Universal Health Realty Income Trust: 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Universal Health Realty Income Trust is a healthcare real estate investment trust that owns or invests in hospitals, medical office buildings, ambulatory facilities, rehabilitation and behavioral healthcare facilities, and childcare centers. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
At September 30, 2014, the portfolio consisted of 59 real estate investments or commitments in 17 states. UHS is the principal tenant, advisor, and employer of the Trust’s officers. UHS hospital leases represented approximately 27% of consolidated third-quarter revenue and 29% of consolidated nine-month revenue.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $15.3 million | $13.4 million | $43.9 million | $40.8 million |
| Net income | $28.1 million | $3.3 million | $35.3 million | $9.7 million |
| Basic and diluted EPS | $2.18 | $0.26 | $2.74 | $0.76 |
| Funds from operations | $8.7 million | $8.7 million | $26.4 million | $26.0 million |
| Adjusted funds from operations | $8.9 million | $8.7 million | $26.7 million | $26.2 million |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $23.9 million | $23.0 million |
Reported revenue increased 13.5% in the quarter and 7.4% for the nine months. On an “as adjusted” basis, giving effect to changes in LLC consolidation, revenue increased approximately 1.7% in the quarter and 2.1% for the nine months. Reported net income benefited principally from a $25.1 million non-cash gain related to fair-value recognition of acquired minority interests.
Reported net margin was approximately 184% in the quarter and 80% for the nine months, but these figures are not representative of recurring profitability because of the non-cash fair-value gain. FFO was approximately $8.7 million in the quarter and $26.4 million for the nine months, indicating materially steadier recurring performance.
At September 30, 2014, total assets were $436.9 million, including $387.1 million of net real estate investments. Cash and cash equivalents were $3.7 million. Total liabilities were $257.4 million and total equity was $179.4 million.
Debt consisted of $120.5 million drawn on the revolving credit facility and $124.3 million of mortgage and other notes payable, including the debt premium. The mortgages are non-recourse to the Trust. The revolving facility had $23.3 million of available capacity after $6.3 million of letters of credit. The Trust was in compliance with all debt covenants, including 40.0% debt to total capital, a 26.2x debt service coverage ratio, and a 1.75x debt to cash flow ratio.
Nine-month dividends were $24.3 million, or $1.885 per share, compared with $23.7 million, or $1.87 per share, in the prior-year period. Operating cash generated by consolidated and unconsolidated properties was approximately $24.9 million, modestly exceeding dividends paid.
Material Changes Versus the Prior Comparable Period
- The Trust acquired the remaining minority interests in Palmdale Medical Properties and Sparks Medical Properties effective January 1, 2014, and in six additional LLCs effective August 1, 2014. These entities became wholly owned and were consolidated.
- The LLC transactions produced a $25.1 million non-cash fair-value gain in 2014, compared with no comparable gain in 2013. A separate $316,000 gain related to the January transactions was included in the nine-month results.
- Net real estate investments increased from $297.7 million at December 31, 2013 to $387.1 million at September 30, 2014, primarily because of acquisitions and consolidation of formerly unconsolidated entities.
- The Trust acquired the Hanover Emergency Center for approximately $8.6 million and two Arkansas medical office buildings for approximately $7.2 million. It also spent approximately $6.8 million to acquire minority interests in six LLCs.
- Net borrowings under the revolving credit facility increased by $26.8 million during the first nine months, while $11.5 million of mortgage and other debt was repaid.
- FFO increased only modestly, by $38,000 in the quarter and $414,000 for the nine months. AFFO increased $197,000 and $545,000, respectively, reflecting limited growth in recurring operating performance despite the large increase in reported net income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- UHS notified the Trust that it intends to purchase The Bridgeway facility when its lease expires in December 2014. The expected December 31, 2014 sale proceeds were estimated at $17.0 million to $17.5 million, with an estimated gain of $12.6 million to $13.1 million. Completion remained subject to appraisals and transaction execution.
- The Bridgeway generated approximately $1.1 million of annual revenue, operating cash flow, and FFO contribution; its sale would therefore reduce recurring revenue after disposition.
- UHS was negotiating potential acquisitions by the Trust of two Texas free-standing emergency departments expected to be completed in the first quarter of 2015. Estimated aggregate cost was $12.5 million to $13.0 million, with potential annual rent of $850,000 to $900,000. The transactions were not assured.
- The $150 million revolving credit facility was scheduled to expire in July 2015. Management was renegotiating a replacement facility and expected completion within three months, but stated that financing on acceptable terms was not assured.
- Several mortgage loans mature in 2015, including the $23.5 million Arlington Medical Properties loan held by an unconsolidated LLC and the Trust’s $5.0 million Spring Valley mortgage. Management expected refinancing, but acknowledged potential financing risk.
- The Trust depends materially on UHS as tenant, guarantor, advisor, and affiliated service provider. This creates concentration and potential conflict-of-interest risks.
- Healthcare reimbursement changes, Medicare and Medicaid reductions, tenant financial performance, occupancy and rental-rate pressure, competition, interest rates, credit-market conditions, and access to capital could affect results and property values.
- Two California properties lack earthquake insurance because coverage was not economically available. The Trust also has equity and debt funding commitments to unconsolidated LLCs, including additional commitments of $1.2 million, $500,000, and up to $1.1 million across disclosed investments.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether The Bridgeway sale closed on December 31, 2014, at the anticipated price and gain, and the resulting impact on recurring FFO and revenue.
- Terms, capacity, maturity, and pricing of the replacement revolving credit facility, including refinancing of near-term mortgage maturities.
- Recurring FFO and AFFO growth excluding the $25.1 million non-cash fair-value gain.
- UHS tenant concentration, lease renewals, purchase options, and the effect of any changes in UHS operating performance or credit quality.
- Final valuations and debt allocations for the LLC interests consolidated in 2014, which were preliminary at the filing date.
- Progress and final terms of the proposed Texas emergency department acquisitions and related UHS leases.
- Liquidity after acquisitions, dividends, debt repayments, and remaining borrowing capacity under the credit facility.