Fitch Upgrades Wise Health System, TX; Removes Rating Watch Positive.
The bonds have been removed from Rating Watch Positive. The Rating Outlook is Stable.
The bonds are secured by the gross revenues of the Decatur Hospital Authority's hospital facilities, a fully funded debt service reserve fund, and a first lien and mortgage on certain property and land on which the Decatur Hospital Authority's hospital facilities are located
The 'BBB-' IDR reflects Fitch's view that Wise will maintain its dominant market position, supporting midrange revenue defensibility and its solid operating cost flexibility. The rating upgrade to 'BBB-' from 'BB+' is driven by Wise's strong financial performance and the "U.S. Not-for-Profit Hospitals and Health Systems Rating Criteria" published on Jan. 9, 2018, which also assesses Wise's leverage relative to its liquidity through the cycle in Fitch's rating case.
KEY RATING DRIVERS
Revenue Defensibility: 'bbb'; Strong Market Share and Stable Payor Mix
Wise's revenue defensibility is based on its strong market share, favorable payor mix, and stable demographic profile. Fitch believes that Wise's strong payor mix and utilization trends mitigate its exposure to supplemental payments.
Operating Risk: 'bbb'; Sound Operating Flexibility and Elevated Capital Needs
The 'bbb' operating risk assessment is based on Wise's sound profitability and cost flexibility of its core health system operations. Five year operating trends reflect variability in nursing facility revenues and opening of the Parkway campus. Elevated capital requirements reflect a 9.7 year average age of plant and an ongoing healthy of capital investment.
Financial Profile: 'bbb'; Stable Finances through the Cycle
Fitch expects Wise to rebound from standard economic stress in the rating case to achieve performance consistent with the 'bbb' assessment as reflected in a fifth year cash to adjusted debt of 84% and net adjusted debt to adjusted EBITDA of 0.6x.
Asymmetric Additional Risk Considerations
There are no asymmetric additional risk considerations.
Stability Expected: Inability to achieve stable financial performance consistent with a 'BBB' category rating would pressure the current rating.
Wise is a healthcare system headquartered in Decatur, TX and owned and operated by the Decatur Hospital Authority. The authority is not a taxing district and the system is not supported by taxes. Wise operates a 148-bed general acute care hospital which is split into two campuses, the West Campus and the East Campus, in Decatur located about 40 miles northwest of downtown Fort Worth. In addition, Wise operates the 24-bed Parkway Surgical and Cardiovascular Hospital in the northern section of Fort Worth, TX. Wise reported $410 million in total revenues for the unaudited fiscal 2017 period (Dec. 31 year-end). Wise's total revenue includes $120 million of skilled nursing revenues from its affiliation with 16 nursing homes under various lease agreements. Fitch expects the potential for modest additional growth of skilled nursing revenues over time.
Wise's gross revenues are derived from Medicare (45%) and commercial/managed care (41%) payors with lesser exposure to Medicaid (5%) and self-pay (7%), reducing its exposure to revenue reimbursement risk. Net patient revenue of $410 million in 2017 consisted of the Wise Health System operations (71%) and largely pass-through patient revenues from 16 nursing homes (28%) under lease and management agreements with nursing home operators which began in 2014.
Wise received $27.4 million of supplemental funding program revenue support for its health system and nursing home operations during 2017 (6.4% of net revenues). Under the Texas Medicaid Waiver program in fiscal 2017, Wise received $7 million in uncompensated care (UC) and $13 million in Delivery System Reform Incentive Payments (DSRIP), during which time it received $7.4 million of support for nursing facility operations under the minimum payment amounts program (MPAP) and Quality Incentive Payment Program (QIPP). In its capacity as a non-state government-owned facility, Wise qualifies for the nursing facility support and shares the benefit through its lease terms with the nursing facilities. Fitch's criteria identify supplemental program support as a constraint on revenue defensibility based on its vulnerable to budgetary and public policy changes, especially during recessionary periods. DSRIP support is already scheduled for elimination beginning in 2020. However, Wise's strong utilization trends and favorable payor mix mitigate its exposure to supplemental payments.
The authority has a commanding market position evidenced by a 57% in patient market share in Wise County, its primary service area. No other hospital or system accounts for more than 10% of in the patient market in Wise County. Supplementing its two-hospital Decatur campus, the addition of the Bridgeport (2013) and Parkway (2014) campuses and operation of several clinics have strengthened Wise's market presence and contributed to strong outpatient utilization growth over the past five years. Wise maintains an affiliation with Baylor Health Care System providing advisory services, physician recruitment services, and continuing education services to foster quality of healthcare service delivery.
Demographic trends support the stability of Wise's payor mix. Five-year population realized a 7.5% compound annual rate of growth through 2016, above that of the U.S. (3.7%), but below that of Texas (8.5%). Wise County's median household income ($56,396 in 2016) modestly exceeds that of the U.S. average, while its 2016 unemployment rate (4.8%) is modestly elevated.
The operating flexibility assessment considers Wise's history of profitable operations and Fitch's view of adequate cost flexibility. Uneven operating trends reflect variability of nursing home revenues, the ramp up of utilization from the Parkway surgical center beginning in 2014, and Wise's ongoing investment in its operations. Strong historic profitability is evidenced by operating EBITDA margins of 10.4% and 9.3% respectively in 2016 and 2017 (unaudited). These margins incorporate nursing facility revenue and expense as reported in Wise's audited and unaudited financial statements. Excluding nursing home facilities, Wise's core health system operating EBITDA margins were stronger at 14.9% and 11.7% respectively in 2016 and 2017 (unaudited). Wise's 2018 operating EBITDA margin reflects the organization's budget expectations and incorporate strong strategic investments in operations.
Fitch expects future EBITDA margins to be generally consistent with that of 2018, taking into account future reductions in supplemental payments and Wise's ability to manage expenses to mitigate those reductions. Wise is not subject to collective bargaining arrangements and has access to a competitive and broad employment base within commuting distance to the expanding Dallas Fort Worth metroplex. As a defined contribution pension provider, Wise is not burdened by future pension obligations. These factors contribute to a high degree of expenditure flexible.
Fitch considers Wise's lifecycle investment needs to be elevated considering a 9.7 year age of plant, healthy capital spending equal to 163% of depreciation for the five years ending in 2017 and expected future capital spending. Wise expects to spend about 110% of depreciation on routine capital over the next five years and does not anticipate a need for an additional tower during this time horizon.
Wise's cash to adjusted debt of 64% at Dec. 31, 2017 reflects $100 million of unrestricted cash, investments and debt service reserve funds in relation to $158 million of adjusted debt ($112.4 million of series 2013A and 2014A revenue bonds, $10.8 million of capital leases, and Fitch's capitalization of Wise's long-term operating leases). Net adjusted debt to adjusted EBITDA of 1.2 at Dec. 31, 2017 represents the magnitude of adjusted debt (net of cash resources) in relation to EBITDA available to service the debt.
Fitch's base case reflects a combination of Wise's budget assumptions and Fitch's expectations for moderate growth of core hospital operations. EBITDA margins are consistent with Wise's 2018 budget, although reduced from more robust historical levels reflecting ongoing investment in the hospital's growth strategy. Supplemental payments are projected to decline in years three through five of the base case, but to be mitigated by reductions in operating expenses. Wise maintains adequate financial flexibility through the cycle, rebounding from standard economic stress to realize net adjusted debt to adjusted EBITDA of 0.6x and cash to adjusted debt of 84% by year five.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||May 15, 2018|
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