Business Context and Reporting Period
Universal Health Realty Income Trust is a healthcare-focused REIT investing in and leasing hospitals, medical office buildings, free-standing emergency departments, rehabilitation and sub-acute facilities, surgery centers, and childcare centers. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparison to the three months ended March 31, 2017.
As of April 30, 2018, the Trust had 68 investments in 20 states. UHS-related tenants generated approximately 31% of consolidated revenue, and three hospital leases to UHS subsidiaries generated approximately 22% of consolidated revenue. UHS also provides the Trust’s advisory services and employs all of the Trust’s officers.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $18.539 million | $17.750 million | +$0.789 million |
| Income before equity income, insurance recoveries, gain and interest | $6.140 million | $5.964 million | +$0.176 million |
| Equity in income of unconsolidated LLCs | $0.429 million | $1.077 million | -$0.648 million |
| Net income | $9.604 million | $31.562 million | -$21.958 million |
| Basic and diluted EPS | $0.70 | $2.32 | -$1.62 |
| Funds from operations | $11.491 million | $10.814 million | +$0.677 million |
| FFO per diluted share | $0.84 | $0.80 | +$0.04 |
| Cash flow from operating activities | $10.759 million | $9.494 million | +$1.265 million |
Revenue increased 4.4%, primarily from higher non-related-party base rent, tenant reimbursements and other income, and UHS facility rent. Net income margin was approximately 51.8% in Q1 2018 versus 177.8% in Q1 2017; the comparison is distorted by nonrecurring items in both periods. Excluding the 2018 hurricane recovery proceeds and the 2017 Arlington transaction gain, the filing does not provide a directly stated adjusted net margin.
Q1 2018 included $4.535 million of hurricane insurance recoveries in excess of damaged-property write-downs and $0.968 million of hurricane-related business interruption proceeds. Q1 2017 included a $27.196 million gain from the Arlington/St. Mary’s transaction.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $4.209 million at March 31, 2018, compared with $3.387 million at December 31, 2017.
- Total assets were $489.585 million and total equity was $211.356 million at March 31, 2018.
- Revolving credit borrowings were $175.0 million. The replacement revolving credit facility increased total capacity to $300 million and matures in March 2022, with two additional six-month extension options.
- Letters of credit totaled $1.5 million, leaving $123.5 million of available borrowing capacity at quarter-end.
- Mortgage notes payable, net, were $70.781 million, all non-recourse to the Trust. Ten mortgages had aggregate principal balances of $71.146 million before financing fees and debt premiums.
- The Trust repaid $4.1 million of mortgage debt in February 2018 and, after quarter-end, repaid an aggregate $17.6 million on two mortgages using the revolving credit facility.
- Credit agreement compliance remained strong: total leverage was 39.7% versus a 60% limit, secured leverage was 11.0% versus a 30% limit, unencumbered leverage was 35.7% versus a 60% limit, and fixed-charge coverage was 3.9x versus a 1.50x minimum.
- Dividends of $9.1 million, or $0.665 per share, were declared during Q1 2018 and paid April 2, 2018. Management stated that operating cash flows were sufficient to fund dividends and that available cash, operating cash flow, borrowing capacity and capital-market access should support requirements for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue increased $0.789 million, while operating expenses increased $0.613 million, including higher depreciation, advisory fees and other operating expenses.
- Net income declined primarily because Q1 2017 included the $27.2 million Arlington transaction gain. This decline was partially offset by $5.5 million of additional hurricane-related insurance proceeds received in Q1 2018.
- FFO increased 6.3% to $11.491 million, although approximately $0.968 million of Q1 2018 FFO reflected business interruption insurance proceeds, including approximately $0.5 million relating to 2017.
- Equity income from unconsolidated LLCs declined $0.648 million, primarily because the Arlington investment was divested in March 2017 and related interest income ceased.
- Investing cash flow fell to $2.180 million from $53.551 million because Q1 2017 included substantial proceeds from the St. Mary’s disposition.
- The Trust entered into a new $300 million revolving credit agreement on March 27, 2018, increasing capacity by $50 million and extending debt maturity.
- No acquisitions or dispositions occurred during Q1 2018.
Outlook, Commentary, Risks and Unusual Items
Five Houston-area medical office buildings damaged by Hurricane Harvey remained substantially closed or non-operational through the quarter. Management expected all occupied space to be completed by June 30, 2018, but provided no assurance regarding reopening dates. Aggregate hurricane recoveries reached $12.5 million, and management believed the proceeds would substantially cover remediation, reconstruction and lost-income costs.
Management expects to finance capital expenditures, acquisitions and dividends through internally generated funds, the revolving credit facility, mortgage refinancing, equity issuance or other long-term debt. No formal earnings or FFO guidance was provided.
- UHS concentration creates tenant, lease-renewal, related-party and potential conflict-of-interest risks. The three hospital leases expire in December 2021; UHS has renewal, purchase and rights-of-first-refusal provisions.
- UHS-related tenants accounted for approximately 31% of consolidated revenue, making the Trust dependent on UHS operating performance, regulatory compliance and credit quality.
- Near-term mortgage maturities and reliance on refinancing expose the Trust to interest-rate, credit-market and capital-availability risk.
- Healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform, competition, occupancy trends and operator financial performance could affect rents and property values.
- Hurricane recovery proceeds and business interruption recoveries materially affected Q1 2018 results and may not recur.
- The Trust remains subject to REIT distribution requirements and must distribute at least 90% of annual REIT taxable income to maintain REIT status.
- The Trust adopted revenue-recognition and restricted-cash standards in 2018. Revenue-standard adoption had no significant financial statement impact and required no cumulative equity adjustment.
Important Facts for Investors to Verify
- Verify the reopening status, remaining repair costs and final insurance recoveries for the five Hurricane Harvey-affected properties.
- Assess the sustainability of FFO after removing the $0.968 million business interruption recovery included in Q1 2018.
- Review UHS’s financial condition, pending legal and regulatory matters, and its ability and intent to renew or purchase the hospital and other facility leases.
- Confirm post-quarter-end refinancing and repayment activity, including the $17.6 million of mortgage repayments funded through the revolving facility.
- Monitor the $300 million credit facility’s leverage, fixed-charge coverage and other covenant compliance, as well as available capacity after subsequent borrowings.
- Evaluate dividend coverage using recurring property cash flow rather than reported net income, which was materially affected by unusual insurance recoveries and the prior-year transaction gain.