Universal Health Realty Income Trust — Q3 2021 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare real estate investment trust that owns or invests in hospitals, behavioral health facilities, specialty hospitals, free-standing emergency departments, medical and office buildings, and childcare centers. The filing covers the three and nine months ended September 30, 2021. As of November 1, 2021, the portfolio included 71 real estate investments or commitments across 20 states.
UHS-related tenants generated approximately 37% of consolidated revenue in the third quarter and 36% for the first nine months. UHS also provides advisory services and employs all of the Trust’s officers, creating significant related-party and concentration exposure.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $21.2 million | $19.7 million | $62.8 million | $58.2 million |
| Net income | $5.3 million | $5.2 million | $17.6 million | $14.4 million |
| Diluted EPS | $0.39 | $0.38 | $1.27 | $1.05 |
| Funds from operations | $12.6 million | $11.9 million | $38.0 million | $34.5 million |
| FFO per diluted share | $0.92 | $0.86 | $2.76 | $2.50 |
| Net cash from operations | Not separately presented | Not separately presented | $36.2 million | $32.8 million |
Revenue increased 7.7% year over year in the third quarter and 7.9% for the first nine months. Net income margin was approximately 25.2% in Q3 2021 versus 26.4% in Q3 2020, and approximately 28.0% for the first nine months versus 24.8% in the comparable 2020 period.
- UHS facility lease revenue increased to $7.6 million in Q3 and $22.0 million for the first nine months, including bonus rents of $1.8 million and $5.2 million, respectively.
- Interest expense increased to $2.3 million in Q3 and $6.6 million for the first nine months.
- Operating cash flow exceeded dividends paid by approximately $7.4 million during the first nine months.
- Dividends were $0.70 per share in Q3 and $2.095 per share for the first nine months, compared with $0.69 and $2.065, respectively, in 2020.
Balance sheet, debt and liquidity
| Item | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $517.7 million | $494.0 million |
| Cash and cash equivalents | $9.3 million | $5.7 million |
| Revolving credit borrowings | $276.8 million | $236.2 million |
| Non-recourse mortgage notes, net | $57.4 million | $58.9 million |
| Total equity | $151.8 million | $159.0 million |
| Available revolver capacity, net of letters of credit | $94.6 million | $108.2 million |
In July 2021, the Trust amended and restated its revolving credit agreement, increasing the commitment from $350 million to $375 million and extending scheduled maturity to July 2, 2025. The facility may be increased by up to an additional $50 million, subject to conditions. The September 30, 2021 borrowing rate was LIBOR plus 1.25%, and the facility fee was 0.25%.
The Trust was in compliance with all debt covenants. September 30 covenant metrics included total leverage of 45.6% against a maximum of 60%, unencumbered leverage of 47.2% against a maximum of 60%, and fixed-charge coverage of 4.8x against a minimum of 1.50x. A $5.3 million mortgage is scheduled to mature in June 2022 and may be refinanced with mortgage debt or revolver borrowings.
Material changes versus the prior comparable period
- Revenue and FFO grew primarily from the Clive Behavioral Health facility, higher bonus rents on UHS hospital leases, and improved property-level results.
- Nine-month net income benefited from a $1.3 million gain on the sale of the Children’s Clinic at Springdale; no comparable gain occurred in 2020.
- Net cash used in investing increased to $41.2 million from $16.8 million, driven by the $12.9 million Fire Mesa acquisition, $16.1 million of investments in unconsolidated entities, a $3.5 million member loan, and $11.5 million of real estate additions.
- Revolver borrowings increased by $40.6 million during the first nine months, helping fund investments, debt repayments and dividends.
- The Trust entered into or maintained three interest-rate swaps with aggregate notional value of $140 million. Their fair value was a net liability of $556,000 at September 30, 2021.
- In July 2021, the PeaceHealth Medical Clinic lease was extended to January 2029.
Guidance, outlook, risks and unusual items
- Management did not provide quantitative earnings or revenue guidance. It stated that operating cash flow, cash, revolver availability and capital-market access are expected to provide sufficient resources for the next 12 months, including required REIT distributions.
- UHS notified the Trust that it intended to terminate the Southwest Healthcare System, Inland Valley Campus lease at December 31, 2021. The parties planned to exchange the property for substitute hospital properties of substantially equal fair value and lease those properties back to UHS, subject to definitive agreements.
- The Wellington Regional Medical Center lease was scheduled to expire December 31, 2021, with renewal pricing at fair market value under negotiation. UHS indicated an intent to renew, subject to acceptable terms.
- Kindred Hospital Chicago Central was expected to become vacant after December 31, 2021 because the tenant did not intend to renew. Two other hospital facilities in Evansville, Indiana, and Corpus Christi, Texas, had remained vacant since 2019.
- COVID-19 could reduce tenant patient volumes, bonus rents, occupancy, rent collections and property values, while increasing tenant staffing and operating costs. The filing stated that COVID-19 had not materially affected the Trust’s results through September 30, 2021.
- The filing discussed potential effects of federal COVID-19 vaccination mandates on healthcare staffing, patient volumes, labor costs and operator results.
- Subsequent to quarter-end, the Trust purchased the remaining 5% interest in Grayson Properties, LP for approximately $3.1 million and expected to consolidate the property. Management did not expect a material net-income impact.
- The Trust completed the sale of Auburn Medical Office Building II on November 1, 2021 for approximately $25.1 million; the gain was expected to be recognized in the fourth quarter of 2021.
Most important facts for investors to verify
- Completion and economics of the planned Southwest Healthcare/Inland Valley property exchange and the resulting lease terms.
- Renewal terms and fair-market rent determination for Wellington Regional Medical Center.
- Leasing or disposition plans for Kindred Hospital Chicago Central and the two long-vacant hospitals.
- UHS tenant concentration, related-party advisory arrangements and the financial condition of UHS operators.
- Revolver utilization, refinancing of the June 2022 mortgage maturity and compliance with debt covenants.
- Actual impact of COVID-19 vaccination requirements, healthcare labor shortages, reimbursement changes and patient-volume trends on tenants.
- Completion and tax treatment of the 1031 exchange transactions, including recognition of the Auburn Medical Office Building II gain.
- Sustainability of the $0.70 quarterly dividend relative to operating cash flow, capital commitments and debt maturities.