Business Context and Reporting Period
Universal Health Realty Income Trust is a Maryland REIT focused on healthcare and human-service real estate. The filing is the Form 10-K for the fiscal year ended December 31, 2022, filed February 27, 2023; it is not a standalone fourth-quarter filing. As of February 27, 2023, the portfolio included 76 investments or commitments across 21 states: six hospitals, 59 medical/office buildings, four free-standing emergency departments, four childcare centers and three vacant specialty facilities.
Universal Health Services, Inc. and its subsidiaries are a major related-party tenant and provide the Trust’s advisory services. UHS-related tenants accounted for approximately 40% of consolidated revenue in 2022, and UHS owned approximately 5.7% of the Trust’s shares.
Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $90.6 million | $84.2 million | Up 7.6% |
| Net income | $21.1 million | $109.2 million | Down $88.1 million |
| Diluted EPS | $1.53 | $7.92 | Down $6.39 |
| Funds from operations | $48.8 million | $50.9 million | Down $2.0 million |
| FFO per diluted share | $3.54 | $3.69 | Down $0.15 |
| Net cash from operations | $46.8 million | $47.7 million | Down $0.9 million |
| Dividends paid | $39.2 million | $38.5 million | Up $0.6 million |
| Net real estate investments | $449.2 million | $438.1 million | Up $11.0 million |
Net income margin was approximately 23.3% in 2022 versus 129.7% in 2021, reflecting the absence of significant 2021 divestiture gains. FFO margin was approximately 53.9% in 2022 versus 60.4% in 2021. The filing does not present a single company-wide operating margin as a primary performance measure.
At December 31, 2022, total assets were $607.5 million, total liabilities were $378.4 million and total equity was $229.1 million. Cash and cash equivalents were $7.6 million. Debt consisted of $298.1 million outstanding under the $375 million revolving credit facility and $44.7 million of net non-recourse mortgage debt. Available revolving capacity, net of borrowings and letters of credit, was $73.8 million. The revolving facility matures July 2, 2025, subject to extension options.
Interest expense increased to $10.8 million from $8.8 million, primarily because average revolving-credit borrowings increased to $277.9 million from $253.5 million and the average effective rate increased to 2.9% from 2.2%. The filing states that a 1% change in applicable variable interest rates would affect net income by approximately $1.6 million after giving effect to interest-rate swaps.
Operating cash flow exceeded dividends paid by approximately $7.6 million. Investing cash outflows were $36.7 million, including $22.5 million for real estate additions and $13.6 million for acquisitions. Financing cash outflows were $25.0 million, including $39.2 million of dividends, partly offset by $26.2 million of net revolving-credit borrowings.
Material Changes Versus the Prior Comparable Period
- Revenue increased $6.4 million, primarily from the consolidation of Grayson Properties, the Wellington lease renewal, the UHS asset exchange and a Chicago specialty-facility settlement.
- Net income declined sharply because 2021 included $87.3 million of gains on real estate divestitures, including the Inland Valley transaction with UHS. No comparable divestiture gains were recorded in 2022.
- FFO declined modestly despite higher revenue, reflecting lower underlying net income excluding 2021 gains and lower depreciation and amortization.
- Wellington Regional Medical Center was renewed for five years effective January 1, 2022, at an annual rent of approximately $6.3 million, with 2.5% annual escalations through 2026 and no bonus-rent component.
- The Trust acquired the Beaumont Heart and Vascular Center for approximately $5.4 million and the 140 Thomas Johnson Drive MOB for approximately $8.0 million.
- Construction continued on Sierra Medical Plaza I in Reno, Nevada. Estimated total cost was approximately $34.6 million, with $20.9 million incurred at year-end and completion expected in March 2023. UHS had a master flex-lease covering approximately 68% of rentable space at an initial annual minimum rent of approximately $1.3 million.
- The Chicago specialty facility was vacant after its lease expired December 31, 2021. Demolition began in the fourth quarter of 2022, with estimated total demolition cost of approximately $1.4 million; $332,000 had been incurred by year-end. The Trust recorded $1.25 million of settlement revenue related to the property.
- Three specialty facilities remained vacant. Related operating expenses were approximately $2.3 million in 2022, including Chicago demolition costs.
Outlook, Commentary, Risks and Unusual Items
Management provided no formal earnings or FFO guidance. Management stated that operating cash flows, cash, available revolver capacity and access to capital markets were expected to provide sufficient resources for operations, capital requirements, debt service and REIT distributions for the next twelve months, while cautioning that financing may not be available on acceptable terms.
- Tenant and related-party concentration: UHS represented approximately 40% of 2022 consolidated revenue and also serves as the Trust’s advisor. The arrangement creates dependence on UHS credit quality, lease renewals and related-party governance.
- Lease rollover and purchase options: Two hospital leases representing approximately $14.9 million of annual rentals expire in 2026. UHS and certain other tenants have renewal, purchase or rights-of-first-refusal provisions that could reduce future rental income or limit sale alternatives.
- Healthcare operating risks: Tenants face labor shortages, higher temporary staffing costs, inflation, supply-chain pressures, reimbursement changes, payer negotiations, regulatory compliance requirements and potential declines in patient volumes.
- Interest-rate and refinancing risk: Revolving-credit borrowings were substantial relative to total assets, and $298.1 million was scheduled to mature in 2025. LIBOR-indexed contracts were subject to the transition to alternative reference rates, including SOFR.
- Liquidity and covenant risk: The Trust was in compliance with its debt covenants. Reported 2022 covenant metrics included total leverage of 42.9% versus a maximum of 60%, unencumbered leverage of 41.8% versus a maximum of 60%, and fixed-charge coverage of 4.3x versus a minimum of 1.50x.
- Vacant properties: The three vacant specialty facilities were expected to incur approximately $1.3 million of annual operating expenses in 2023, excluding additional Chicago demolition costs.
- COVID-19 and public health: Although COVID-19 had not materially adversely affected 2022 results, management continued to identify potential effects on staffing, patient volumes, reimbursement, tenant liquidity, construction and capital markets.
- REIT status: The Trust must distribute at least 90% of annual REIT taxable income to maintain its REIT qualification. Dividend payments were $2.84 per share in 2022, including $2.24 of ordinary income and $0.60 of non-dividend distributions.
- Accounting and valuation: Net real estate investments totaled $449.2 million. The critical audit matter concerned recoverability assessments, which depend on assumptions regarding occupancy, rental rates, capital requirements and expected holding periods.
Most Important Facts for Investors to Verify
- Review UHS’s financial condition, legal proceedings and ability to continue paying rent, given its approximately 40% contribution to 2022 consolidated revenue.
- Assess the 2025 maturity and refinancing plan for the $298.1 million revolving-credit balance and the effect of higher interest rates on cash flow and dividends.
- Monitor 2026 expirations for McAllen Medical Center and Wellington Regional Medical Center, including renewal decisions and potential purchase-option exercises.
- Confirm completion, leasing progress and final cost of Sierra Medical Plaza I, including the extent to which the UHS master flex-lease remains in effect.
- Evaluate the carrying values and future costs of the three vacant specialty facilities, including Chicago demolition and ongoing operating expenses.
- Reconcile GAAP net income with FFO and avoid treating FFO as a substitute for operating cash flow or liquidity.
- Review related-party transactions, the annual renewal of the UHS advisory agreement and advisory fees of $5.1 million in 2022.
- Verify dividend coverage under operating cash flow, debt covenants and the REIT distribution requirements.