Universal Health Realty Income Trust — Q2 2015 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare and human-services real estate investment trust. As of June 30, 2015, it owned or held interests in 62 investments across 18 states, including hospitals, free-standing emergency departments, medical office buildings and childcare centers. The filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Universal Health Services, Inc. and its subsidiaries are the Trust’s principal tenant and provide advisory and management services. UHS-related hospital leases represented approximately 25% of consolidated revenue in both the second quarter and first six months of 2015. The Trust had no salaried employees as of June 30, 2015.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $16.0 million | $14.3 million | $32.3 million | $28.6 million |
| Net income | $12.0 million | $3.4 million | $15.7 million | $7.2 million |
| Diluted earnings per share | $0.90 | $0.26 | $1.18 | $0.56 |
| Funds from operations | $9.5 million | $8.8 million | $19.0 million | $17.7 million |
| Adjusted funds from operations | $9.6 million | $8.9 million | $19.2 million | $17.8 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $17.8 million | $15.3 million |
| Dividends paid | $8.5 million | $8.1 million | $17.0 million | $16.2 million |
Reported net profit margins were approximately 74.8% for the quarter and 48.7% for the six-month period, substantially reflecting the $8.7 million non-cash gain on a property exchange. Excluding that gain, the filing does not present a separately labeled recurring net margin.
At June 30, 2015, total assets were $444.4 million, cash and cash equivalents were $4.4 million, total liabilities were $240.8 million and equity was $203.6 million. Net real estate investments were $397.0 million.
Debt and liquidity
- The Trust entered into a new $185 million revolving credit agreement on March 27, 2015, replacing its prior facility. The agreement matures in four years and includes a one-year extension option and a potential $50 million capacity increase, subject to lender approval.
- Revolving credit borrowings were $115.3 million, with $5.1 million of letters of credit outstanding and $64.6 million of available borrowing capacity at June 30, 2015.
- Consolidated non-recourse mortgage debt totaled $116.3 million, excluding a $0.4 million debt premium. Two mortgages totaling approximately $9.7 million mature in October 2015 and are expected to be refinanced.
- At June 30, 2015, the Trust was in compliance with its debt covenants: total leverage was 44.6% versus a maximum of 60%, secured leverage was 21.0% versus a maximum of 30%, unencumbered leverage was 35.6% versus a maximum of 60%, and fixed-charge coverage was 3.2x versus a minimum of 1.5x.
- Operating cash flow exceeded dividends paid by approximately $0.8 million during the first six months of 2015. Management stated that cash, operating cash flow, available borrowing capacity and capital-market access were sufficient for the next twelve months, while noting that future financing may not be available on acceptable terms.
Material changes versus the prior comparable period
- Revenue increased 12.1% to $16.0 million in the quarter and 12.8% to $32.3 million for the six months. On the filing’s adjusted basis, which gives comparable treatment to LLCs consolidated beginning August 2014, revenue increased $0.2 million for the quarter and $0.6 million for the six months.
- Net income increased $8.6 million for the quarter and $8.5 million for the six months, primarily because of the $8.7 million property-exchange gain recorded in 2015.
- FFO increased 7.2% for the quarter and 7.2% for the six months; AFFO increased 8.4% and 7.7%, respectively. These increases exclude the property-exchange gain through the FFO reconciliation.
- Non-related-party base rental revenue increased to $8.8 million from $7.0 million in the quarter and to $17.7 million from $14.3 million for the six months, primarily reflecting recently acquired medical office buildings and other properties.
- Depreciation and amortization increased to $5.9 million from $4.8 million in the quarter and to $11.4 million from $9.6 million for the six months, partly due to fair-value accounting and additional consolidated properties.
- The Trust acquired two Texas free-standing emergency departments from UHS for approximately $12.8 million and acquired the Haas Medical Office Park for approximately $4.1 million. The acquisitions added approximately $0.9 million of annual initial rental revenue for the emergency departments.
- In May 2015, the Trust exchanged the Sheffield Medical Building for two Atlanta-area medical office buildings, received $2.0 million in cash and recorded an $8.7 million non-cash gain. The replacement properties are subject to 15-year master leases with 3% annual rent increases.
- Net cash used in investing activities increased to $19.6 million from $8.9 million, primarily because of higher property acquisitions and capital expenditures. Net borrowings under the revolving credit facility increased to $25.5 million from $8.7 million.
Guidance, outlook, management commentary and risks
Management did not provide quantitative earnings or revenue guidance. It expects to finance capital expenditures, acquisitions and dividends through operating cash flow, cash on hand, the revolving credit facility, equity issuance and other financing sources.
- UHS leases for three acute-care hospitals expire in December 2016. UHS has renewal and purchase options, and the Trust cannot predict whether the leases will be renewed or whether properties will be purchased.
- UHS-related concentration, the advisory relationship with UHS and the fact that all officers are UHS employees create tenant-concentration and potential conflict-of-interest risks.
- The Trust expects to refinance the October 2015 consolidated mortgage maturities and an unconsolidated LLC loan of approximately $22.9 million maturing in October 2015. Failure to refinance on reasonable terms could require additional equity or revolving-credit borrowings.
- Healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform, regulatory compliance, operator performance and competition could affect tenants, property values, bonus rents and lease renewals.
- Interest-rate exposure exists through floating-rate debt. Interest-rate caps with a total notional amount of $30 million expire in January 2017; no counterparty payments had been received through June 30, 2015.
- The Trust had $5.1 million of standby letters of credit and additional equity and debt financing commitments relating to unconsolidated LLC investments.
- The filing states that there were no material changes in previously disclosed risk factors, no material changes in market-risk disclosures, and effective disclosure controls and procedures.
Most important facts for an investor to verify
- Whether the October 2015 mortgage maturities and the $22.9 million unconsolidated LLC loan were refinanced on acceptable terms.
- UHS operating performance, lease-renewal intentions and any exercise of purchase options for hospital and emergency-department properties.
- The recurring earnings and cash-flow contribution of the acquired properties after excluding the $8.7 million property-exchange gain.
- Compliance with revolving-credit covenants as borrowings increase and debt maturities approach.
- The sustainability of the $0.640-per-share quarterly dividend relative to AFFO, operating cash flow, capital expenditures and debt repayments.
- Exposure to UHS-related transactions, advisory fees, conflicts of interest and tenant concentration.