Universal Health Realty Income Trust — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT investing in and leasing hospitals, medical office buildings, free-standing emergency departments, rehabilitation and sub-acute facilities, and childcare centers. The report covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. As of April 30, 2019, the portfolio included 69 investments in 20 states.
UHS-related tenants generated approximately 31% of consolidated revenue, and UHS hospital leases generated approximately 22%. A UHS subsidiary serves as the Trust’s advisor, and the Trust’s officers are UHS employees, creating related-party and concentration considerations.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $19.1 million | $18.5 million | Up 3.1% |
| Net income | $4.2 million | $9.6 million | Down $5.4 million |
| Basic and diluted EPS | $0.31 | $0.70 | Down $0.39 |
| Net income margin | 22.0% | 51.8% | Down 29.8 percentage points |
| Funds from operations | $11.0 million | $11.5 million | Down 4.7% |
| FFO per diluted share | $0.80 | $0.84 | Down $0.04 |
| Cash flow from operating activities | $8.6 million | $10.8 million | Down $2.1 million |
| Dividends paid | $9.3 million, or $0.675 per share | $9.1 million declared, paid April 2, 2018 | Per-share dividend up $0.010 |
Revenue consisted primarily of lease revenue: $5.8 million from UHS facilities and $12.7 million from non-related parties. Depreciation and amortization was $6.7 million, advisory fees to UHS were $970,000, and net interest expense was $2.7 million.
At March 31, 2019, total assets were $489.1 million, net real estate investments were $433.3 million, cash and cash equivalents were $6.0 million, total liabilities were $295.4 million, and total equity was $193.6 million.
Debt, liquidity and capital resources
- The $300 million revolving credit facility had $200.3 million outstanding and $99.7 million of available capacity at March 31, 2019. The facility matures in March 2022 and has two possible six-month extensions, subject to conditions.
- Non-recourse mortgage notes totaled $64.5 million net of financing fees and debt premium. The mortgages had a combined fair value of approximately $65.8 million.
- Total debt, including revolving credit borrowings and mortgage notes, was approximately $264.8 million before considering other liabilities.
- The Trust was in compliance with all credit agreement covenants. Reported ratios included total leverage of 41.9%, secured leverage of 9.8%, unencumbered leverage of 38.5%, and fixed-charge coverage of 4.2x.
- Net cash used in financing activities was $5.8 million, including $9.3 million of dividends, partly offset by $3.9 million of additional revolving-credit borrowings.
- Management stated that operating cash flow, cash, available borrowing capacity and access to capital markets should provide sufficient resources for operating, investing and financing needs over the next 12 months, including REIT distributions.
Material changes versus the prior comparable period
- Net income declined primarily because Q1 2018 included $4.5 million of Hurricane Harvey insurance recoveries in excess of property damage write-downs and $968,000 of business-interruption insurance proceeds. These items were not repeated in Q1 2019.
- Q1 2019 included a $250,000 gain on sale of land, while Q1 2018 did not.
- Interest expense increased by approximately $224,000 year over year.
- FFO declined modestly because Q1 2018 included approximately $500,000 of business-interruption insurance proceeds related to 2017.
- Operating cash flow declined as a result of lower reported earnings and unfavorable changes in lease receivables, tenant reserves, deferred rents, and accrued liabilities.
- The Trust adopted ASC 842 lease accounting on January 1, 2019. It recognized approximately $8.8 million of right-of-use land assets and corresponding ground-lease liabilities, with no opening retained-earnings adjustment.
- The Trust’s two interest-rate caps, covering an aggregate notional amount of $60 million, expired in March 2019. Management was evaluating replacement caps or swaps.
- There were no acquisitions or dispositions during Q1 2019. The Trust funded $1.8 million of real estate additions and $541,000 of investments in unconsolidated LLCs.
Guidance, outlook, commentary and risks
No formal earnings or revenue guidance was provided. Management expects to fund capital expenditures, acquisitions and dividends through internally generated funds, revolving-credit borrowings, mortgage financing or refinancing, equity issuance, and other long-term debt.
- Two non-UHS hospital leases, representing approximately 2% of Q1 2019 consolidated revenue, were expected to expire in May and June 2019 without renewal. One tenant was expected to vacate, while discussions were underway regarding a possible short-term lease for the other facility.
- Two UHS hospital leases expire in December 2021 and another expires in December 2026. UHS has renewal, purchase and rights-of-first-refusal provisions that could affect future revenue and property ownership.
- UHS concentration, related-party arrangements, healthcare reimbursement changes, Medicare and Medicaid reductions, regulatory changes, competition, occupancy and rental-rate pressure, interest rates, refinancing availability, and property-market conditions are material risks.
- Future vacancies, lower replacement rents, or renovation requirements at the expiring hospital properties could materially reduce operating results.
- UHS-related legal, regulatory or operational issues could indirectly affect the Trust because of UHS’s tenant and advisory roles.
- Hurricane Harvey reconstruction was substantially completed by June 30, 2018; the Q1 2019 results did not include comparable insurance recoveries.
Most important facts for investors to verify
- Whether the expiring Encompass Health Deaconess and Vibra Hospital leases were renewed, replaced, or left vacant after Q1 2019, and the related effect on revenue and capital spending.
- The renewal or purchase decisions for UHS hospital and other UHS-related leases, which represent a substantial portion of revenue.
- Revolving-credit utilization, refinancing requirements, interest-rate exposure, and whether replacement hedges were obtained after the $60 million of interest-rate caps expired.
- Dividend coverage, particularly because Q1 property-related cash generation of approximately $8.9 million was below the $9.3 million dividend paid.
- Compliance with debt covenants and the availability of the remaining $99.7 million of revolving-credit capacity.
- The impact of ASC 842 and the reported ground-lease liabilities on future balance-sheet and cash-flow presentation.
- The filing contains inconsistent disclosures for the March 31, 2019 revolving-credit pricing margin over LIBOR: the debt footnote states 1.20%, while the MD&A states 1.15%. The definitive credit agreement or subsequent filing should be checked.