Business Context and Reporting Period
Universal Health Realty Income Trust is a healthcare-focused REIT that invests in and leases hospitals, medical office buildings and other healthcare and human-service facilities. As of March 31, 2013, the portfolio included 54 investments or commitments across 15 states: seven hospitals, 43 medical office buildings and four preschool or childcare centers. The unaudited Form 10-Q covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012.
UHS is the principal tenant, provides the Advisor and employs all of the Trust’s officers. Four hospital facilities are leased to UHS subsidiaries, and UHS-related hospital leases represented approximately 30% of consolidated revenue in the quarter.
Financial Performance and Liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $13.885 million | $13.351 million | +$0.534 million, approximately 4.0% |
| Income before equity income, interest and gain | $4.753 million | $3.608 million | +$1.145 million |
| Equity in income of unconsolidated LLCs | $0.569 million | $0.554 million | +$0.015 million |
| Net income | $3.427 million | $9.514 million | -$6.087 million |
| Diluted earnings per share | $0.27 | $0.75 | -$0.48 |
| Funds from operations | $8.937 million | $8.179 million | +$0.758 million |
| Adjusted funds from operations | $9.019 million | $8.699 million | +$0.320 million |
| Net cash provided by operating activities | $7.622 million | $7.007 million | +$0.615 million |
Revenue increased primarily because of contributions from medical office buildings acquired in the first and fourth quarters of 2012. The income-before-equity-and-interest margin was approximately 34.2%, compared with 27.0% in the prior-year quarter. Net margin was approximately 24.7%, compared with 71.3% in Q1 2012; the prior-year result included a $7.375 million gain on the divestiture of property owned by an unconsolidated LLC.
Operating cash flow was $7.622 million. Cash used in investing activities was $0.705 million, while cash used in financing activities was $6.644 million. Cash and cash equivalents increased from $3.048 million at December 31, 2012 to $3.321 million at March 31, 2013.
The Trust declared and paid $7.867 million of dividends, or $0.62 per share, during the quarter. Management stated that operating cash flows were sufficient to fund dividends, although property-level cash generated from operating activities exceeded dividends by approximately $0.518 million and the funding source for dividends is not wholly dependent on any single period’s operating cash flow.
Debt, Capitalization and Commitments
- Revolving credit facility: $150 million capacity, with $84.2 million borrowed and $12.4 million of letters of credit outstanding at March 31, 2013; available capacity was $53.4 million.
- Consolidated mortgage and other notes payable: $114.943 million, including a $1.2 million net debt premium. The mortgages are non-recourse to the Trust.
- Combined consolidated debt, including revolving borrowings and mortgages, was approximately $199.1 million.
- The Trust reported compliance with all revolving-credit covenants: tangible net worth of $148.7 million versus a $125.0 million minimum, debt-to-total-capital of 32.7% versus a maximum of 55%, debt-service coverage of 21.10 times versus a minimum of 5.00 times, and debt-to-cash-flow of 1.96 times versus a maximum of 3.50 times.
- Standby letters of credit totaled $12.4 million. The Trust also had equity and debt financing commitments to various LLCs, including additional funding commitments for Palmdale, Sparks, Texoma and Forney properties.
Material Changes Versus the Prior Comparable Period
- Net income declined 64.0% and diluted EPS declined from $0.75 to $0.27, primarily because Q1 2012 included a $7.375 million divestiture gain.
- Underlying operating performance improved: revenue increased $0.534 million, income before equity income, interest and gain increased $1.145 million, FFO increased 9.3%, AFFO increased 3.7%, and operating cash flow increased 8.8%.
- Depreciation and amortization expense decreased $0.406 million, transaction costs decreased $0.438 million, and net interest expense decreased $0.128 million.
- Q1 2013 had no acquisitions or divestitures. In comparison, Q1 2012 included the acquisition of the PeaceHealth Medical Clinic and the Canyon Springs Medical Plaza divestiture.
- Effective January 1, 2013, the annual advisory fee paid to UHS increased from 0.65% to 0.70% of average invested real estate assets. First-quarter advisory fees increased to $0.571 million from $0.533 million.
- Forney Medical Plaza II, a 30,000-square-foot property owned through an entity in which the Trust holds a 95% non-controlling interest, opened on April 1, 2013.
Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to finance capital expenditures, acquisitions and dividends through operating cash flow, cash on hand, the revolving facility, refinancing or additional debt and potential capital-market transactions. The Trust believes these resources are sufficient for the next twelve months, but notes that financing may not be available on acceptable terms.
A $6.253 million Palmdale Medical Plaza mortgage was scheduled to mature on July 31, 2013. Management expected to refinance it for a three- to ten-year term and stated that, if refinancing were unavailable on reasonable terms, repayment could be funded through the revolving facility or other alternatives.
- UHS-related concentration is significant: UHS subsidiaries are major tenants, UHS guarantees the hospital leases, UHS provides advisory services and UHS employees serve as the Trust’s officers.
- UHS’s financial condition, healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform, patient volumes and operator compliance could affect rent collections, bonus rentals, lease renewals and property values.
- The Trust is exposed to interest-rate and credit-market conditions affecting refinancing costs and access to capital.
- The master lease supporting consolidated Palmdale Medical Properties had not reached its 75% threshold and was scheduled to expire in June 2013.
- Two California LLC properties are located in earthquake zones and do not carry earthquake insurance because management considered available coverage uneconomical.
- The Trust had no salaried employees; its officers are employees of UHS, creating potential related-party conflicts that are overseen by independent trustees.
Important Facts for Investors to Verify
- Verify the refinancing or other resolution of the Palmdale mortgage maturing in July 2013.
- Review subsequent filings for the June 2013 expiration and status of the Palmdale master lease.
- Assess UHS’s credit quality, operating performance and ability to meet lease obligations, given its contribution to consolidated revenue.
- Reconcile dividend coverage using operating cash flow, property-level cash flow, LLC distributions and required debt repayments.
- Monitor the $53.4 million of available revolver capacity, outstanding letters of credit, LLC funding commitments and near-term non-recourse debt maturities.
- Distinguish recurring FFO and AFFO from GAAP net income, particularly because the prior-year comparison included a substantial divestiture gain.
- Review the impact of the increased advisory fee, healthcare reimbursement changes, interest rates and uninsured earthquake exposure on future results.