Universal Health Realty Income Trust — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare real estate investment trust that owns, leases and invests in hospitals, medical office buildings, freestanding emergency departments, rehabilitation and sub-acute facilities, and childcare centers. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited.
As of July 31, 2019, the portfolio included 69 investments in 20 states. UHS and its subsidiaries served as tenants for three hospital facilities and portions of 17 medical office buildings or freestanding emergency departments. A UHS subsidiary also provided advisory and administrative services.
Financial performance and key metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $19.3 million | $20.1 million | $38.4 million | $38.7 million |
| Net income | $4.3 million | $5.8 million | $8.5 million | $15.4 million |
| Net margin | 22.0% | 28.9% | 22.0% | 39.9% |
| Diluted EPS | $0.31 | $0.42 | $0.62 | $1.12 |
| FFO | $11.0 million | $12.0 million | $21.9 million | $23.5 million |
| FFO per diluted share | $0.80 | $0.88 | $1.60 | $1.71 |
Second-quarter revenue declined approximately 3.9% year over year, while net income declined approximately 26.6%. Six-month revenue declined approximately 0.5%, while net income declined approximately 45.0%. Interest expense was $2.8 million in the second quarter and $5.5 million for the six months, compared with $2.4 million and $4.9 million, respectively, in the prior-year periods.
Net cash provided by operating activities was $21.5 million for the six months ended June 30, 2019, versus $23.2 million in the prior-year period. Investing activities used $3.0 million, including $3.0 million of real estate additions and $598,000 invested in unconsolidated LLCs. Financing activities used $17.5 million, including $9.3 million of dividends and $4.9 million of net revolving-credit repayments.
At June 30, 2019, cash and cash equivalents were $6.1 million. Revolving-credit borrowings were $191.6 million under the $300 million facility, leaving $108.4 million available. Non-recourse mortgage notes payable were $61.6 million, for total consolidated debt of approximately $253.1 million. The Trust was in compliance with all debt covenants.
Net real estate investments were $429.6 million and total assets were $482.8 million at June 30, 2019. Total equity was $188.5 million. The Trust declared dividends of $0.68 per share for the second quarter and $1.355 per share for the first six months; the second-quarter dividend was paid July 2, 2019.
Material changes versus the prior comparable period
- Second-quarter net income decreased $1.5 million, primarily because the second quarter of 2018 included a $1.7 million lease-termination-related benefit and $194,000 of Hurricane Harvey business-interruption insurance proceeds.
- Six-month net income decreased $6.9 million, principally because the prior-year period included $4.5 million of hurricane insurance recoveries in excess of property damage write-downs and $1.2 million of business-interruption recoveries.
- Interest expense increased by approximately $360,000 for the quarter and $584,000 for the six months, primarily because of higher average borrowing costs and, for the six-month period, higher average borrowings.
- Bonus rent from UHS hospital facilities increased $148,000 for the quarter and $216,000 for the six months.
- FFO declined $1.0 million, or $0.08 per diluted share, for the quarter and $1.6 million, or $0.11 per diluted share, for the six months.
- No acquisitions or dispositions were completed during the first six months of 2019. A $250,000 gain on sale of land was recorded in the first quarter.
- The Trust adopted ASC 842 on January 1, 2019 and recognized approximately $8.9 million of right-of-use land assets and ground-lease liabilities.
Guidance, outlook, risks and unusual items
Management stated that operating cash flow, cash, available credit and access to capital markets should provide sufficient resources for operating, investing and financing needs over the next 12 months, including required REIT distributions. No formal earnings or revenue guidance was provided.
Two hospital leases expired during the second quarter. The Encompass Health Deaconess Rehabilitation Hospital lease was replaced with a short-term lease scheduled to expire September 30, 2019, subject to renewal options. The Vibra Hospital of Corpus Christi tenant vacated on June 1, 2019, and the property was being marketed to a new tenant. These properties represented approximately 2% of consolidated revenue in each of 2017 and 2018; extended vacancy, lower replacement rents or renovation costs could materially affect results.
UHS-related tenants accounted for approximately 30% of consolidated revenue in the quarter and 31% for the six months. UHS hospital leases representing approximately 21% and 22% of consolidated revenue in the respective 2019 periods include two leases scheduled to expire in December 2021 and one in December 2026. UHS has renewal, purchase and change-of-control rights under the applicable master lease arrangements.
Other significant risks include dependence on UHS, conflicts of interest arising from the UHS advisory relationship, healthcare reimbursement and regulatory changes, competition and occupancy or rental-rate pressures, interest-rate and refinancing risk, access to capital, property damage from severe weather, and maintaining REIT qualification. The $60 million total notional amount of interest-rate caps expired in March 2019; management was evaluating replacement caps or swaps.
In August 2019, after the reporting period, the Trust agreed to develop a pre-leased behavioral health hospital in Clive, Iowa. Estimated project cost was $37.5 million, estimated initial annual rent was $2.7 million, and expected completion was fall 2020. The filing text does not provide a formal company-wide outlook beyond these project and liquidity disclosures.
Important facts for investors to verify
- UHS tenant concentration, lease renewal and purchase options, and the independence and renewal terms of the UHS Advisory Agreement.
- Re-leasing progress and expected economics for the vacant Vibra Hospital property and the short-term Encompass lease.
- Availability and cost of the revolving credit facility, March 2022 maturity, covenant headroom, and refinancing requirements for mortgage debt.
- Whether recurring operating cash flow and future property cash flows continue to cover dividends, capital expenditures and debt obligations.
- Replacement of the expired interest-rate caps and sensitivity to LIBOR or other variable-rate borrowing costs.
- Execution, financing and lease commencement risks for the Clive behavioral health hospital project.
- The effect of healthcare reimbursement, regulatory and insurance-market changes on UHS and other facility operators.