Fitch Affirms Upland Hills Health (WI) Ratings at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following Wisconsin Health and Education Facilities Authority bonds issued on behalf of Upland Hills Health (UHH) at 'BBB+':
--$6.5 million revenue refunding bonds series 2006A;
--$10.3 million revenue bonds series 2006B;
--$9.5 million revenue bonds series 2006C*.
*The 'BBB+' is an underlying rating. The series 2006C bonds are supported by a direct-pay letter of credit (LOC) issued by US Bank. Fitch was not asked to provide a rating based on LOC support.
The Rating Outlook is Stable.
The bonds are supported by a pledge of revenues, mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG HISTORICAL PROFITABILITY: UHH's profitability has been supported by its strong market position, good payor mix and enhanced reimbursement due to its CAH designation. UHH's operating EBITDA margin has averaged at 15.8% over the last four fiscal years, significantly ahead of Fitch's 'BBB' median of 7.7%. Profitability, while declined, remained solid through the five-month interim period (ended Feb. 29, 2016) with 1.4% operating and 11.9% operating EBITDA margins.
ROBUST LIQUIDITY POSITION: UHH's unrestricted liquidity position has grown significantly over the last four audited years, as a result of strong operating performance and solid cash flows. UHH's 368.2 days cash on hand (DCOH), 17.5x cushion ratio and 167.2% cash to debt at Feb. 29, 2016, exceeded Fitch's 'BBB' medians of 161.5 days, 11.1x, and 89.5%, respectively.
MODERATE DEBT BURDEN: UHH's debt burden remained moderate in fiscal 2015, as evidenced by 2.4x debt to EBITDA and 30.4% debt to capitalization, both favorable to Fitch's 'BBB' category medians of 4.4x and 48.1%, respectively. Maximum annual debt service (MADS) as a percent of revenue of 4.8% is the only debt metric that remains unfavorable to Fitch's median of 3.6%. However, it has moderated from 5.7% in fiscal 2013.
SIZABLE CAPITAL PLANS: UHH has finished the development of its three-year master facilities plan (MFP) in 2015. The total cost of the proposed capital projects is estimated between $28-$30 million, with $5 million being spent in 2017 and the remainder being evenly split between 2018 and 2019. The plan is expected to be funded out of cash flows and cash reserves and Fitch believes that UHH has room at the current rating to absorb a project of this size.
SSM HEALTH CARE AFFILIATION: Since 1987, UHH has maintained a clinical and governance affiliation with SSM Health Care (revenue bonds rated 'AA-' by Fitch) and accrues many benefits, including capital and strategic support, governance expertise, and leverage to procure strong pricing from vendors, all lending further credit strength. Further, UHH's rural location provides the organization with a stable and leading market position, and a very limited competitive landscape.
SUCCESSFUL IMPLEMENTATION OF CAPITAL PLAN: Fitch believes that Upland Hills Health has enough financial and operating cushion at the current rating level to absorb its expected sizable capital plans. Fitch will continue to monitor the progress of the project and expects Upland Hills Health to complete the proposed renovations on time and on budget.
CRITICAL ACCESS DESIGNATION: Upland Hills Health is exposed to potential changes in the CAH program, which would likely have a negative impact on its financial profile. Management does not anticipate any near term changes to the program.
Located in Dodgeville, WI, approximately 45 miles west of Madison, WI, UHH consists of a 25-bed critical access hospital, a 44-bed nursing home, home health service, hospice service, and other non-consolidated entities. Total revenues were $53.4 million in fiscal 2015.
STRONG HISTORICAL PROFITABILITY
UHH's $5.3 million in income from operations in fiscal 2015 equated to a very strong 9.9% operating and a 19.3% operating EBITDA margins. UHH's operating margin improved from 5.0% in fiscal 2014 due to stronger volumes and favorable shifts in payor mix. Operating performance, although still solid against category medians, dipped somewhat through the five-month interim due to start-up costs related to the hiring of several new physicians, as well as a recent change in revenue recognition methodology. Management believes that UHH is still on track to meet its year-end budget of a 4.0% operating margin, which Fitch views as feasible given the cyclical nature of interim results.
Fitch believes that UHH's payor mix is a key driver of its historically robust operating profitability. UHH's payor mix is characterized by a high percentage of commercial payors (43%) and Medicare (41%), as well as, low Medicaid and self-pay. In addition, UHH receives enhanced Medicare reimbursement due to its critical access hospital (CAH) designation.
ROBUST LIQUDITY POSITION
UHH's $45.1 million in unrestricted cash and investments at Feb. 29, 2016 equated to 368.2 days cash on hand (DCOH), 17.5x cushion ratio and 167.2% cash to debt, all of which exceeded Fitch's 'BBB' category medians of 161.5 days, 11.1x, and 89.5%, respectively. UHH's cash and investments have grown from $28.7 million at fiscal 2012 year-end. The robust cash grown is attributed to strong operating performance and cash flows over the last four audited years. UHH is expecting to fund its three-year MFP from cash flows and cash reserves, and Fitch believes that UHH has cushion in its liquidity position to support a project of such magnitude.
MODERATE DEBT BURDEN
UHH's debt burden is moderate with 2.4x debt to EBITDA and 30.4% debt to capitalization in fiscal 2015, both of which are favorable to Fitch's category medians. In addition, MADS coverage by EBITDA of 4.2x was significantly above the 2.7x median and has averaged at 3.2x over the last four audited years. MADS as a percent of revenue of 4.8% was unfavorable compared to Fitch's 'BBB' median of 3.6%, however UHH's stable year-over-year revenue growth has helped moderate the metric from 5.7% in fiscal 2012. Fitch believes that UHH has debt capacity at the current rating level, however, no new debt is anticipated at this time.
SIZABLE CAPITAL PLANS
UHH's capital expenditures have been tempered over the last four fiscal years, averaging only 79% of annual depreciation. However, average age of plant has remained low at 9.4 years in fiscal 2015, compared to the median of 11.4 years. In 2015 UHH finalized the development of its MFP which calls for approximately $28 - $30 million in capital spending over a three year period, beginning in 2017. UHH is expecting to spend $5 million in 2017 and approximately $12 million a year in both 2018 and 2019. The plan details the construction of new operating rooms, a med-surg ICU unit, a new OB area and a C-Section suite. Fitch believes that the projects will help improve UHH's competitive position and should bolster volumes and revenues over the longer term.
UHH has approximately 64% in fixed rate and 36% in variable rate debt. The variable rate debt is secured by a letter of credit which expires on June 22, 2016. Fitch believes that UHH has ample liquidity to offset put, renewal and interest rate risk, with 477.7% cash to demand debt at Feb. 29, 2016.
UHH is the guarantor for up to 49% of a $2.7 million bank loan for Crest Ridge Assisted Living, of which UHH is part owner. Fitch used MADS of $2.6 million, which includes the full $213,000 potential annual debt service on the guarantee, which has never been utilized. UHH's debt service coverage covenant calculation is more stringent and includes the 49% of the principal amount of the guaranteed debt ($1.3 million) in debt service requirements and resulted in 3.5x coverage for fiscal 2015. UHH does not have any outstanding swaps.
UHH covenants to provide audited annual financial statements and quarterly disclosure to bondholders via the Municipal Securities Rulemaking Board's EMMA system. Quarterly disclosure consists of a balance sheet, income statement, and utilization statistics, but not management discussion and analysis of the statement of cash flows.