Universal Health Realty Income Trust — Q3 2023 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT that owns, develops and leases acute-care hospitals, behavioral-health hospitals, medical office buildings, free-standing emergency departments, childcare centers and specialty facilities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, filed November 8, 2023. The Trust reported one operating segment.
UHS-related tenants generated approximately 41% of consolidated revenue. A UHS subsidiary also provides advisory and administrative services, and all Trust officers are UHS employees. The Advisory Agreement was renewed for 2023 on unchanged terms.
Financial performance and key metrics
| ($ in thousands, except per-share data) | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $24,223 | $22,151 | $71,255 | $66,497 |
| Net income | $3,872 | $4,848 | $11,807 | $15,471 |
| Diluted EPS | $0.28 | $0.35 | $0.85 | $1.12 |
| Funds from operations | $11,193 | $11,801 | $33,186 | $36,402 |
| FFO per diluted share | $0.81 | $0.86 | $2.40 | $2.64 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $32,484 | $34,516 |
- Revenue increased 9.4% in Q3 and 7.2% for the first nine months, primarily from the Reno medical office building, the McAllen Doctor’s Center acquisition and improved property-level results.
- Net margin was approximately 16.0% in Q3 2023 versus 21.9% in Q3 2022, and approximately 16.6% for the first nine months versus 23.3% in the prior-year period.
- Income before equity in unconsolidated LLCs and interest expense was $8.0 million in Q3 and $23.2 million for the first nine months, compared with $7.3 million and $21.9 million, respectively, in the prior-year periods.
- Interest expense increased to $4.5 million in Q3 from $2.8 million and to $12.3 million for the first nine months from $7.4 million. The principal driver was higher average borrowing costs and greater average revolver borrowings.
- Operating cash flow exceeded dividends paid by approximately $2.7 million during the first nine months of 2023. Dividends paid were $29.8 million, or $2.155 per share, compared with $29.3 million, or $2.125 per share, in the prior-year period.
Balance sheet, debt and liquidity
| ($ in thousands) | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $607,883 | $607,540 |
| Cash and cash equivalents | $8,359 | $7,614 |
| Revolver borrowings | $321,500 | $298,100 |
| Non-recourse mortgage notes, net | $39,319 | $44,725 |
| Total liabilities | $397,575 | $378,439 |
| Total equity | $210,308 | $229,101 |
- The $375 million revolving credit facility matures July 2, 2025, with options for two additional six-month extensions. At September 30, 2023, $3.1 million of letters of credit were outstanding and available capacity was $50.4 million.
- The revolver carried an applicable adjusted-term-SOFR margin of 1.20% and a facility fee of 0.20% at quarter-end. The average effective revolver borrowing rate was 6.89% in Q3 2023 versus 3.71% in Q3 2022.
- The Trust was in compliance with all debt covenants. Reported covenant measures included total leverage of 44.5%, secured leverage of 4.9%, unencumbered leverage of 44.2% and fixed-charge coverage of 3.3x.
- Fixed-rate, non-recourse mortgages totaled approximately $39.5 million before financing fees and debt premiums. The $6.1 million 2704 North Tenaya Way mortgage maturing in November 2023 was subsequently repaid with revolver borrowings; the $12.3 million Summerlin Hospital MOB III mortgage matures in April 2024 and is expected to be refinanced or repaid with revolver borrowings.
- Interest-rate swaps with an aggregate notional amount of $140 million had a net fair-value asset of $10.5 million. Management estimated that a 1% change in interest rates would affect net income by approximately $1.8 million, after giving effect to the swaps.
Material changes versus the prior comparable period
- Revenue increased, but net income declined 20.1% in Q3 and 23.7% for the first nine months because higher interest expense more than offset property-level income growth.
- FFO declined 5.2% in Q3 and 8.8% for the first nine months.
- Other operating expenses increased by $1.0 million in Q3 and $1.9 million for the first nine months, excluding demolition costs, largely reflecting the recently opened Reno MOB and other property-level increases.
- Chicago specialty-facility demolition costs totaled approximately $1.1 million during the first nine months of 2023, contributing to the year-over-year earnings decline. Demolition was substantially completed during the second quarter.
- The Trust acquired the approximately 79,500-square-foot McAllen Doctor’s Center in August 2023 for approximately $7.5 million. The property is 100% master leased to a UHS subsidiary under a lease with initial annual rent of approximately $624,000.
- Sierra Medical Plaza I in Reno was substantially completed in March 2023. Its estimated total cost is approximately $35 million, with approximately $26 million incurred by September 30, 2023.
- The credit facility was amended in May 2023 to replace LIBOR with adjusted term SOFR.
Outlook, risks, contingencies and unusual items
Management stated that operating cash flow, cash, available revolver capacity and access to capital markets should provide sufficient resources for operating, investing and financing requirements over the next twelve months, including required REIT distributions. No quantitative earnings or FFO guidance was provided.
- Key risks include higher interest rates, refinancing requirements, restricted access to capital, inflation, construction costs and the potential effect of tenant financial performance on rent collections and property values.
- UHS concentration is material: UHS-related tenants accounted for approximately 41% of revenue. Hospital and other leases may not be renewed, and UHS or its affiliates may exercise purchase options at lease expiration or following a change of control.
- Healthcare tenants face labor shortages, elevated temporary labor costs, supply-chain pressures, reimbursement uncertainty and potential reductions in patient volumes or services.
- Three specialty facilities remain vacant or are being marketed, including the Chicago property undergoing demolition. Management estimated approximately $1.3 million of aggregate 2023 operating costs for the vacant properties, excluding Chicago demolition costs.
- The Trust has four unconsolidated LLC/LP investments. Related entities have approximately $21.4 million of non-recourse mortgage debt, and the Trust has certain equity and financing commitments, including up to $5.0 million related to Grayson Properties II, of which $2.2 million had been funded.
- UHS-related conflicts of interest are possible because UHS provides advisory services, employs the Trust’s officers and is a significant tenant. Transactions with UHS require approval by independent trustees.
Most important facts for investors to verify
- Whether elevated revolver rates and the July 2025 maturity will continue to pressure earnings, FFO and dividend coverage.
- The refinancing or repayment plan and terms for the $12.3 million Summerlin Hospital MOB III mortgage maturing in April 2024.
- UHS tenant performance, lease renewals, purchase-option activity and the sustainability of the approximately 41% revenue concentration.
- Occupancy, leasing progress and additional carrying or redevelopment costs for the vacant specialty facilities.
- Actual rent-up and economics of Sierra Medical Plaza I and the McAllen Doctor’s Center.
- Whether operating cash flow remains sufficient to fund dividends, capital expenditures, acquisitions and required REIT distributions without increasing leverage.