Business Context and Reporting Period
Company: Universal Health Realty Income Trust (UHRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: UHRT is a Real Estate Investment Trust (REIT) investing in healthcare and human service facilities, including acute care hospitals, behavioral health facilities, rehabilitation hospitals, medical office buildings (MOBs), and childcare centers. As of year-end 2006, the portfolio consisted of 45 investments or commitments across 15 states.
Key Financial Metrics
| Metric | 2006 | 2005 | 2004 |
|---|---|---|---|
| Total Revenue | $32,509,000 | $33,338,000 | $31,777,000 |
| Net Income | $34,697,000 | $25,423,000 | $23,671,000 |
| Diluted EPS | $2.92 | $2.15 | $2.00 |
| Funds from Operations (FFO) | $28,930,000 | $29,202,000 | $31,149,000 |
| Cash from Operating Activities | $24,702,000 | $25,303,000 | $26,967,000 |
| Total Assets | $194,139,000 | $196,889,000 | $204,583,000 |
| Total Indebtedness (Consolidated) | $26,337,000 | $35,548,000 | $46,210,000 |
| Dividends Per Share | $2.260 | $2.175 | $2.000 |
Note: Total indebtedness excludes $180.9 million of non-recourse debt held by unconsolidated LLCs.
Material Changes vs. Prior Period
- Net Income Increase: Net income rose 36.5% to $34.7 million in 2006 compared to $25.4 million in 2005. This increase was primarily driven by a $14.0 million gain recognized from an asset exchange and substitution agreement with Universal Health Services, Inc. (UHS) regarding the Chalmette Medical Center (damaged by Hurricane Katrina).
- Revenue Decline: Total revenue decreased slightly by 2.5% to $32.5 million. This was largely due to the deconsolidation of two LLCs in the fourth quarter of 2006, shifting their revenue recognition to the equity method.
- FFO Decline: Funds from Operations decreased 0.9% to $28.9 million, reflecting the removal of the one-time Chalmette gain and a decrease in equity income from unconsolidated LLCs.
- Debt Reduction: Consolidated indebtedness decreased significantly from $35.5 million in 2005 to $26.3 million in 2006, aided by the deconsolidation of LLC debt and repayment of borrowings.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items
- Chalmette Asset Exchange: In Q3 2006, UHRT completed an exchange of the damaged Chalmette property for capital additions at three other UHS facilities (Wellington, Bridgeway, and Inland Valley). This resulted in a $14.0 million gain recorded in 2006 net income.
- Accounting Change: In Q4 2006, two LLCs were deconsolidated due to the expiration of master lease arrangements with UHS. Their results are now reported via the equity method.
Risks and Contingencies
- Concentration Risk: UHS accounted for 49% of total revenues in 2006. Four of the six hospital facilities are leased to UHS subsidiaries. UHS also serves as the Trust's Advisor.
- Legal Proceedings: UHS affiliates operating McAllen Medical Center are under investigation by the Department of Health and Human Services regarding Medicare/Medicaid compliance (False Claims Act). While base rent is guaranteed, bonus rent (approx. $1.9 million in 2006) could be adversely impacted.
- Competition: Intense competition in the McAllen, Texas market has led to declines in patient volume and profitability at McAllen Medical Center.
- Insurance: Two LLCs owning properties in California earthquake zones could not obtain earthquake insurance at economically beneficial rates.
Outlook
Management expects to meet short-term liquidity requirements through working capital and operating cash flows. The Trust has committed to invest approximately $28.4 million in equity and debt financing for various LLC developments scheduled to open in 2007.
Investor Verification Checklist
- UHS Financial Health: Verify the financial stability of Universal Health Services, Inc., given that nearly half of UHRT's revenue depends on UHS leases.
- McAllen Investigation Status: Monitor the outcome of the federal investigation into McAllen Medical Center, as it poses a risk to bonus rental income.
- Lease Renewals: Review the status of UHS hospital leases, with key terms expiring between 2011 and 2014, to assess renewal risks.
- FFO vs. Net Income: Analyze Funds from Operations ($28.9M) rather than Net Income ($34.7M) to understand recurring cash flow, as Net Income was inflated by a one-time asset exchange gain.
- Debt Covenants: Confirm compliance with the revolving credit facility covenants, particularly the limitation on dividends to 95% of cash available for distribution.