NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following revenue and refunding bonds issued through the Miami Beach Health Facilities Authority on behalf of Mount Sinai Medical Center of Florida (MSMC) at 'BBB+':
--$179.4 million series 2014;
--$119.2 million series 2012.
The Rating Outlook is Stable.
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 $148.8 million as of Dec. 31, 2015) has provided an unconditional guaranty on debt issued by MSMC. Fitch's analysis is based on the consolidated system results.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: MSMC's maintained solid operating performance in fiscal 2015 reflecting strong volumes and good expense control. In fiscal 2015 (year-end Dec.31, audited), MSMC generated operating income of $20.8 million equating to an operating margin of 4% and operating EBITDA margin of 11.3%, both favorable to Fitch's 'BBB' medians. Solid operations continued in the first quarter of the current fiscal year, ended March 31, 2016, with operating margin and operating EBITDA margins of 7.3% and 14.3%, respectively.
SUPPORT OF FOUNDATION: The rating also reflects MSMC's close relationship with the foundation, which provides an unconditional guarantee for MSMC's debt service payments. Since 2001 the foundation has raised between $13-$15 million annually and at March 31, 2016 had $79.4 million of cash and investments, of which $49.6 million are unrestricted. The foundation is expected to contribute approximately $95 million in funding for MSMC's upcoming replacement hospital tower project (from transfers and a capital campaign). Fitch views the community support for MSMC through the foundation as a key credit strength.
REPLACEMENT TOWER PROJECT ON TRACK: 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. These additions will more than double its current capacity. The project is currently on time and on budget, and management expects occupancy of the new tower in September of 2018. Fitch views the strategy behind the project favorably.
HIGH BUT MODERATING DEBT BURDEN: Maximum annual debt service (MADS) equated to a high 5.3% of total revenues (adjusted to exclude the insurance recovery) in 2015 compared against Fitch's 'BBB' category median of 3.6%. While Fitch expects leverage to slowly decline over time, coverage of MADS by EBITDA is somewhat light at 2.7x and 1.9x in fiscal 2015 and 2014, respectively.
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. Volumes have been strong, and the draw of the services provided at MSMC is evidenced by the high 70% of patients originating from outside the primary service area.
CONTINUED SOLID PERFORMANCE EXPECTED: Fitch expects Mount Sinai Medical Center of Florida's operating cash flow to remain consistent resulting in adequate debt service coverage and moderating leverage, while successfully raising sufficient philanthropy for the replacement tower.
Mount Sinai Medical Center, a teaching hospital operated on two campuses in Miami Beach, FL, 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 satellite primary care centers in Key Biscayne, Hialeah, Key West, and Coral Gables, and a satellite outpatient diagnostic center and a free-standing emergency room in Aventura. The medical center also plans to three additional ambulatory locations in 2017. In 2015 (audited), MSMC had total operating revenues of $538.8 million.
SOLID CREDIT PROFILE
The rating is supported by MSMC's fundamental credit strengths, which include the organization's sound profitability, solid liquidity, leading market position, and strong foundation support. In fiscal 2015 MSMC reported $35.3 million in operating income, which included a one-time malpractice insurance recovery adjustment of $14.5 million. Adjusting for the one-time item, fiscal 2015 operating income was $20.8 million, still ahead of both budgeted $17.9 million and the prior year's $15.1 million. The adjusted operating and operating EBITDA margins of 4% and 11.3% compare favorably to Fitch 'BBB' median of 0.6% and 7.7%, respectively. Profitability for fiscal 2016, 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 7.3% and 14.3%, respectively), although the first quarter typically is stronger due to the influx of the snowbird population. Management is conservatively budgeting operating income for fiscal 2016 at $17.8 million.
Management attributes the organization's sound profitability gains to solid utilization trends, supported by several strategically located ambulatory locations. Admissions in 2015 were level with 2014 but are 6.8% ahead through March 31, 2016 compared to the first quarter of the prior year. Surgical volumes, in particular, are solid, inpatient surgeries increased by 5.2% in 2015 and outpatient surgeries by 6%, with similar growth in the first quarter of the current fiscal year. Open heart procedures were 1.9% higher last year, and angioplasties increased by 14.3%. The results also benefited from tight expense controls, with an internal consulting group continuing the monitor the improvements implemented as a result of an external consulting engagement a couple of years ago.
At March 31, 2016, MSMC had $321.3 million in unrestricted cash and investments (including $49.6 million of investments that are not restricted at the foundation). This equated to 221.5 days cash on hand, 11.6x cushion ratio, and 99.4% cash to debt, all of which compare favorably to the respective 'BBB' medians of 162 days, 11.1x, and 89.5%. During the construction period, the corporation is using a very conservative asset allocation with 64% in cash and 36% in fixed income. Fundraising continues to be steady with $16.1 million raised last year. Through the foundation, MSMC enjoys strong community support in its market. Fitch believes that the foundation will meet its fundraising goal of $50 million which will be combined with a $45 million equity contribution from the foundation.
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 an emergency department replacement. This will more than double its current capacity. A 750-car garage has already been built, and a number of preparatory projects have been completed. The actual tower construction will commence in July 2016 and completion is projected for September 2018. 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% 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, 2016, total outstanding long term debt was approximately $323 million and is 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'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form