Business Context and Reporting Period
Universal Health Realty Income Trust is a healthcare and human-services real estate investment trust. It owns or invests in hospitals, behavioral health facilities, medical and office buildings, free-standing emergency departments, childcare centers and specialty facilities. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022.
As of May 1, 2023, the portfolio comprised 76 investments or commitments in 21 states. UHS and its subsidiaries are a significant related-party tenant and provide advisory and executive services. UHS-related tenants generated approximately 40% of consolidated revenue in the first quarter of 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $23.2 million | $22.2 million | +$1.1 million, or 4.7% |
| Net income | $4.5 million | $5.4 million | -$0.9 million, or 17.5% |
| Basic and diluted EPS | $0.32 | $0.39 | -$0.07 |
| Funds from operations | $11.4 million | $12.4 million | -$1.0 million, or 8.4% |
| FFO per diluted share | $0.82 | $0.90 | -$0.08 |
| Net cash from operating activities | $10.1 million | $11.7 million | -$1.6 million |
| Dividends paid | $9.9 million, or $0.715 per share | $9.7 million, or $0.705 per share | +$0.2 million |
Net income margin was approximately 19.2%, compared with 24.4% in the prior-year quarter. Income before equity income and interest expense was $7.8 million, compared with $7.4 million, while net interest expense increased to $3.7 million from $2.2 million.
At March 31, 2023, total assets were $604.3 million, including net real estate investments of $447.6 million and a $83.5 million financing receivable from UHS. Cash and cash equivalents were $8.1 million. Line-of-credit borrowings were $308.4 million and non-recourse mortgage debt was $40.1 million, for approximately $348.5 million of reported debt before other adjustments.
The $375 million revolving credit facility matured in July 2025. Outstanding borrowings were $308.4 million, letters of credit were $3.1 million and available borrowing capacity was $63.5 million at quarter-end. The Trust was in compliance with all debt covenants, including total leverage of 43.4%, secured leverage of 5.0%, unencumbered leverage of 42.7% and fixed-charge coverage of 4.0x.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from higher activity at various properties, acquisitions from prior periods and the newly constructed Sierra Medical Plaza I medical office building.
- Interest expense increased by $1.5 million, principally because the average effective borrowing rate rose to 6.06% from 1.76% and average revolving borrowings increased to $300.9 million from $269.0 million.
- Net income declined despite higher revenue because of increased interest expense and $265,000 of demolition costs for a vacant Chicago specialty facility.
- FFO declined to $11.4 million from $12.4 million, and FFO per diluted share declined to $0.82 from $0.90.
- Operating cash flow declined to $10.1 million from $11.7 million, but exceeded dividends paid by approximately $217,000 in the current quarter.
- Investing cash outflows decreased to $5.4 million from $18.3 million because the prior-year period included approximately $13.6 million of property acquisitions. Current-year investing included $5.0 million of real estate additions and $3.9 million of investments in unconsolidated LLCs, partly offset by a $3.5 million repayment of an advance from an LLC.
- The $4.2 million Desert Valley Medical Center mortgage was repaid in January 2023 using revolving credit borrowings. Two additional non-recourse mortgages totaling $18.7 million mature in November 2023 and April 2024.
- Interest-rate swaps had a combined notional amount of $140 million and a $10.3 million net asset fair value at March 31, 2023. The Trust received approximately $1.2 million from swap counterparties during the quarter.
Outlook, Commentary, Risks and Unusual Items
Management stated that operating cash flows, cash, available revolver capacity and access to capital markets are expected to provide sufficient resources for operating, investing and financing requirements over the next twelve months, including REIT-required distributions. No specific revenue, earnings or FFO guidance was provided.
- Sierra Medical Plaza I in Reno was substantially completed in March 2023. Estimated total cost is approximately $34.6 million, with $22.3 million incurred by quarter-end. A master flex lease commenced for approximately 68% of the building at initial annual minimum rent of $1.3 million, subject to reduction as third-party leases are executed.
- A vacant Chicago specialty facility is being demolished, with total demolition costs expected to be approximately $1.4 million. The Trust expects approximately $1.3 million of aggregate 2023 operating expenses for three vacant specialty facilities, excluding remaining Chicago demolition costs.
- UHS lease renewals and purchase options could materially affect future revenue. Certain hospital leases expire in December 2026, while others extend through 2033 or 2040. UHS-related tenants also account for approximately 40% of consolidated revenue, creating concentration and related-party risks.
- Healthcare tenant risks include labor shortages, higher temporary labor costs, patient-volume and payer-mix changes, reimbursement pressure, regulatory changes, inflation and possible effects from the expiration of COVID-19-related healthcare policies.
- Higher interest rates and substantial variable-rate debt are important risks. Management estimates that a 1% change in interest rates would affect net income by approximately $1.7 million after giving effect to the interest-rate swaps.
- LIBOR-indexed debt and derivatives require transition to an alternative reference rate after the expected cessation of applicable U.S. dollar LIBOR tenors. The revolving facility includes fallback provisions, but the timing, cost and financial impact of the transition remain uncertain.
- The Advisory Agreement with a UHS subsidiary was renewed for 2023 on unchanged terms. Advisory fees were $1.3 million in the quarter, and the Trust has no salaried employees; its officers are UHS employees.
Investor Verification Priorities
- Verify the sustainability of dividends relative to operating cash flow, particularly given the narrow first-quarter coverage of dividends by operating cash flow.
- Review the maturity and refinancing plan for the November 2023 and April 2024 mortgages and the July 2025 revolving credit facility.
- Assess exposure to UHS, including tenant concentration, lease renewal and purchase options, related-party governance and the advisory arrangement.
- Monitor the leasing and eventual economics of Sierra Medical Plaza I and the disposition, redevelopment or continuing carrying costs of vacant specialty facilities.
- Evaluate sensitivity to variable interest rates, LIBOR transition requirements and the effectiveness of the interest-rate swaps.
- Review tenant operating conditions, healthcare staffing costs, reimbursement changes and the potential effect of the end of COVID-19 public-health flexibilities.