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Fitch Rates Miami Jewish Health System, Inc. (FL) 2017 Revs 'BBB'; Outlook Stable
[December 09, 2016]

Fitch Rates Miami Jewish Health System, Inc. (FL) 2017 Revs 'BBB'; Outlook Stable


Fitch Ratings has assigned a 'BBB' rating to the following bonds expected to be issued on behalf of Miami Jewish Health System, Inc. (Miami Jewish):

--$45,545,000 City of Miami Health Facilities Authority Revenue and Refunding Bonds Series 2017.

The Rating Outlook is Stable.

The bonds are expected to be issued as fixed rate via negotiation the week of Dec. 12, 2016.

SECURITY

The bonds are secured by a pledge of gross revenues and a mortgage on certain property of the obligated group (OG) and a debt service reserve fund.

KEY RATING DRIVERS

WIDE ARRAY OF ELDERLY SERVICES: Miami Jewish provides a unique array of services for the elderly, drawing from a fairly geographically limited service area in Miami-Dade County. System components include a large skilled nursing (SNF) component, a growing Program for All-Inclusive Care for the Elderly (PACE) network, an independent and assisted living facility, a small acute care and rehab component, clinics and management of HUD Section 202 housing.

CHALLENGING PAYOR MIX: While the organization's payor mix is heavily skewed towards governmental sources, with 68% combined Medicare and Medicaid, the risk is somewhat offset by the significant revenues from the PACE program, which is capitated. All of the ILU's and ALU's are private pay and a planned future sizeable expansion of the memory care program will also be all private pay.

GOOD COVERAGE/ MODERATE LEVERAGE: Pro-forma maximum annual debt service (MADS) of $3.1 million equates to a modest 2.9% of fiscal 2016 revenues which Miami Jewish covered at a solid 3.3x on a historical pro-forma basis.

ADEQUATE LIQUIDITY: Unrestricted cash and investments of $48.4 million at Sept. 30, 2016 equated to 160 days cash on hand (DCOH) and cash was equal to 97% of pro-forma debt. Miami Jewish's liquidity metrics are adequate and reflective of its business lines- rental senior housing, skilled nursing and PACE. Additionally, management is focused on maintaining cash reserves and any major expansion plan would be dependent on raising a majority of needed funds from philanthropy.

RATING SENSITIVITIES

MAINTENANCE OF SOLID COVERAGE: Fitch expects Miami Jewish Health System to continue to maintain solid debt service coverage while executing its campus renewal and repositioning plan that will include expansion of its memory care program in the next two to three years, requiring significant fundraising. Failure to raise sufficient philanthropy for the project or a material decline in profitability impacting debt service coverage would likely result in negative rating pressure.

CREDIT PROFILE

Founded in 1940's as a 23-bed nursing home for Jewish widows and widowers, Miami Jewish Health System has grown into a provider of a wide array of senior services in South Florida. The OG consists of a 438-bed skilled nursing facility, one of the largest in the Southeast, a rental 95 unit independent living (ILU) and 81 unit assisted living (ALU) and 19 memory care facility and a small 32-bed acute care hospital, mostly catering to the needs of the Miami Jewish residents, all located on the system's main campus in Miami, and a Foundation. Additionally the OG operates a large PACE program with four centers serving providing care to 550 participants. The main entities outside of the OG include the Wolf/Cypen Foundation which operates exclusively for the benefit of Miami Jewish, as well as three HUD 202 apartment buildings providing subsidized housing for the elderly, and a nurse registry program.

The OG represented substantially all of the consolidated system revenues and 80.4% of consolidated system assets in fiscal 2016 (year-end June 30). Fitch reports on the performance of the consolidated system. Given the unique composition of revenues and despite the presence of a small acute care presence, the medians referred to in the press release refer to Fitch's Not-for Profit Continuing Care Retirement Communities Rating Criteria (CCRC) medians.

The management lead by the President and CEO with a deep experience in various for-profit sectors, appointed in 2008, includes several individuals recruited from the for-profit sector. His leadership has brought stability to the organization and the strategic initiatives being executed should further leverage the organization's core competency programs to further bolster profitability.

New Issue Details

Miami Jewish plans to issue approximately $45.4 million of series 2017 fixed rate bonds. Bond proceeds will used to refinance variable rate letter of credit backed series 2005 and a 2013 bank loan, fund $17.3 million of routine capital improvements, pay $1.3 million swap termination payment and fund a DSRF and costs of issuance. The 2017 bonds will have a final maturity date of 2031 and an average coupon currently estimated at 5%. There are no swaps outstanding. The bonds are expected to have level debt service of $3.1 million until 2033, when MADS declines to $2.6 million. Post issuance, the series 2017 fixed rate bonds will be the only debt outstanding, other than a $4.7 million draw under a $5 million revolving credit facility, which is interest only at 30-day LIBOR rate plus 1.75%.

