while absorbing the costs associated with the new replacement tower.
CONSTRUCTION PROJECT RISK: Mount Sinai Medical Center is building a new replacement tower, which is expected to be completed in May 2018. Thus far, construction is on time and on budget, but Fitch notes the inherent risks with such a project that includes cost overruns and construction delay. Although unexpected, any material adverse event impacting the project would be viewed negatively.
CREDIT PROFILE
Mount Sinai Medical Center, a teaching hospital operated on two campuses in Miami Beach, Florida is licensed for 672 beds of which 608 are staffed. The medical center offers a wide range of services including tertiary level services in oncology and cardiology. MSMC also operates four satellite primary care centers in Key Biscayne, Hialeah, Sunny Isles, and Coral Gables, a satellite outpatient diagnostic center and a free-standing emergency room in Aventura. In 2014 (audited), MSMC had total operating revenues of $529.2 million.
RATING UPGRADE OF 'BBB+'
The rating upgrade reflects MSMC's fundamental credit strengths, which include the organization's sound profitability, improving unrestricted balance sheet reserves, leading market position, and strong Foundation support.
In fiscal 2014 (Dec. 31, 2014; audited), MSMC earned $16.5 million in operating income, which was consistent relative to historical performance and in line with budgeted expectations. Fiscal 2014's profit translated to an operating margin and operating EBITDA margin of 3.1% and 10.2%, which compared favorably to the 'BBB' medians of 1.1% and 7.9%, respectively. Profitability for fiscal 2015, as of March 31, 2015 (three-months; unaudited), continues to be good and is ahead of the same period last year (operating margin and operating EBITDA margin of 4.8% and 12.5%, respectively). Management is projecting a 3.5% operating margin at 2015 year-end, which MSMC is on pace to surpass.
Management attributes the organization's sound profitability gains to solid utilization trends (in part related to MSMC's outreach strategy) and effective expense management practices. Specifically, new born births, outpatient surgeries, and emergency department visits all increased from prior year levels. Although inpatient discharges declined to 22,613 in 2014 from 22,742 in 2013, Fitch notes that observation stays increased significantly by approximately 17.5% during the same period.
At March 31, 2015, MSMC (including amounts at the Foundation) had $301.5 million in unrestricted cash and investments, which increased from $265.6 million in 2013 and equated to 223 days cash on hand, 11.2x cushion ratio, and 91.9% cash to debt. Fitch views SLH's historical balance sheet growth favorably and as an additional credit factor contributing towards the rating upgrade. MSMC's liquidity metrics compare either favorably or are consistent with Fitch's 'BBB' category medians of 145 days, 10.3x, and 93.6%.
CAPITAL IMPROVEMENT PLAN
MSMC is building a new replacement inpatient tower (154 replacement beds), 12 operating rooms, a new 18-22 bed observation unit, and emergency department replacement, which will more than double its current capacity. Overall, Fitch views the strategy behind the project favorably, as the replacement tower will supplant the current tower that was originally constructed in 1960. Thus far, construction is on time and on budget and total project costs are expected to be nearly $270 million, which is being financed through MSMC's series 2014 bond issuance, Foundation transfers, philanthropy, operational cash flow, and the city of Miami Beach.
GOVERNMENTAL PAYOR BASE
MSMC's service area is heavily weighted towards governmental payors (65.8% Medicare and Medicaid gross payors), which challenges profitability. While management is continually focused on controlling expenses and expanding its market reach, Fitch recognizes the risk of having a high base of governmental payors that can expose the organization to reimbursement pressure at the state and federal level.
DEBT PROFILE & DISCLOSURE
As of March 31, 2015, total outstanding debt was approximately $328 million and 100% fixed rate. The organization has no outstanding swaps. Fitch views MSMC's debt profile as conservative. 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, 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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987489
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