Universal Health Realty Income Trust — 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2016, filed May 6, 2016. Universal Health Realty Income Trust is a healthcare-focused REIT with 63 investments in 19 states, including hospitals, free-standing emergency departments, medical office buildings and childcare centers. Five jointly owned entities are accounted for under the equity method.
Universal Health Services, Inc. and its subsidiaries are a significant related party: UHS leases three hospitals, supplies the Trust’s advisor and employs all Trust officers. UHS hospital leases represented approximately 25% of consolidated revenue.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $16.226 million | $16.202 million | +$24,000 |
| Income before equity income and interest | $5.541 million | $5.234 million | +$307,000 |
| Equity income from unconsolidated LLCs | $1.059 million | $592,000 | +$467,000 |
| Net income | $4.428 million | $3.696 million | +$732,000 |
| Basic and diluted EPS | $0.33 | $0.28 | +$0.05 |
| Funds from operations | $10.211 million | $9.516 million | +$695,000 |
| Adjusted funds from operations | $10.293 million | $9.573 million | +$720,000 |
| Cash flow from operations | $9.094 million | $8.229 million | +$865,000 |
Net margin was approximately 27.3% in Q1 2016, compared with approximately 22.8% in Q1 2015. Income before equity income and interest represented approximately 34.2% of revenue. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP net income or operating cash flow.
Cash and cash equivalents were $4.316 million at March 31, 2016, compared with $3.894 million at December 31, 2015. Net real estate investments were $397.171 million, and total assets were $471.107 million.
Debt, Liquidity and Capital Allocation
- Revolving credit borrowings increased to $159.650 million from $142.150 million at year-end 2015. The $185 million facility had $22.3 million of available capacity after $3.0 million of letters of credit.
- Non-recourse mortgage and other notes payable were $109.332 million on the balance sheet; the underlying mortgage table reported approximately $109.5 million outstanding before debt premium and financing-fee adjustments.
- Debt-related covenant metrics were within limits: total leverage of 46.6%, secured leverage of 19.4%, unencumbered leverage of 46.2%, fixed-charge coverage of 3.5x and tangible net worth of $171.326 million versus a $125 million minimum.
- The Trust paid $8.596 million of dividends, or $0.645 per share, during the quarter. Management stated that operating cash flows were sufficient to fund dividends and expects available operating cash, cash balances, borrowing capacity and capital-market access to fund the next twelve months.
- Investing uses included $9.910 million for the Madison Professional Office Building, $5.386 million of investments in LLCs and $1.841 million of real estate additions.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially unchanged, but net income increased 19.8%, primarily from the 2015 property exchange, lower borrowing costs associated with an unconsolidated LLC refinancing and improved property-level results.
- Equity income increased substantially, partly because the Trust purchased an additional 10% of Arlington Medical Properties, raising its ownership to 85%, and earned approximately $296,000 of interest income on an advance to that LLC.
- Operating cash flow improved by $865,000, while investing cash outflows declined to $16.781 million from $20.459 million, reflecting lower acquisition spending than in Q1 2015.
- Financing cash flow declined to $8.109 million from $12.320 million because 2016 had lower revolving-credit borrowings and no comparable equity issuance proceeds.
- The Trust committed up to $21.1 million to develop Henderson Medical Plaza, scheduled to open with the related UHS hospital in the fourth quarter of 2016.
Guidance, Outlook, Risks and Unusual Items
- The three UHS acute-care hospital leases are scheduled to expire in December 2016. UHS may renew, purchase the facilities at appraised fair value or decline to renew; management cannot predict the outcome or whether current rental rates will continue.
- Near-term mortgage maturities include approximately $10.6 million due in December 2016 and approximately $20.7 million due in April 2017. Management expects to evaluate refinancing or use of the revolving facility.
- The Trust recommenced its ATM equity program after quarter-end, with capacity to sell approximately $23.3 million of additional shares. No ATM shares were issued during Q1 2016.
- Key risks include dependence on UHS, related-party conflicts, healthcare reimbursement and regulatory changes, tenant and operator performance, occupancy and rental-rate pressure, interest rates, refinancing and access to capital, REIT qualification requirements, litigation and possible purchase-option or lease-expiration revenue losses.
- The Trust reported no divestitures, no incentive fees to UHS and no payments under its interest-rate caps during the quarter. The caps, covering $30 million of notional amounts, expire in January 2017.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Renewal, purchase-option and rental-rate outcomes for the three UHS hospital leases expiring in December 2016.
- Refinancing plans and interest-rate exposure for the December 2016 and April 2017 mortgage maturities.
- Actual funding requirements and completion status for the $21.1 million Henderson Medical Plaza commitment.
- Availability, pricing and dilution from the post-quarter-end ATM equity program.
- Cash coverage of dividends after acquisitions, capital expenditures, LLC funding and debt repayments.
- Concentration of revenue and governance exposure involving UHS, including the advisory agreement and related-party transactions.