Jan 10 - Fitch Ratings has affirmed the following bonds of the Martin County
Hospital District (MCHD), Texas at 'BBB':
--$17.8 million combination limited tax and revenue bonds, series 2011A;
--$3.9 million combination limited tax and revenue bonds, taxable series 2011B.
The Rating Outlook is Stable.
The bonds are secured by a limited ad valorem tax and pledge of net revenues of
KEY RATING DRIVERS
BUSINESS OPERATIONS RISK: The district's business operations operate at a
deficit and receive considerable support from local property tax revenue.
LIMITED AND CONCENTRATED LOCAL ECONOMY: The service area is a small rural
community, and the tax base and local economy has a significant concentration in
oil and gas exploration.
EXCESS TAX REVENUE SUPPORT: Operations are aided by property tax revenues beyond
what is pledged to the bonds, and the district maintains sizeable taxing
capacity for operations under its statutory limits.
HIGH PER CAPITA DEBT: While low as a percentage of assessed value, the
tax-supported debt level is high on a per capita basis. Amortization of
principal is slow.
COMPETITION AN ISSUE: The hospital is the only one in Martin County and is
designated as a Critical Access Hospital (CAH). However, patient volume has been
very low historically as many district residents utilize hospital facilities in
NEW HOSPITAL BUILDING OPENED: Proceeds from the bonds were used to finance the
construction of a replacement hospital and adjacent medical office building,
which opened on May 1, 2012. Outpatient volume has increased at the new
facility; however, inpatient volume is still flat due to physician recruitment
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO IMPROVE FINANCIAL PERFORMANCE: Fitch expects MCHD to reduce its
operating losses due to physician recruitment plans that are expected to enhance
services and drive revenue growth. The failure to improve financial performance
will likely put downward pressure on the rating.
Located in central west Texas in the Permian Basin, which holds a significant
portion of the nation's proven, accessible oil and natural gas reserves, Martin
County is approximately 20 miles east of Midland. The hospital district was
established in 1967 to serve county residents (presently estimated at about
5,000) and its taxing jurisdiction is coterminous with county boundaries. The
25-licensed bed, acute care facility operated by MCHD in the city of Stanton is
the only hospital in the county and is designated as a CAH.
MINERALS BASED ECONOMY
Activity in mineral extraction drives much of the local economy, which has
reportedly gained additional momentum in light of recent rises in oil prices. In
addition, the large and broader Midland-Odessa employment base is easily
accessible. County unemployment levels have improved over the past year,
dropping from 5% in October 2010 to 3.9% in October 2012; the county rate
remains well below the state (6.2%) and national (7.5%) averages for the month.
Area wealth levels are slightly below the state and U.S. averages.
The district's tax base totals nearly $4.6 billion for fiscal 2013 or close to
an astounding $960,000 per capita. More than 85% of the tax base is comprised of
oil and gas reserves susceptible to fluctuations in mineral values. Top taxpayer
concentration in this sector is high at around 46%. The top taxpayer is Endeavor
Energy Resources at 17%. Taxable assessed valuation (TAV) experienced strong
annual gains of 30% on average since fiscal 2008, including a very large 58%
gain for fiscal 2013.
LOW TAX RATE RELATIVE TO STATUTORY CAP
Fitch views positively the significant taxing margin currently available under
the statutory cap of $0.75 per $100 of TAV; the fiscal 2013 total tax rate of
$0.14 provides MCHD with ample financial flexibility in the event of large TAV
declines. However, Fitch tempers this currently large taxing margin with the
highly volatile and correlated nature of the district's tax base. The operating
component of the tax rate is limited to $0.30, and the fiscal 2013 operating
rate is $0.0937.
PROPERTY TAXES SUPPORT OPERATIONS
MCHD's operating performance historically has been hampered by a small rural
service area and aging hospital, and results have been aided materially by
property tax revenues; operating results excluding tax revenues have typically
shown losses. Tax revenues in recent years had provided roughly 25% of total
operating revenues, but that amount increased to more than 35% beginning in
fiscal 2011 with a property tax rate increase. Although patient revenue was down
in fiscal 2011 and again in 2012, the boost in tax revenues generated net income
of more than $2 million and $1 million, respectively, and an increase in
liquidity and operating margin.
The district's operating margin was a healthy 18% in fiscal 2011 but dropped to
9% in fiscal 2012 due to decreased patient revenue while still operating at the
old facility. Liquidity levels, as measured by days cash on hand, improved to
184 days from 171 days in fiscal 2011. For fiscal 2013 management anticipates a
bottom line gain of $1 million for the year and generated $513 thousand through
the six months ended Oct. 31, 2012.
The hospital benefits from its CAH status as it is reimbursed by Medicare at
cost plus 1%. Also, CAHs are reimbursed for capital costs (depreciation and
interest) of construction based on their Medicare payor mix. Medicare patients
comprised nearly 36% of the payor mix in fiscal 2012, which is somewhat below
average for a CAH.
INDEPENDENT BOARD APPROVES TAX RATE
The district is governed by an independent six member board appointed by the
county commissioners. Members serve staggered two-year terms, meet monthly for
policy oversight and to approve the annual operating and debt service levies as
proposed by the county assessor and by district management.
Overall debt levels are low at 0.9% of market value but very high on a per
capita basis at almost $8,800 given the county's small population base and
relatively high mineral property wealth. The outstanding $21.7 million in
limited tax debt was sold in 2011 to finance the construction of a replacement
hospital and adjacent medical office building. The $22.8 million authorization
received strong voter approval at more than 80% in May 2010.
Principal amortization is very slow (but not atypical for hospitals) with
approximately 27% retired in 10 years. The district's debt service tax rate was
projected to increase to the $0.11--$0.13 range to service this debt, but rapid
TAV growth in recent years has kept the rate to under $.05. Management reports
no additional borrowing plans.
EXPECTED IMPROVEMENT WITH NEW FACILITY
Fitch expects MCHD's financial performance to improve as benefits from the move
to the new facility are realized. Management has several physician recruitment
plans that should enhance inpatient volume and services at the facility. The
failure to realize these benefits could result in negative rating pressure.