Fitch Affirms Winthrop-University Hospital 2012 Revs at 'BBB+'; Outlook Stable
--$130,180,000 Nassau County Local Economic Assistance Corporation Revenue Bonds (Winthrop-University Hospital Association Project), Series 2012.
The Rating Outlook is Stable.
Debt payments are secured by a mortgage on the core acute care facilities and a pledge of gross receivables. There is no debt service reserve fund.
KEY RATING DRIVERS
STABLE BUT MIXED FINANCIAL PROFILE: WUH's financial profile is characterized by a very manageable debt burden, which helps to mitigate light but improving operating profitability and weak liquidity relative to expenses. WUH's light debt burden allows for solid debt service coverage even in softer performing years.
GOOD MARKET POSITION: WUH has a leading 17.3% inpatient market share (2015 data) in a fragmented Nassau County (GOs rated 'A') and employs over 450 physicians, including a large base of primary care physicians. WUH maintains its competitive position by providing higher end tertiary services as indicated by its 1.9 Medicare case mix index, coupled with a strong outpatient presence, including a CyberKnife location in Manhattan and a new outpatient center in Garden City.
STRONG START TO FY16: WUH posted a 3.3% operating margin and 7.5% operating EBITDA for the first six months of 2016. The results were the strongest WUH has produced through the four year historical period. Good volume growth, with inpatient admissions up 3.9% and outpatient surgeries up 9.4%, from the comparable prior year period, supported the improved performance and generated strong coverage of maximum annual debt service (MADS) of 5.2x.
NYU HOSPITAL CENTERS LOI: WUH and NYU Hospitals Center (NYUHC revenue bonds rated 'A-'/ Stable Outlook) signed a non-binding letter of intent in July 2016 to explore bringing the two organizations together to create an integrated healthcare network. Both organization are in the process of due diligence. The current rating does not factor in the impact of any potential affiliation or merger between WUH and NYUHC.
FUTURE CAPITAL PROJECTS: WUH is contemplating a variety of capital projects that include adding bed capacity at its main hospital. Fitch has noted the inpatient capacity challenges at WUH's main hospital, which is currently running at a fairly high 89% of capacity. Investments in service lines and physicians and its recent Trauma I designation should keep capacity levels tight. No projects have been approved yet by the board, and the current rating does not factor in any of these potential projects.
CURRENT CAPITAL SPENDING: WUH's spending on capital has been strong, with capital spending averaging 185.1% of depreciation over the last four audited years, relative to Fitch's 'BBB' category median of 83.2%. WUH went live on August 1 with a major information technology upgrade and prior to that capital spending including the building of a new research center and investments in key services lines.
OUTCOME OF INITIATIVES: Clarity on future capital projects and/or the potential affiliation/ merger of Winthrop-University Hospital and NYU Hospitals Center is expected over the next 12 - 24 months which could have an impact on the rating.
WUH is a 591-licensed bed tertiary medical center located in Mineola, NY. Total operating revenue in 2015 was $1.2 billion.
Good Trend in Performance
Since FY2013, WUH's underlying operating performance has been on a steady trend of improvement. WUH finished 2013 with a very thin 4% operating EBITDA margin. Since then, WUH's operating EBITDA has improved each year, and it climbed to a solid 7.5% in the first six months of FY16, relative to a median 8.7 WUH finished FY2015 with a 6% operating EBTIDA margin. The steady financial improvement has been the result of good cost management and investments in key service lines and in physicians, which has led to volume growth.
WUH has been able to maintain good debt service coverage throughout the last four audited years. Over this time, WUH's coverage of its $19.9 million MADS has ranged from 2.7x to 4.4x, and was at 5.2x through the first six month of FY2016, relative to a 'BBB' category median of 3x. WUH's MADS drops to approximately $13.4 million in 2024.
WUH has been able to maintain good coverage even in weaker performing years due to its manageable debt burden. MADS, as a percent of revenue, was a very modest 1.4% of revenues relative to the 'BBB' category median of 3.6% at June 30, 2016.
Mixed Liquidity Indicators
WUH's elevated capital spending and debt amortization has stunted improvement in liquidity metrics. WUH days cash on hand remained very thin for the rating level at 53.7 days at June 30, 2016, relative to a 'BBB' median of 161.5 days. However, it remained relatively consistent with prior years. Cash to debt of 81% compared more favorably to the 'BBB' category of 89.5%.
Good Market Position
Fitch views WUH's position as an academic health center, with a sizable employed physician base, and its geographic position in a densely populated area just across the Queens border in Nassau County favorably. WUH's market share has incrementally increased over the last three years in spite of the competitive market with formidable competitors in the primary service area and regionally.
Fitch also views WUH's participation in the Long Island Health Network (LIHN), a network of 10 Long Island hospitals that share data on quality and cost, negotiate payor contracts as a single entity and in aggregate have revenues of nearly $4 billion, as a credit strength. However, a merger with NYU Hospital Center would likely lead to WUH leaving LIHN.
Debt Profile/Capital Spending
WUH has a conservative debt structure, with the vast majority of its $234 million in long-term debt fixed rate and no swaps outstanding. Fitch views the conservative debt structure positively especially in light of WUH's thin liquidity. WUH is paying down approximately $10 million a year in principal.
WUH discloses annual and quarterly financial information on EMMA: