Universal Health Realty Income Trust: FY2019 Form 10-K Summary
Business context and reporting period
Universal Health Realty Income Trust is a Maryland healthcare-focused REIT reporting for the fiscal year ended December 31, 2019. The Trust owns or invests in hospitals, medical office buildings, free-standing emergency departments, behavioral health facilities, and childcare centers. As of February 26, 2020, it reported 71 investments or commitments across 20 states, including 56 medical/office buildings, seven hospitals, four emergency departments, and four childcare centers.
Universal Health Services, Inc. and its subsidiaries are a significant related-party tenant and provide the Trust’s external advisory and executive-management services. UHS-related tenants generated approximately 31% of consolidated revenue in 2019. The Trust had no salaried employees at December 31, 2019.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $77.2 million | $76.2 million | Up 1.3% |
| Net income | $19.0 million | $24.2 million | Down $5.2 million |
| Diluted EPS | $1.38 | $1.76 | Down $0.38 |
| Funds from operations | $44.0 million | $45.0 million | Down $1.0 million |
| Diluted FFO per share | $3.20 | $3.28 | Down $0.08 |
| Cash flow from operating activities | $42.7 million | $42.9 million | Down $0.3 million |
| Dividends paid | $37.4 million | $36.8 million | Up $0.6 million |
Revenue growth primarily reflected a $563,000 increase in UHS hospital bonus rent and higher rent from a short-term Evansville hospital lease. These benefits were partly offset by the vacancy of the Corpus Christi hospital after June 1, 2019. The Trust’s 2019 operating cash flow exceeded dividends paid by approximately $5.6 million, before considering other investing and financing cash flows.
Reported net income included approximately $2.0 million of net gains from real estate sales. The 2018 comparison benefited from $4.5 million of Hurricane Harvey insurance recoveries in excess of property write-downs, $1.2 million of business-interruption recoveries, and $1.7 million from a lease termination agreement. Excluding unusual items, the filing does not provide a single adjusted net-income or margin figure.
| Balance-sheet metric | December 31, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $488.8 million | $483.8 million |
| Net real estate investments | $432.5 million | $437.7 million |
| Total indebtedness, including debt premium | $273.7 million | $261.3 million |
| Cash and cash equivalents | $6.1 million | $5.0 million |
| Total equity | $181.7 million | $198.6 million |
At year-end, the Trust had $213.0 million outstanding under its $300 million revolving credit facility and $87.0 million of available capacity. The facility matures in March 2022, subject to two six-month extension options. Consolidated non-recourse mortgage debt was $60.7 million net of financing fees and debt premium. Total debt increased primarily because of additional revolving-credit borrowings.
Management reported compliance with all debt covenants. At December 31, 2019, total leverage was 42.3% versus a covenant maximum of 60%, secured leverage was 9.1% versus 30%, unencumbered leverage was 38.5% versus 60%, and fixed-charge coverage was 4.0x versus a minimum of 1.5x.
Material changes versus the prior comparable period
- Revenue increased modestly, but net income and FFO declined because 2018 included material hurricane recoveries and a lease-termination payment.
- Two hospital leases expired in 2019 without renewal. The Evansville, Indiana facility became vacant after a short-term lease expired September 30, 2019; the Corpus Christi, Texas facility became vacant June 1, 2019. Together, these facilities represented approximately 2% of consolidated revenue in 2018 and 2017.
- The Trust acquired the Bellin Health Family Medicine Center in Michigan for approximately $5.1 million.
- The Trust sold the Kings Crossing II medical office building and a parcel of land, generating approximately $2.0 million of total gains.
- Construction began on a 108-bed behavioral health hospital in Clive, Iowa, and the Texoma Medical Plaza II medical office building in Denison, Texas. Both projects were expected to be completed in late 2020.
- Capital additions to real estate were approximately $12.3 million, including $5.9 million for the Clive behavioral health project. The Trust also invested approximately $2.1 million in unconsolidated LLCs and LPs.
- The Trust adopted ASC 842, Leases, on January 1, 2019, recognizing approximately $8.9 million of right-of-use land assets and ground-lease liabilities.
- The amended advisory agreement effective January 1, 2019 eliminated the incentive-fee provision. Advisory fees remained 0.70% of average invested real estate assets and totaled approximately $4.0 million in 2019.
- The quarterly dividend increased to $2.72 per share from $2.68 per share in 2018.
Guidance, outlook, commentary, risks and unusual items
Management stated that operating cash flow, cash, available revolving-credit capacity, and access to capital markets should provide sufficient resources for operating, investing, financing requirements, and REIT distributions for the next 12 months. No specific earnings, revenue, FFO, acquisition, or dividend guidance was provided.
Management expects to fund capital expenditures, acquisitions, and dividends through internally generated cash and additional borrowings, equity issuance, mortgage refinancing, or other long-term debt. The filing cautions that financing may not be available on acceptable terms when needed.
- UHS concentration and related-party exposure: UHS-related tenants represented approximately 31% of 2019 consolidated revenue, and UHS also serves as advisor. UHS guarantees the three acute-care hospital leases, but its subsidiaries have renewal, purchase, and rights-of-first-refusal provisions.
- Lease rollover and vacancies: UHS leases for Wellington Regional Medical Center and Southwest Healthcare System-Inland Valley Campus expire in December 2021, while the McAllen Medical Center lease expires in December 2026. UHS may renew, purchase, or decline to renew facilities.
- Healthcare reimbursement and regulation: Medicare, Medicaid, ACA-related litigation and reform, value-based purchasing, licensing, certification, and government-payor changes could affect tenants’ ability to pay rent and the Trust’s bonus rents.
- Interest-rate and refinancing risk: Most outstanding borrowings under the revolving facility bear variable rates tied to LIBOR. The filing discusses LIBOR’s expected phaseout after 2021. A 1% change in applicable interest rates was estimated to affect net income by approximately $1.6 million after giving effect to disclosed swaps.
- Construction and commitments: Remaining construction commitments were approximately $46.0 million for the Clive behavioral health hospital and Texoma Medical Plaza II. The Trust had also committed up to $17.9 million to the Texoma project and had funded approximately $2.5 million by year-end.
- Unconsolidated ventures: The Trust held non-controlling interests in five LLCs or LPs, with approximately $26.7 million of related third-party debt that was non-recourse to the Trust. These ventures generated approximately 12% of consolidated and unconsolidated revenue in 2019.
- Asset valuation: KPMG identified assessment of the carrying value of net real estate investments as a critical audit matter because impairment testing depends on subjective assumptions regarding market rents, growth rates, capitalization rates, and future cash flows.
- Other risks: Tenant defaults or bankruptcies, competition, labor shortages, cybersecurity incidents, natural disasters, insurance costs, REIT qualification, and general economic deterioration could adversely affect results.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019. The filing reported no legal proceedings and no unresolved SEC staff comments.
Most important facts for an investor to verify
- Whether UHS renews the two hospital leases expiring in 2021 and the McAllen lease expiring in 2026, and whether any purchase options are exercised.
- The duration, leasing costs, and eventual rent levels for the vacant Evansville and Corpus Christi hospitals.
- Refinancing plans for the $213.0 million revolving-credit balance due in March 2022 and compliance with related covenants.
- Actual completion costs, lease commencement, tenant commitments, and stabilized returns for the Clive behavioral health hospital and Texoma Medical Plaza II.
- Exposure to UHS-related revenue, advisory fees, related-party conflicts, and UHS litigation or regulatory matters disclosed in UHS filings.
- The effect of Medicare and Medicaid reimbursement changes, ACA developments, labor costs, and value-based purchasing on tenants’ operating performance.
- Whether cash flow and future FFO adequately support the $2.72-per-share annual dividend after capital expenditures, debt service, and lease-up costs.