Business Context and Reporting Period
Company: Universal Health Realty Income Trust (UHRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: UHRT is a Maryland real estate investment trust (REIT) investing in healthcare and human service facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings (MOBs). As of December 31, 2008, the Trust held 49 real estate investments or commitments across 15 states. A significant portion of the portfolio is leased to subsidiaries of Universal Health Services, Inc. (UHS), which also serves as the Trust's Advisor.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenue | $29.2 million | $28.0 million |
| Net Income | $11.7 million | $22.2 million |
| Funds From Operations (FFO) | $25.0 million | $29.1 million |
| Net Cash Provided by Operating Activities | $21.8 million | $22.8 million |
| Total Assets | $221.1 million | $199.7 million |
| Total Indebtedness (Consolidated) | $71.7 million | $36.6 million |
| Dividends Per Share | $2.34 | $2.30 |
Note: Total indebtedness excludes $230.5 million of non-recourse third-party debt held by unconsolidated LLCs.
Material Changes Versus Prior Period
- Net Income Decline: Net income decreased by $10.5 million (47.5%) from 2007 to 2008. The primary driver was a $4.6 million asset impairment charge recorded in the fourth quarter related to two medical office buildings (Southern Crescent Centers I and II) in Georgia due to lease expiration risks and local market conditions.
- Revenue Growth: Total revenue increased by $1.2 million (4.3%), driven by the acquisition of Kindred Hospital-Corpus Christi in February 2008 and the completion of Palmdale Medical Plaza in the third quarter of 2008.
- Increased Leverage: Consolidated indebtedness nearly doubled from $36.6 million in 2007 to $71.7 million in 2008. This increase was due to higher borrowings under the revolving credit facility to fund acquisitions and investments in LLCs, as well as new term and construction loans for consolidated properties.
- FFO Decrease: Funds From Operations decreased by $4.1 million, primarily attributable to the $4.6 million impairment charge.
Guidance, Outlook, Risks, and Contingencies
- Concentration Risk: UHS accounted for approximately 58% of consolidated revenues in 2008. Four of the seven hospital facilities are leased to UHS subsidiaries with lease terms expiring in 2011 or 2014. The Trust cannot guarantee these leases will be renewed at current rates.
- Legal Proceedings (UHS): UHS is under investigation by the Department of Justice and the Office of Inspector General regarding compliance with Medicare/Medicaid rules at its South Texas Health System affiliates (including McAllen Medical Center). UHS recorded a $25 million pre-tax reserve in 2008. While base rent is guaranteed, future bonus rent (which totaled $1.7 million from McAllen in 2008) could be materially adversely impacted if the facility's operating results decline.
- Asset Impairment Risk: The Trust identified risks regarding the Southern Crescent Centers in Georgia, where a master lease expires in June 2010. Renewal is considered unlikely, posing a risk to future cash flows from these properties.
- Capital Markets: The Trust noted that the deterioration of credit and capital markets may adversely affect access to funding for growth and refinancing, though it currently believes it can meet liquidity requirements.
- Regulatory Environment: Changes in Medicare/Medicaid reimbursement rates and potential healthcare reform legislation could impact the financial viability of lessees, thereby affecting rent payments.
Important Facts for Investor Verification
- Impairment Specifics: Verify the assumptions used for the $4.6 million impairment charge on the Southern Crescent Centers and the likelihood of lease renewal or alternative tenant acquisition.
- UHS Legal Exposure: Monitor the status of the DOJ/OIG investigation into UHS's South Texas Health System and any potential settlement amounts that could impact UHS's ability to pay bonus rents.
- Debt Maturities: Review the schedule of debt maturities, specifically the $17.8 million due in 2009 (including a $9.6 million construction loan and a $7.7 million term loan), and the Trust's refinancing strategy.
- Lease Expirations: Assess the risk associated with the 2011 expiration of leases for three major UHS hospital facilities (McAllen, Wellington, Inland Valley), which represent a significant portion of revenue.
- Unconsolidated Debt: Note that the Trust has significant exposure to $230.5 million of non-recourse debt held by unconsolidated LLCs, which is not reflected in the consolidated debt figure but impacts the overall leverage of the portfolio.