Universal Health Realty Income Trust — Q1 2014 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, rehabilitation and behavioral healthcare facilities, sub-acute facilities, surgery centers, childcare centers and related properties. The filing covers the three months ended March 31, 2014, and was filed May 7, 2014.
At March 31, 2014, the portfolio consisted of 58 real estate investments or commitments in 16 states: seven hospitals, 47 medical office buildings, including 11 owned through unconsolidated LLCs, and four preschool or childcare centers. UHS is the principal tenant and also provides advisory and management services through a subsidiary.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $14.288 million | $13.885 million | Reported increase of $403,000; $116,000 increase on an adjusted basis |
| Income before equity income, interest and gains | $4.857 million | $4.753 million | +$104,000 |
| Equity income from unconsolidated LLCs | $593,000 | $569,000 | +$24,000 |
| Net income | $3.774 million | $3.427 million | +$347,000, or approximately 10.1% |
| Diluted earnings per share | $0.29 | $0.27 | +$0.02 |
| Funds from operations | $8.883 million | $8.937 million | -$54,000 |
| Adjusted funds from operations | $8.945 million | $9.019 million | -$74,000 |
| Net cash provided by operating activities | $6.966 million | $7.622 million | -$656,000 |
Reported net margin was approximately 26.4% in Q1 2014 versus 24.7% in Q1 2013. The increase in net income was primarily attributable to a $316,000 non-cash gain from the fair-value recognition of two formerly non-controlling LLC investments, with the remaining increase described as other combined net increases.
Revenue included $3.914 million of base rent and $1.150 million of bonus rent from UHS facilities. UHS hospital leases represented approximately 29% of consolidated revenue. Advisory fees paid or payable to UHS were $610,000, compared with $571,000 in the prior-year quarter.
At March 31, 2014, total assets were $388.014 million, cash and cash equivalents were $3.844 million, total liabilities were $224.099 million and total equity was $163.915 million. The Trust declared and paid $0.625 per share in dividends during the quarter, totaling $8.050 million.
Liquidity, Debt and Cash Flow
- The $150 million revolving credit facility had $101.250 million drawn, $8.2 million of letters of credit outstanding and $40.5 million of available capacity at March 31, 2014. The facility expires July 24, 2015.
- Consolidated non-recourse mortgage debt totaled approximately $115.4 million, excluding the net debt premium. Total line-of-credit borrowings and mortgage debt were approximately $217.4 million.
- The Trust was in compliance with all credit facility covenants. Reported covenant measures included debt to total capital of 38.2%, debt service coverage of 18.2 times and debt to cash flow of 2.37 times.
- Operating cash flow was $7.0 million, compared with $7.6 million in Q1 2013. Investing cash use was $7.9 million, primarily due to $7.1 million spent acquiring two medical office buildings, $641,000 of real estate additions and $442,000 invested in unconsolidated LLCs.
- Financing activities provided $1.2 million, including $7.6 million of net revolving-credit borrowings and $2.5 million of net proceeds from share issuance, partly offset by dividends and mortgage repayments.
- Management stated that operating cash flows, cash, available credit capacity and access to capital markets were expected to provide sufficient resources for the next twelve months, including required REIT distributions.
Material Changes Versus the Prior Comparable Period
- Effective January 1, 2014, the Trust acquired the remaining minority interests in Palmdale Medical Properties and Sparks Medical Properties for $170,000 and began consolidating both LLCs. The transactions produced a $316,000 non-cash gain and added approximately $19.5 million of net real estate investments, $2.8 million of intangible assets and $10.7 million of non-recourse debt through fair-value accounting.
- The Trust acquired two Arkansas medical office buildings for an aggregate purchase price of approximately $7.2 million, funded with $7.05 million of cash after a previously paid deposit.
- Under the ATM equity program, the Trust issued 57,410 shares at an average price of $42.67, generating approximately $2.4 million of net proceeds or receivables. Since inception, the program had generated approximately $8.4 million of net proceeds from 212,123 shares.
- Dividends increased to $0.625 per share from $0.62 per share in the prior-year quarter.
- FFO and AFFO declined slightly despite higher reported net income, reflecting the non-cash gain and changes in depreciation, amortization and transaction costs.
- Two additional interest-rate caps with total notional value of $20 million were entered into during the quarter. Including a prior cap, the caps protect $30 million of notional exposure against one-month LIBOR exceeding 1.50% and expire January 13, 2017.
Outlook, Risks and Unusual Items
- The Bridgeway hospital lease, generating approximately $1.1 million of annual revenue, is scheduled to expire in December 2014. UHS may renew at fair-market-value rent, purchase the property at appraised fair value or decline to renew, potentially reducing revenue, cash flow and FFO.
- A $9.1 million consolidated mortgage loan is scheduled to mature in July 2014. Management expected to refinance it or use other financing alternatives, including the revolving credit facility, if necessary.
- An unconsolidated LLC loan of approximately $12.5 million matures in 2014, and management expected to refinance it. Failure to refinance on reasonable terms could require additional equity funding or other financing.
- Approximately 29% of consolidated revenue came from UHS hospital leases. UHS also serves as advisor, employs the Trust’s officers and held approximately 6.1% of the Trust’s shares, creating related-party and concentration risks.
- Healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform, operator performance, occupancy, competition, regulatory compliance and economic conditions could reduce tenant demand, bonus rent and property values.
- Two California properties owned through LLCs were not covered by earthquake insurance because available coverage was not considered economical.
- The Trust had commitments to fund additional equity in certain unconsolidated LLCs, including $2.1 million for Texoma Medical Properties, $1.2 million for Arlington Medical Properties and up to $1.4 million remaining under the Forney Medical Plaza II commitment.
- No material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls and procedures were effective as of March 31, 2014.
Important Facts for Investors to Verify
- Confirm the renewal, purchase or replacement-tenant outcome for The Bridgeway lease after its December 2014 expiration.
- Monitor refinancing of the July 2014 consolidated mortgage and the 2014 maturity of the Grayson Properties LLC loan.
- Assess dividend coverage using recurring operating cash flow and AFFO rather than reported net income, which benefited from the $316,000 non-cash gain.
- Track reliance on UHS, including UHS lease concentration, advisory fees, related-party governance and the financial condition of UHS facility operators.
- Review available revolver capacity, ATM share issuance, covenant headroom and future capital commitments when evaluating liquidity and acquisition capacity.