Universal Health Realty Income Trust — Q3 2013 Form 10-Q
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013. The REIT invests in healthcare and human-service facilities, including hospitals, medical office buildings and childcare centers. At quarter-end, the portfolio comprised 56 investments or commitments in 16 states: seven hospitals, 45 medical office buildings and four preschool or childcare centers.
UHS is the principal tenant and, through UHS of Delaware, provides advisory and management services. UHS hospital leases represented approximately 30% of consolidated revenue in both the third quarter and first nine months of 2013.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $13.448 million | $13.610 million | $40.835 million | $40.627 million |
| Net income | $3.303 million | $2.986 million | $9.671 million | $14.967 million |
| Basic and diluted EPS | $0.26 | $0.24 | $0.76 | $1.18 |
| Funds from operations | $8.674 million | $9.029 million | $26.001 million | $25.453 million |
| Adjusted FFO | $8.713 million | $9.043 million | $26.171 million | $26.116 million |
| Cash flow from operations | Not provided | Not provided | $23.003 million | $22.443 million |
Net income margin was approximately 24.6% in Q3 2013 versus 21.9% in Q3 2012, and 23.7% for the first nine months of 2013 versus 36.8% in the prior-year period. The nine-month comparison was materially affected by a $7.375 million gain on an LLC property divestiture recorded in 2012.
- Q3 revenue declined $162,000 year over year on a reported basis; management reported a $166,000 increase on an adjusted basis after excluding the Palmdale deconsolidation effect.
- Nine-month revenue increased $208,000 on a reported basis and $536,000 on an adjusted basis, primarily from an MOB acquired in late 2012, partly offset by lower tenant reimbursements.
- Q3 FFO decreased $355,000, primarily because of lower depreciation and amortization add-backs. Nine-month FFO increased $548,000 after excluding the prior-year divestiture gain effect.
- Dividends paid were $7.9 million, or $0.625 per share, in Q3 and $23.7 million, or $1.87 per share, for the first nine months.
Liquidity, Debt and Balance Sheet
| Balance-sheet item | September 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $375.317 million | $383.038 million |
| Cash and cash equivalents | $2.936 million | $3.048 million |
| Line of credit borrowings | $97.100 million | $81.750 million |
| Mortgage and other notes payable | $107.102 million | $116.186 million |
| Total liabilities | $211.287 million | $205.293 million |
| Shareholders’ equity | $164.030 million | $177.671 million |
- The $150 million revolving credit facility matures July 24, 2015. Borrowings were $97.1 million, letters of credit were $9.5 million and available capacity was $43.4 million at quarter-end.
- Reported covenant metrics remained compliant: tangible net worth of $141.853 million versus a $125 million minimum; debt-to-total-capital of 37.2% versus a maximum of 55%; debt-service coverage of 20.2x versus a minimum of 5.0x; and debt-to-cash-flow of 2.29x versus a maximum of 3.50x.
- Consolidated mortgages totaled $106.2 million, were non-recourse to the Trust and had maturities beginning in 2014. Equity-method LLCs had an additional $80.563 million of non-recourse mortgage debt.
- Management stated that operating cash flow, cash, available borrowing capacity and capital-market access should provide sufficient resources for the next 12 months, including required REIT distributions.
Material Changes, Transactions and Outlook
- Effective July 1, 2013, the Palmdale Medical Properties master lease with a UHS subsidiary expired. Palmdale was deconsolidated and thereafter accounted for under the equity method. Management expects an unfavorable effect on net income and FFO but not a material effect on financial condition or liquidity.
- The Trust acquired Ward Eagle Office Village in Michigan for approximately $4.1 million and 5004 Poole Road MOB in Texas for approximately $625,000. Forney Medical Plaza II opened in April 2013 through an equity-method investment.
- The advisory fee payable to UHS increased effective January 1, 2013 from 0.65% to 0.70% of average invested real estate assets. Advisory fees were $603,000 in Q3 and $1.759 million for the first nine months.
- No formal earnings or FFO guidance was provided. Future dividends will depend on operating results, REIT distribution requirements, capital commitments and debt repayments.
Risks, Contingencies and Unusual Items
- Dependence on UHS creates tenant concentration, related-party and conflict-of-interest risks; UHS also has rights to renew or purchase certain hospital properties.
- UHS hospital lease revenue is exposed to UHS operating performance, patient volumes, reimbursement changes, healthcare reform, Medicare and Medicaid reductions, and UHS’s own indebtedness.
- Refinancing and interest-rate risk exist because the revolving facility expires in 2015 and certain mortgages mature beginning in 2014. Capital-market conditions could affect future financing costs and availability.
- Two California LLC properties are located in earthquake zones and do not carry earthquake insurance because management considers available coverage uneconomical.
- The Trust has additional funding commitments to LLC investments, including approximately $2.9 million for Palmdale, $2.3 million for Texoma Medical Properties and other project-related commitments.
- The filing reports no material changes in risk factors from the 2012 Form 10-K and no material changes in market-risk disclosures. Management concluded disclosure controls were effective.
Important Facts for Investors to Verify
- Reconcile reported versus adjusted results following the Palmdale deconsolidation and distinguish consolidated revenue from LLC revenue.
- Assess UHS tenant concentration, lease renewal and purchase rights, advisory-fee arrangements and related-party governance.
- Review near-term mortgage maturities, the July 2015 revolving-credit expiration, available capacity and covenant compliance.
- Evaluate dividend coverage using operating cash flow, FFO/AFFO, capital expenditures, LLC funding needs and debt repayments.
- Monitor the effect of the expired Palmdale master lease on occupancy, rental income, FFO and future distributions.
- Review non-recourse LLC debt, outstanding letters of credit, funding commitments and uninsured earthquake exposure.