Business Context and Reporting Period
Company: Universal Health Realty Income Trust (UHRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: UHRT is a Maryland real estate investment trust (REIT) investing in healthcare and human service facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, medical office buildings (MOBs), and childcare centers. As of December 31, 2007, the portfolio consisted of 46 investments or commitments across 14 states. The Trust is managed by Universal Health Services, Inc. (UHS), which also serves as the primary tenant for a significant portion of the portfolio.
Key Financial Metrics
| Metric | 2007 | 2006 | 2005 |
|---|---|---|---|
| Total Revenue | $27,960,000 | $31,714,000 | $32,590,000 |
| Net Income | $22,191,000 | $34,697,000 | $25,423,000 |
| Funds from Operations (FFO) | $29,066,000 | $28,930,000 | $29,202,000 |
| Diluted EPS | $1.87 | $2.92 | $2.15 |
| Dividends Per Share | $2.30 | $2.26 | $2.175 |
| Total Assets | $199,749,000 | $194,139,000 | $196,889,000 |
| Total Indebtedness (Consolidated) | $36,617,000 | $26,337,000 | $35,548,000 |
| Cash from Operating Activities | $22,775,000 | $24,702,000 | $25,303,000 |
Note: Total indebtedness excludes $214.9 million of non-recourse debt held by unconsolidated LLCs.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by approximately $3.8 million (11.8%) compared to 2006. This was primarily due to the deconsolidation of two LLCs in the fourth quarter of 2006, which removed their revenues from the consolidated statement.
- Net Income Volatility: Net income decreased by $12.5 million (36%) from 2006 to 2007. The 2006 results were significantly boosted by a $14.0 million gain from an asset exchange and substitution agreement with UHS regarding the Chalmette Medical Center (damaged by Hurricane Katrina). In 2007, the gain recognized from this transaction was only $1.7 million.
- FFO Stability: Despite the drop in net income, Funds from Operations (FFO) remained relatively stable, increasing slightly by $136,000 to $29.1 million, reflecting the non-recurring nature of the 2006 asset exchange gain.
- Debt Levels: Consolidated indebtedness increased by approximately $10.3 million, driven by borrowings on the revolving credit facility and a new construction loan for the Palmdale Medical Plaza.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to meet short-term liquidity requirements through working capital and operating cash flows. The Trust intends to maintain its REIT status by distributing at least 90% of taxable income. In February 2008, the Trust acquired Kindred Hospital in Corpus Christi, Texas, for $8.1 million, signaling continued investment activity.
Unusual Items
- Chalmette Asset Exchange: A significant portion of 2006 income ($14.0 million) and 2007 income ($1.7 million) was derived from the settlement of the Chalmette Medical Center hurricane damage via an asset exchange with UHS.
- Discontinued Operations: In 2007, the Trust sold the Fresno-Herndon Medical Plaza, resulting in a $2.3 million gain recorded in discontinued operations.
Risks and Contingencies
- Concentration Risk: UHS accounted for 57% of total revenues in 2007. The Trust relies heavily on UHS for both management and lease payments. UHS also owns 6.7% of the Trust's outstanding shares.
- Legal Proceedings (McAllen Medical Center): UHS is under investigation by the Department of Health and Human Services (OIG) and the U.S. Attorney's Office regarding potential False Claims Act violations related to physician employment and patient referrals at McAllen Medical Center. While base rents are guaranteed, bonus rents (which totaled $1.7 million in 2007) could be materially adversely impacted if the facility's operating results decline.
- Competition: Intense competition in the McAllen, Texas market has led to declines in patient volume and profitability at McAllen Medical Center, potentially affecting future bonus rents and lease renewal terms.
- Insurance: Three LLCs owning properties in California could not obtain earthquake insurance at economically beneficial rates.
Investor Verification Checklist
- UHS Financial Health: Verify the financial stability of Universal Health Services, Inc., given that 57% of UHRT's revenue is derived from UHS subsidiaries.
- McAllen Investigation Status: Monitor the outcome of the government investigation into McAllen Medical Center to assess potential impacts on bonus rent revenue.
- Lease Renewals: Review the status of lease renewals for the four UHS hospital facilities, with terms expiring in 2011 and 2014, as renewal at current rates is not guaranteed.
- FFO vs. Net Income: Analyze Funds from Operations (FFO) rather than Net Income as the primary performance metric, as Net Income is heavily influenced by non-recurring asset exchange gains.
- Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, which limit dividend increases to 95% of cash available for distribution.