Universal Health Realty Income Trust — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, including fourth-quarter results. The Trust is a healthcare-focused REIT investing in hospitals, medical office buildings, free-standing emergency departments, and childcare facilities. As of February 28, 2015, it reported 61 investments or commitments across 18 states.
Financial performance and key metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $59.8 million | $54.3 million | +10.1% |
| Net income | $51.6 million | $13.2 million | +291% |
| Net income before gains | $13.1 million | Not clearly provided on a comparable reported basis | Not meaningful |
| Basic and diluted EPS | $3.99 | $1.04 | +2.95 |
| Funds from operations | $35.9 million | $35.0 million | +2.8% |
| Adjusted FFO | $36.4 million | $35.2 million | +3.4% |
| Cash flow from operations | $32.8 million | $31.3 million | +4.8% |
| Dividends declared per share | $2.520 | $2.495 | +1.0% |
Reported net income and EPS were materially increased by a $25.4 million non-cash gain from acquiring minority interests in eight previously majority-owned LLCs and a $13.0 million gain on the sale of The Bridgeway. Excluding these gains, net income was $13.1 million, implying an approximate 21.9% margin on reported revenue; the reported net margin of approximately 86% is not representative of recurring operations.
Revenue consisted primarily of base rent, bonus rent, and tenant reimbursements. UHS-related hospital leases generated approximately 28% of consolidated revenue in 2014, compared with 30% in each of 2013 and 2012. Including unconsolidated investments, UHS hospital leases represented approximately 22% of combined revenue.
Balance sheet, debt and liquidity
- Total assets were $428.9 million, including $380.1 million of net real estate investments.
- Total liabilities were $224.3 million and total equity was $204.6 million.
- Total indebtedness, including debt premium, was approximately $213.2 million, consisting primarily of $89.8 million drawn under the revolving credit facility and $123.4 million of non-recourse mortgage and other debt.
- The $150 million revolving credit facility had $89.8 million outstanding, $6.3 million of letters of credit, and $54.0 million of available capacity at year-end. The facility was scheduled to mature July 24, 2015; management expected to complete a replacement facility by March 31, 2015, but provided no assurance.
- Sixteen consolidated property mortgages totaled approximately $122.9 million. Consolidated scheduled debt repayments totaled $107.6 million in 2015, including the $89.8 million revolving facility balance.
- Cash and cash equivalents were $3.9 million at December 31, 2014.
- The Trust reported compliance with all credit facility covenants. Year-end debt-to-total-capital was 30.0%, debt service coverage was 25.4x, and debt-to-cash-flow was 1.29x.
- Variable-rate debt was approximately $126.9 million, and management estimated that a 1% change in interest rates would affect annual net income by approximately $1.7 million.
Material changes versus prior comparable period
- Revenue increased by $5.5 million on a reported basis. On an adjusted basis reflecting comparable LLC consolidation, revenue increased approximately $1.3 million, primarily from acquired medical office properties, higher UHS bonus rent, and other property-level changes.
- Eight previously non-controlling LLC investments became wholly owned and consolidated during 2014: two effective January 1 and six effective August 1. The transactions added approximately $84.1 million of real estate investments and generated the $25.4 million non-cash fair-value gain.
- The Bridgeway, a 103-bed behavioral health facility, was sold to UHS on December 31, 2014 for $17.3 million, producing a $13.0 million gain and eliminating approximately $1.1 million of annual rental revenue, operating cash flow, and FFO contribution.
- The Trust acquired three medical office or emergency-care properties for $15.6 million and spent $2.9 million on real estate additions, principally tenant improvements.
- Operating cash flow increased $1.5 million, while net cash used in investing activities declined to $4.0 million from $13.4 million. Net cash used in financing activities increased to $29.8 million, primarily due to dividends, debt repayments, and property-related financing activity.
- The Trust issued 426,187 shares under its ATM program in 2014, generating approximately $19.5 million of net proceeds. Approximately $23.3 million of gross issuance capacity remained at year-end.
- Medical office building lease renewals executed during 2014 had weighted-average rental rates approximately 1% below expiring lease rates. Tenant improvement costs averaged approximately $22 per square foot.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Revenue | $15.9 million | $13.4 million |
| Net income | $16.2 million | $3.5 million |
| Basic EPS | $1.24 | $0.27 |
Fourth-quarter 2014 net income included approximately $25.1 million of the LLC fair-value gain and the $13.0 million Bridgeway gain. Accordingly, reported fourth-quarter earnings were not representative of recurring operating performance.
Outlook, commentary and principal risks
- Management stated that operating cash flows, cash, available revolver capacity, ATM equity capacity, and capital-market access were expected to provide sufficient resources for the next twelve months, including REIT-required distributions.
- The Advisory Agreement with UHS was renewed for 2015 on the same terms as 2014. The advisory fee was 0.70% of average invested real estate assets; 2014 advisory fees were $2.5 million. No incentive fee was earned in 2014.
- Three UHS acute-care hospital leases expire in December 2016. UHS has renewal, purchase, rights-of-first-refusal, and change-of-control rights that could affect future rent and property ownership.
- UHS accounted for 35% of consolidated revenue in 2014, creating significant tenant and related-party concentration. UHS also provides the Advisor and employs all Trust officers.
- Key risks include renewal or purchase of UHS-leased hospitals, government reimbursement and healthcare-regulatory changes, tenant credit quality, competition, medical office occupancy, interest-rate exposure, access to refinancing, and maintenance of REIT status.
- The Trust had $2.6 million of remaining equity and debt financing commitments to unconsolidated LLCs and $6.3 million of standby letters of credit. Unconsolidated LLCs also had $52.7 million of third-party debt that was non-recourse to the Trust.
- Two California medical office buildings could not obtain earthquake insurance at economically beneficial rates. Management reported no material legal proceedings and no unresolved SEC staff comments.
- KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Investor verification checklist
- Verify refinancing or replacement of the $150 million revolving credit facility before its July 2015 maturity and the treatment of 2015 mortgage maturities.
- Assess recurring earnings and FFO excluding the $25.4 million LLC fair-value gain and $13.0 million Bridgeway gain.
- Review renewal, purchase-option, and change-of-control provisions for the three UHS hospital leases expiring in 2016.
- Monitor UHS concentration, related-party advisory fees, and governance safeguards involving independent trustees.
- Reconcile consolidated results with comparable results after the 2014 LLC consolidations and review the effect on future depreciation and amortization.
- Evaluate dividend coverage using recurring operating cash flow, FFO, capital expenditures, scheduled debt repayments, and required REIT distributions.
- Review exposure to variable interest rates, refinancing costs, healthcare reimbursement changes, tenant concentration, and uninsured property risks.