Unique and Complementary Array of Services

Because of the complementary nature of the services provided by Miami Jewish, several of the system components serve as feeders to its programs. The three HUD 202 subsidized elderly housing projects owned and managed by Miami Jewish generate referrals to its large and growing PACE program, which delivers comprehensive medical and social services to the frail elderly, most of whom are dually eligible for Medicare and Medicaid benefits and are reimbursed under capitated contracts. The PACE program accounted for 38% of net revenues in fiscal 2016, only second to the 44% of net revenues generated by the SNF facility. Miami Jewish is planning to increase its operations of the HUD 202 program by adding a fourth location and has been growing enrollment in its PACE program, which is a core competence and generates a solid return.

Adequate Financial Performance and Moderate Leverage

The system's operating ratio averaged 95% over the last four years, which is consistent with a 'BBB' peer of providers with sizable SNF operations. Profitability is relatively light, with net operating margin at 5.4% in fiscal 2016, but improved over the average 2.3% in the prior three years. However, Fitch notes that the light profitability is somewhat mitigated by the increasing source of revenues from the PACE program, which generates operating returns well above 10% and the absence of real estate risks inherent in operating the residential facilities (ALU and ILU), which are rental only. Miami Jewish's pro-forma debt burden is moderate, as represented by pro-forma MADS representing a light 2.9% of consolidated system fiscal 2016 revenues. Historical coverage of pro-forma MADS was a solid 3.3x and 3.1x in fisca 2016 and fiscal 2015, respectively.



Adequate Liquidity

The consolidated system's unrestricted cash and investments totaled $48.4 million at Sept. 30, 2016, equating to 160 days cash on hand (DCOH) and cash was equal to 97% of pro-forma debt. Liquidity metrics as of the end of the first quarter of fiscal 2017 were materially improved due to the receipt of approximately $7 million of receivables from the PACE program related to fiscal 2016 services, but received following the fiscal year end. The OG does not include the Wolf/Cypen Foundation, which held approximately $6.7 million of cash and investments at 2016 fiscal year-end, but the foundation benefits Miami Jewish exclusively. Excluding the Wolf/Cypen Foundation investments, the OG's DCOH would be reduced to 138 and cash to pro-forma debt would decline to 84%. Fitch views Miami Jewish's liquidity position as adequate in light of its business lines and operating profile, which has no entrance fee refund exposure. Further, management is focused on maintaining system liquidity at the current levels and has stated that any major expansion plan would be highly dependent on the ability to raise a majority of needed funds from philanthropy.


Capital Plans

Of the new money proceeds in the series 2017 transaction, $17.3 million will be used for a number of projects at the Miami Jewish main campus. Approximately $8 million will be used for a construction of a parking garage, and the remaining funds will be applied towards renovations of three of the campus buildings.

As part of its master facility plan, Miami Jewish is planning to develop a 99 unit memory care rental facility on the main campus, which would be designed using the 'neighborhood model'. The project is in early stages of development and has not yet obtained required approvals. According to management realization is 2-3 years out, during which time the organization would need to raise a substantial portion of the approximately $50 million estimated cost. Fitch has not incorporated this project into the current rating, and in Fitch's view Miami Jewish has limited debt capacity at this time.

Occupancy and Competition

Occupancy of the large SNF has been consistently in mid to high 90%, most recently 98% in fiscal 2016, and the ALU and memory care units averaged occupancy of 90%. Miami Jewish has somewhat struggled with the ILU occupancy, which was reported at slightly increasing to 80% at 2016 fiscal year end from 76% in 2014. Aiding occupancy levels, the rental nature of the ILU units allows for renting vacant units to 'snowbirds' from the Northeast and Canada on a monthly basis. While there are a number of residential facilities in this market, Miami Jewish is the only facility that provides kosher food and thus appeals to a certain market segment. Management believes that there exists significant demand for the planned memory care facility, which will be instrumental in attracting philanthropy for the project.

DISCLOSURE

Miami Jewish covenants to provide quarterly statements within 45 days and audited financial within 150 days of the fiscal year end to the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://www.fitchratings.com/site/re/868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/site/re/866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016271

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016271

Endorsement Policy

https://www.fitchratings.com/regulatory

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