Universal Health Realty Income Trust — 2012 Q2 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT that owns or invests in hospitals, medical office buildings, behavioral healthcare, rehabilitation, sub-acute, surgery, childcare and related facilities. The filing covers the three and six months ended June 30, 2012; financial statements are unaudited.
At June 30, 2012, the Trust had 54 real estate investments or commitments in 15 states, consisting of seven hospital facilities, 43 medical office buildings and four preschool or childcare centers. UHS remained the principal tenant and advisor, and UHS-related hospital leases represented approximately 30% of consolidated revenue in the 2012 periods.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $13.7 million | $6.8 million | $27.0 million | $13.4 million |
| Net income | $2.5 million | $3.7 million | $12.0 million | $7.8 million |
| Diluted earnings per share | $0.19 | $0.29 | $0.95 | $0.62 |
| Funds from operations | $8.2 million | $7.9 million | $16.4 million | $16.2 million |
| Adjusted funds from operations | $8.4 million | $7.9 million | $17.1 million | $16.2 million |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $14.6 million | $10.3 million |
Reported net margins were approximately 18% for the second quarter and 44% for the first six months of 2012, compared with approximately 55% and 58%, respectively, in the prior-year periods. The quarter’s decline primarily reflected higher depreciation and amortization, transaction costs and interest expense. Six-month net income benefited from a $7.4 million gain on the divestiture of a property owned by an unconsolidated LLC.
At June 30, 2012, total assets were $390.8 million, including $311.7 million of net real estate investments and $38.3 million of investments in and advances to LLCs. Cash and cash equivalents were $3.2 million, compared with $11.6 million at December 31, 2011.
Debt included $81.2 million drawn on the revolving credit facility and $116.3 million of mortgage and other notes payable, including debt premiums. The Trust also had $12.0 million of outstanding letters of credit and $56.8 million of remaining borrowing capacity under its $150 million revolver. Debt-to-total-capital was 30.4%, debt service coverage was 28.21x and debt-to-cash-flow was 1.32x, all within covenant requirements.
The Trust declared and paid dividends of $0.615 per share in the second quarter and $1.225 per share during the first six months of 2012. Six-month operating cash flow from the properties was approximately $16.9 million versus $15.5 million of dividends paid.
Material changes versus the prior comparable period
- Revenue increased $6.9 million, or approximately 102%, in the second quarter and $13.6 million, or approximately 101%, in the first six months. Comparisons were significantly affected by the consolidation of 11 LLCs beginning in December 2011 and by acquisitions completed in 2011 and the first quarter of 2012.
- On an “As Adjusted” basis that reflects comparable consolidation, revenue increased $2.4 million in the quarter and $4.8 million in the six-month period.
- Net income decreased $1.2 million in the second quarter, primarily because depreciation and amortization increased $2.6 million on an adjusted basis, interest expense increased $393,000 and $129,000 of transaction costs was incurred.
- Six-month net income increased $4.2 million, primarily due to the $7.4 million divestiture gain, partially offset by higher depreciation and amortization, interest expense and $649,000 of transaction costs.
- FFO increased $332,000 in the quarter and $230,000 in the six-month period. AFFO increased $461,000 and $879,000, respectively.
- The Trust acquired the approximately 99,000-square-foot PeaceHealth Medical Clinic in Bellingham, Washington, for approximately $30.4 million, including assumed third-party financing of approximately $22.4 million. Net cash paid was $7.3 million.
- An LLC in which the Trust held a 95% noncontrolling interest sold Canyon Springs Medical Plaza, generating approximately $8.1 million of net cash proceeds and a $7.4 million gain.
- Net cash used in financing activities was $15.3 million in the first six months of 2012, versus $3.8 million of cash provided in the prior-year period, primarily due to dividends and mortgage repayments.
Guidance, outlook, commentary, risks and unusual items
Management stated that operating cash flows, available cash, revolver capacity, ATM equity capacity and access to capital markets were expected to provide sufficient resources for operating, investing and financing requirements over the next twelve months, including REIT-required distributions. No formal earnings guidance was provided.
Management expected to refinance the $6.2 million BRB Medical Office Building mortgage maturing in 2012. If refinancing could not be obtained on reasonable terms, the Trust indicated it could consider using the revolving facility or other financing alternatives. One unconsolidated LLC also had a $3.8 million mortgage maturing in 2012.
- Revenue concentration and related-party exposure to UHS, including UHS’s role as principal tenant, advisor and employer of the Trust’s officers.
- Potential effects of healthcare reform, Medicare and Medicaid reimbursement reductions, patient-volume declines, uninsured patients and regulatory compliance on facility operators and rental income.
- Interest-rate, refinancing and capital-market risks, particularly for floating-rate debt and near-term maturities.
- Economic and real estate market weakness could reduce occupancy, rents, property values and bonus rentals.
- Three LLCs owning California properties lacked economically available earthquake insurance.
- Special one-time cash and restricted-stock compensation awards were approved and paid or granted during the second quarter; the restricted shares vest after two years.
- The Trust had $8.9 million of total investment commitments to Palmdale Medical Properties, with $5.0 million funded, and other LLC equity and debt financing commitments. The filing text does not provide a single aggregate amount for all remaining commitments.
Important facts for investors to verify
- Reconcile reported growth with the consolidation of 11 LLCs and the acquisitions and divestitures affecting comparability.
- Assess recurring earnings and cash generation excluding the $7.4 million divestiture gain and $649,000 of six-month transaction costs.
- Review the maturity and refinancing plan for the BRB mortgage and other non-recourse debt, including floating-rate exposure.
- Evaluate dividend sustainability relative to operating cash flow, capital expenditures, LLC funding needs and debt repayments.
- Monitor UHS credit quality, lease renewals, related-party governance and the concentration of rental income from UHS facilities.
- Review outstanding letters of credit, LLC financing commitments, potential funding requirements and uninsured earthquake exposure.