Business Context and Reporting Period
Universal Health Realty Income Trust is a healthcare-focused REIT with 64 investments across 19 states, including hospitals, free-standing emergency departments, medical office buildings and childcare centers. The unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the same 2015 periods.
UHS is the principal tenant, advisor and employer of the Trust’s officers. Three acute-care hospital leases were renewed for five years through December 2021 at existing lease rates. Five jointly owned LLCs/LPs are accounted for under the equity method and are excluded from consolidated revenue.
Financial Performance and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $16.5 million | $16.0 million | $32.7 million | $32.3 million |
| Net income | $4.5 million | $12.0 million | $9.0 million | $15.7 million |
| Diluted EPS | $0.34 | $0.90 | $0.67 | $1.18 |
| FFO | $10.4 million | $9.5 million | $20.6 million | $19.0 million |
| FFO per diluted share | $0.78 | $0.71 | $1.54 | $1.43 |
| Operating cash flow | Not separately provided | Not separately provided | $20.0 million | $17.8 million |
Reported net margin was approximately 27.5% in Q2 2016 and 27.4% for the first six months, but these figures include equity income from unconsolidated LLCs and are not directly comparable to operating margins. FFO, the REIT’s principal non-GAAP operating measure, increased 10% in the quarter and 8% year to date.
At June 30, 2016, total assets were $487.4 million, cash and cash equivalents were $4.7 million, and total equity was $200.2 million. Line-of-credit borrowings were $167.0 million and mortgage and other notes payable were $108.5 million, for approximately $275.5 million of consolidated debt.
The $250 million revolving credit facility had $80.0 million of availability after $167.0 million of borrowings and $3.0 million of letters of credit. The facility matures in March 2019, subject to an extension option. Management reported compliance with all covenants, including 46.2% total leverage versus a maximum of 60% and fixed-charge coverage of 3.6x versus a minimum of 1.50x.
The Trust paid dividends of $8.8 million, or $0.65 per share, in Q2 and $17.4 million, or $1.295 per share, during the first six months. Management stated that operating cash flows were sufficient to fund dividends during the period and expected available cash, borrowing capacity and capital-market access to fund requirements for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 2.6% in Q2 and 1.4% for the first six months, driven by higher base and bonus rents and improved property-level performance.
- Net income decreased $7.5 million in Q2 and $6.7 million year to date, primarily because 2015 included an $8.7 million gain on a property exchange that did not recur.
- Interest expense increased to $2.2 million in Q2 and $4.4 million year to date, principally because of higher average borrowings used for acquisitions and investments.
- Equity income from unconsolidated LLCs increased to $1.2 million in Q2 and $2.3 million year to date, partly reflecting a larger ownership interest in Arlington Medical Properties and interest income on a member advance.
- Operating cash flow increased $2.2 million year to date to $20.0 million.
- Investing cash outflows increased to $37.0 million, including $27.9 million for acquisitions, $5.5 million for LLC investments and $4.1 million for real estate additions.
- The Trust acquired Chandler Corporate Center III for approximately $18.0 million and Madison Professional Office Building for approximately $10.1 million. It also committed up to $21.1 million for Henderson Medical Plaza, of which $1.5 million had been invested by June 30, 2016.
- The ATM program was recommenced. The Trust issued 249,016 shares in Q2 for approximately $13.2 million of net proceeds and had issued 829,916 shares since inception for approximately $38.8 million of net proceeds.
Outlook, Risks, Contingencies and Unusual Items
No formal earnings or revenue guidance was provided. Management expects to finance acquisitions, capital expenditures and dividends through operating cash flow, the revolving credit facility, ATM equity issuance and other debt or equity sources. Management cautioned that financing may not be available on acceptable terms.
- UHS-related hospital leases represented approximately 24% of consolidated Q2 revenue and 25% of consolidated six-month revenue. UHS also controls the advisory relationship, creating concentration and potential conflicts-of-interest risks.
- UHS has purchase options and additional renewal rights on certain facilities. Nonrenewal, purchase of properties by UHS, or renewal on less favorable terms could reduce future revenue.
- Three consolidated mortgages totaling approximately $42.5 million are scheduled to mature between December 2016 and June 2017 and may require refinancing or use of the revolving facility.
- The Trust is exposed to interest-rate risk through floating-rate debt. Existing $30 million interest-rate caps expire in January 2017; a new $30 million cap becomes effective at that time.
- Healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform, operator compliance, patient volumes and competition could adversely affect tenants and property values.
- Real estate occupancy, rental rates, local market conditions, access to capital and the ability to satisfy REIT distribution requirements remain material risks.
- Off-balance-sheet commitments included $3.0 million of letters of credit and additional equity or debt funding commitments to unconsolidated entities. The filing states that there were no material changes in market-risk disclosures or risk factors from the 2015 Form 10-K.
- The filing identifies no material impairment, litigation matter or control deficiency. Disclosure controls and procedures were deemed effective as of June 30, 2016.
Important Facts for Investors to Verify
- Whether UHS and other tenants maintain occupancy, operating performance and lease renewals, particularly for the facilities contributing a significant share of revenue.
- Refinancing plans and terms for the mortgages maturing from December 2016 through June 2017, as well as future interest-rate exposure.
- Actual performance, funding requirements and debt maturities of the five unconsolidated LLCs/LPs, including the $22.1 million advance to Arlington Medical Properties.
- Construction timing, final cost and lease-up of Henderson Medical Plaza, scheduled for completion in the fourth quarter of 2016.
- Whether acquisitions and ATM equity issuance generate returns sufficient to offset incremental debt, dilution and financing costs.
- The reconciliation of FFO to net income and the sustainability of dividend coverage from recurring operating cash flow rather than financing or asset-sale proceeds.