Universal Health Realty Income Trust — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022. The Trust is a healthcare-focused REIT that owns or invests in acute-care hospitals, behavioral-health hospitals, free-standing emergency departments, medical and office buildings, childcare centers and specialty facilities. As of May 1, 2022, it had 76 investments or commitments in 21 states and operated as one reportable segment.
UHS-related tenants generated approximately 41% of consolidated revenue, up from 36% in the prior-year quarter. UHS also provides advisory and administrative services, employs the Trust’s officers and leases several properties, creating significant related-party concentration and potential conflicts of interest.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $22.2 million | $20.7 million | +$1.5 million |
| Net income | $5.4 million | $5.6 million | -$0.2 million |
| Basic and diluted EPS | $0.39 | $0.41 | -$0.02 |
| Funds from operations | $12.4 million | $12.7 million | -$0.3 million |
| FFO per diluted share | $0.90 | $0.92 | -$0.02 |
| Net cash from operating activities | $11.7 million | $11.3 million | +$0.5 million |
| Dividends paid | $9.7 million | $9.6 million | +$0.1 million |
Net margin was approximately 24.4% in Q1 2022 versus 27.0% in Q1 2021. Comprehensive income was $11.1 million, including a $5.7 million unrealized gain on cash-flow hedges. The Trust declared and paid a quarterly dividend of approximately $0.70 per share, compared with $0.695 per share in Q1 2021.
At March 31, 2022, total assets were $602.4 million and total equity was $237.0 million. Cash and cash equivalents were $8.9 million, down from $22.5 million at December 31, 2021. Investing activities used $18.3 million, principally for acquisitions and real estate investment, while financing activities used $7.0 million after dividends and debt repayments.
Debt consisted of $275.1 million drawn under the $375 million revolving credit facility and $56.3 million of non-recourse mortgage debt, net. Available revolver capacity was $96.7 million after $3.2 million of letters of credit. The revolver matures July 2, 2025. Management reported compliance with all debt covenants, including total leverage of 42.4%, secured leverage of 7.2%, unencumbered leverage of 41.3% and fixed-charge coverage of 4.8x.
Material changes versus the prior comparable period
- Revenue increased primarily from consolidating Grayson Properties, the Wellington Regional Medical Center lease renewal, the UHS asset exchange and other property activity. These benefits were partly offset by the expiration of the Chicago specialty-hospital lease.
- Net income decreased $181,000. The vacant Chicago facility reduced results by approximately $884,000, including lost rent and newly incurred operating expenses. The UHS asset exchange contributed a net $431,000, and the Wellington renewal contributed $335,000.
- UHS lease revenue increased to $7.4 million from $7.1 million, while non-related-party lease revenue declined to $12.9 million from $13.1 million. UHS bonus rent declined to $678,000 from $1.7 million because the prior-year amount included bonus rent from three facilities.
- Interest expense increased to $2.2 million from $2.1 million, primarily because average revolver borrowings increased to approximately $270.2 million from $239.2 million and the average effective borrowing rate increased to 1.76% from 1.64%.
- The Trust acquired the Beaumont Heart and Vascular Center for approximately $5.4 million and the 140 Thomas Johnson Drive medical office building for approximately $8.0 million. No divestitures occurred during the quarter.
- The Trust began accounting for Grayson Properties on a consolidated basis after acquiring the remaining minority interest in late 2021. Management said the change was not expected to materially affect net income.
Outlook, management commentary, risks and unusual items
Management did not provide quantitative earnings or revenue guidance. Management stated that operating cash flow, cash, available revolver capacity and access to capital markets should be sufficient for the next twelve months, including required REIT distributions, while cautioning that financing may not be available on acceptable terms.
The Trust expects approximately $5.5 million of 2022 interest income from financing arrangements related to Aiken Regional Medical Center and Canyon Creek Behavioral Health. The related transaction transferred those properties to the Trust while UHS acquired the Inland Valley Campus; the Trust paid approximately $4.1 million to equalize the property values. The financing receivable was $83.7 million at March 31, 2022.
The Sierra Medical Plaza I medical office building in Reno, Nevada began construction in January 2022. The estimated cost is approximately $34 million, with completion anticipated in the first quarter of 2023. A master flex lease covers approximately 68% of the building’s rentable area, subject to reduction as third-party leases are executed.
- Three specialty facilities, including the Chicago facility, remained vacant. Management estimated approximately $1.9 million of aggregate operating expenses for the remaining nine months of 2022 and warned that prolonged vacancies or renovation costs could materially harm results.
- UHS concentration is a key risk: UHS-related tenants represented approximately 41% of consolidated revenue. Lease nonrenewals, purchase-option exercises, tenant financial deterioration or reduced hospital volumes could reduce revenue and property values.
- Healthcare labor shortages, higher temporary staffing costs, COVID-19 developments, vaccination requirements, reimbursement changes and regulatory actions could affect UHS and other tenants and indirectly affect the Trust.
- The revolver is variable-rate debt. The Trust had three interest-rate swaps with aggregate notional amounts of $140 million and a net fair-value asset of $6.8 million. Management estimated that a 1% change in interest rates would affect net income by approximately $1.4 million, after giving effect to the swaps.
- Mortgage maturities include approximately $5.2 million in June 2022, $5.2 million in December 2022 and $4.3 million in January 2023. Management intends to repay or refinance these obligations using the revolver or new mortgage financing.
- The Advisory Agreement with a UHS subsidiary was renewed for 2022 on unchanged terms. Advisory fees were approximately $1.2 million in Q1 2022 versus $1.1 million in Q1 2021.
Important facts for investors to verify
- Reconcile the revenue increase and net-income decline, particularly the effects of the Chicago vacancy, UHS asset exchange, Wellington renewal and Grayson Properties consolidation.
- Review UHS’s financial condition, tenant concentration, lease guarantees, renewal options and purchase rights because UHS-related tenants provide approximately 41% of revenue.
- Assess the Trust’s ability to refinance near-term mortgage maturities and manage the $275.1 million revolver balance amid rising interest rates.
- Evaluate the funding requirements and leasing progress for the approximately $34 million Sierra Medical Plaza I project.
- Monitor the three vacant specialty facilities, estimated carrying costs and potential renovation or disposition requirements.
- Review dividend coverage: Q1 operating cash flow exceeded dividends by approximately $2.0 million, but management notes that dividends and investments are funded from aggregate cash sources and uses, not solely property operating cash flow.
- Consider non-GAAP FFO alongside GAAP net income and cash flow; the filing states that FFO is not a measure of liquidity or cash available for distributions.