[June 11, 2014]

Fitch Affirms Mount Sinai Med Center of Florida (FL) Revs at 'BBB'; Outlook to Positive

Fitch Ratings has affirmed the 'BBB' rating on the following hospital revenue bonds issued through the Miami Beach Health Facilities Authority on behalf of Mount Sinai Medical Center of Florida (MSMC):

--$124.9 million series 2012;

--$79.6 million series 2004.

The Rating Outlook has been revised to Positive from Stable.

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 2004 and 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

POSITIVE OUTLOOK: The Outlook revision to Positive 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 very favorably against Fitch's 'BBB' respective category medians of 1.8% and 9%, and also marked the organization's highest profit ever. 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 would likely result in positive rating movement despite its pending large capital project.

HIGH BUT MODERATING DEBT BURDEN: Maximum annual debt service (MADS) equated to a high 5% 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 its strong operating profitability, MSMC's historical debt service coverage of MADS by EBITDA and operating EBITDA was just adequate at 3.1x, respectively, in 2013.

GROWING MARKET FOOTPRINT: Although MSMC operates in a relatively competitive environment in the Miami-Dade County market, the organization has been successful in expanding its reach through growth in outpatient centers as well as clinical excellence in certain service lines such as cardiology. Approximately 22% of MSMC's revenue is from cardiac services.

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 annual average 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.

LARGE MEDICARE POPULATION: The patient population in MSMC's service area is heavily weighted towards governmental payors (67.7% Medicare and Medicaid gross payors), which challenges profitability. While management has focused on controlling expenses and expanding its reach in the market, expected reimbursement pressures at the state and federal level could hamper future performance.

RATING SENSITIVITIES

MAJOR PROJECT AHEAD: MSMC plans to build a new replacement tower in late 2014, which is expected to be partially financed by $100 million in additional debt in early August 2014. Fitch believes MSMC could have additional debt capacity at a higher rating level, as MADS is expected to decline slightly due to the restructuring of its series 2004 bonds in conjunction with the new money. Fitch will evaluae the impact of the additional debt when it is issued.

SUSTAINED FINANCIAL IMPROVEMENT: MSMC has sustained its positive momentum and vastly improved its financial profile since fiscal 2007 when the organization had a 'BB+' credit rating. Further upward rating movement may be warranted with sustained successful financial results that continue to propel improved liquidity metrics and debt service coverage while absorbing the cost of the new replacement tower.

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.

RATING OUTLOOK TO POSITIVE

The Outlook revision to Positive 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 and debt service coverage metrics. Specifically, through the three-month interim period 2014 (March 31, 2014; unaudited), unrestricted cash and investments totaled $238.3 million, which translated into 185 days cash on hand, 9.1x cushion ratio, and 100% cash-to-debt. MADS coverage is somewhat light at 2.3x by EBITDA, which is primarily due to the organization's high debt burden.

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. Currently, MADS is $26.1 million, and is expected to drop to $25.6 million even with the additional debt due to extending the maturity of its series 2004 bonds.

CAPITAL IMPROVEMENT PLAN

MSMC plans to build a new replacement inpatient tower (150 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 additional debt, $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. Fitch notes cost overruns and construction delays as inherent risks in the project, but recognizes management's focused efforts on planning and preparation to mitigate any unforeseen events.

CONSERVATIVE DEBT PROFILE

Fitch views MSMC's debt profile as conservative as its debt profile is 100% fixed-rate with no outstanding swaps. Management's intent is to issue the series 2014 bonds in a fixed-rate mode.

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:

'U.S. 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=834186

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