Universal Health Realty Income Trust — 2021 Form 10-K Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT reporting for the fiscal year ended December 31, 2021. As of February 24, 2022, its portfolio comprised 75 investments or commitments across 21 states, including six hospitals, 58 medical office buildings, four free-standing emergency departments, four childcare centers and three vacant specialty facilities. The Trust operates as a single reportable segment.
UHS is a significant related party: a UHS subsidiary serves as the Trust’s Advisor, all Trust officers are UHS employees, and UHS-related tenants generated approximately 37% of 2021 consolidated revenue. UHS owned approximately 5.7% of the Trust’s shares at year-end.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $84.2 million | $78.0 million | Up 7.9% |
| Net income | $109.2 million | $19.4 million | Up $89.7 million |
| Diluted EPS | $7.92 | $1.41 | Up $6.51 |
| Funds from operations | $50.9 million | $46.2 million | Up 10.1% |
| FFO per diluted share | $3.69 | $3.36 | Up $0.33 |
| Cash flow from operations | $47.7 million | $44.2 million | Up $3.5 million |
| Dividends paid | $38.5 million | $38.0 million | Up $0.6 million |
Revenue growth primarily reflected increased UHS hospital bonus rent, income from Clive Behavioral Health, and contributions from properties acquired in 2021 and late 2020. UHS facility lease revenue was $29.9 million, including $6.9 million of bonus rent; non-related-party lease revenue was $52.3 million.
Net income and EPS were heavily affected by an $87.3 million gain on real estate divestitures, including the Inland Valley transaction. Excluding this gain from the FFO reconciliation, recurring operating performance improved more modestly. The reported net income margin was approximately 130%, which is not representative of recurring operating profitability because of the gain.
Liquidity, debt and capital resources
- Cash and cash equivalents increased to $22.5 million from $5.7 million.
- The Trust had $271.9 million outstanding under its $375 million revolving credit facility, with $99.9 million of borrowing capacity remaining after letters of credit.
- The revolving facility matures July 2, 2025 and bears interest based primarily on LIBOR or a base rate plus applicable margins.
- Non-recourse mortgage notes payable totaled $56.9 million net at year-end, compared with $58.9 million in 2020.
- Total consolidated debt carrying value was approximately $329.1 million, excluding certain non-recourse debt held by unconsolidated affiliates.
- Debt covenant compliance remained strong: total leverage was 43.1% versus a 60% limit, secured leverage was 7.4% versus a 30% limit, unencumbered leverage was 41.9% versus a 60% limit, and fixed-charge coverage was 4.8x versus a 1.50x minimum.
- Interest expense increased to $8.8 million from $8.3 million, primarily because of higher average revolving borrowings and interest-rate swap expense.
- Scheduled 2022 mortgage repayments totaled approximately $12.2 million. The $271.9 million revolving facility balance is scheduled to mature in 2025 unless refinanced or extended.
Management stated that operating cash flow, cash balances, available revolver capacity and capital-market access should be sufficient for operating needs, capital expenditures, acquisitions, debt service and required REIT distributions for the next twelve months. The filing provides no formal earnings or revenue guidance.
Material changes versus the prior comparable period
- On December 31, 2021, UHS acquired the Inland Valley Campus from the Trust for $79.6 million and transferred Aiken Regional Medical Center and Canyon Creek Behavioral Health to the Trust at aggregate fair value of approximately $82.4 million. The Trust paid UHS approximately $2.8 million in cash.
- The transaction was accounted for as a financing arrangement and failed sale-leaseback. The balance sheet includes an $82.4 million financing receivable from UHS rather than real estate investments for the transferred properties.
- The transaction generated a gain of approximately $68.4 million. The Aiken and Canyon Creek leases provide approximately $5.6 million of 2022 annual rent, with 2.25% annual compounded increases beginning in 2023.
- The Trust acquired the Fire Mesa office building for approximately $12.9 million and acquired the remaining 5% interest in Grayson Properties, LP for approximately $3.1 million, resulting in consolidation of that LP.
- The Trust sold Auburn Medical Office Building II for approximately $24.9 million and the Children’s Clinic at Springdale for approximately $3.2 million, generating gains of approximately $17.6 million and $1.3 million, respectively.
- Wellington Regional Medical Center renewed its lease for five years beginning January 1, 2022 at annual rent of approximately $6.3 million, with 2.50% annual increases beginning in 2023 and no continuing bonus-rent component.
- Three specialty facilities were vacant at year-end. The Chicago specialty facility became vacant when its lease expired on December 31, 2021; the Evansville and Corpus Christi facilities had been vacant since 2019.
- The Trust’s 2021 dividend was $2.80 per share, compared with $2.76 in 2020.
Guidance, outlook, commentary and risks
- Management said COVID-19 did not materially adversely affect 2021 results, but Delta and Omicron contributed to higher tenant COVID-19 volumes in the second half of 2021 and into early 2022. The Trust stated that the pandemic could materially affect future results through lower patient volumes, staffing shortages, higher labor and supply costs, delayed procedures and tenant liquidity pressure.
- Healthcare reimbursement, Medicare and Medicaid funding, value-based purchasing, regulation, licensing and certification remain significant risks because they affect tenant operating results and rent-paying capacity.
- UHS concentration is a major risk. UHS-related tenants generated approximately 37% of 2021 revenue, and UHS leases six hospital facilities with terms expiring from 2026 through 2040. UHS and certain tenants have renewal, purchase, right-of-first-refusal or change-of-control rights.
- The Trust expects approximately $34 million of construction costs for Sierra Medical Plaza I in Reno, Nevada. Construction began in January 2022, and a UHS subsidiary has a master flex lease covering approximately 68% of rentable space, subject to reductions from third-party leasing.
- Three vacant specialty facilities are expected to incur approximately $2.5 million of annual operating expenses in 2022 while being marketed. Extended vacancies, lower replacement rents or required renovations could materially reduce results.
- The Trust is exposed to refinancing and interest-rate risk. LIBOR-indexed contracts require transition to an alternative benchmark, and a 1% change in applicable interest rates was estimated to affect net income by approximately $1.3 million.
- Other material risks include competition, tenant defaults or bankruptcy, healthcare labor shortages, inflation, property damage and insurance costs, cyber incidents, adverse UHS litigation or regulatory matters, REIT qualification requirements and restricted access to capital.
Most important facts for investors to verify
- Reconcile 2021 net income and EPS to recurring FFO, given the $87.3 million of divestiture gains and the $68.4 million UHS transaction gain.
- Review the accounting and valuation of the $82.4 million financing receivable and the failed sale-leaseback treatment.
- Assess UHS tenant concentration, lease renewal and purchase options, and the impact of Wellington’s elimination of bonus rent.
- Confirm the refinancing plan for the $271.9 million revolver maturity in 2025 and the $12.2 million of 2022 mortgage maturities.
- Monitor occupancy, leasing spreads and renewal exposure in the medical office portfolio, particularly the 2022-2027 expirations.
- Evaluate the operating and capital requirements associated with the three vacant specialty facilities and the Reno MOB development.
- Review COVID-19 effects on tenant staffing, reimbursement, patient volumes and rent coverage, together with UHS’s separate SEC disclosures regarding litigation and regulatory matters.