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 and childcare facilities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. As of July 31, 2017, the portfolio comprised 67 investments in 20 states.
UHS of Delaware, Inc., a subsidiary of Universal Health Services, Inc. (UHS), serves as the Trust’s advisor, and all Trust officers are UHS employees. Three hospitals are leased to UHS subsidiaries; UHS-related hospital leases represented approximately 22% of consolidated second-quarter revenue and 23% for the first six months.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $18.1 million | $16.5 million | $35.9 million | $32.7 million |
| Net income | $4.0 million | $4.5 million | $35.6 million | $9.0 million |
| Diluted EPS | $0.30 | $0.34 | $2.62 | $0.67 |
| Funds from operations | $10.5 million | $10.4 million | $21.3 million | $20.6 million |
| FFO per diluted share | $0.77 | $0.78 | $1.57 | $1.54 |
| Net cash from operating activities | Not separately reported | Not separately reported | $20.3 million | $20.0 million |
Second-quarter net margin was approximately 22.2%, compared with approximately 27.5% in the prior-year quarter. The six-month net margin was approximately 99.2%, compared with approximately 27.4%, primarily because of a $27.2 million nonrecurring gain. FFO, which excludes the gain and real estate depreciation, increased modestly year over year.
- At June 30, 2017, cash and cash equivalents were $4.1 million and restricted cash was $11.3 million.
- Line-of-credit borrowings were $182.9 million under a $250 million revolving facility; letters of credit totaled $2.1 million, leaving $65.1 million of available capacity.
- Non-recourse mortgage notes payable were $90.6 million net, or $90.9 million before financing fees and debt premium.
- Total liabilities were $290.8 million and total equity was $209.0 million.
- Dividends paid were $9.0 million, or $0.66 per share, in the second quarter and $17.9 million, or $1.315 per share, during the first six months.
- Management stated that operating cash flows, cash, borrowing capacity and capital-market access should be sufficient for operating, investing and financing needs over the next 12 months, including REIT distributions.
Material changes versus the prior comparable period
- Revenue increased 10.2% in the second quarter and 9.8% for the first six months, primarily reflecting 2016 property acquisitions and higher property-level activity.
- Second-quarter net income declined $0.5 million. Higher interest expense and a $0.7 million decline in equity income from unconsolidated LLCs, following the St. Mary’s disposition, more than offset improved property income.
- Six-month net income increased $26.6 million, almost entirely due to the $27.2 million gain associated with acquiring the minority interest in Arlington Medical Properties, LLC and the subsequent sale of St. Mary’s Professional Office Building.
- Six-month FFO increased 3.1% to $21.3 million, while FFO per diluted share increased from $1.54 to $1.57.
- Investing cash flow changed from a $37.0 million use in 2016 to a $39.8 million source in 2017, driven by approximately $54.0 million of net proceeds from the St. Mary’s disposition.
- Financing cash flow changed from a $17.8 million source to a $60.0 million use, reflecting repayment of line-of-credit and mortgage debt, partly offset by a new $13.2 million mortgage.
- The Henderson Medical Plaza opened in April 2017; total investment was $10.7 million at June 30.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management expects to fund capital expenditures, acquisitions and dividends through operating cash flow, the revolving facility, mortgage refinancing, potential ATM equity issuance and other long-term debt.
- In July 2017, the Trust acquired The Health Center at Hamburg for approximately $4.7 million under a planned Section 1031 like-kind exchange. A $6.7 million Auburn Medical II mortgage was also repaid at maturity using revolving-facility borrowings.
- Several mortgages totaling approximately $45.1 million were scheduled to mature from October 2017 through May 2018, requiring refinancing or repayment decisions. The Trust stated that it was in compliance with all credit-facility covenants at June 30, 2017.
- The St. Mary’s transaction involved approximately $11.3 million of restricted proceeds held by a qualified 1031 intermediary at quarter-end. The Trust may complete another qualifying acquisition by mid-September 2017, but provided no assurance that it would do so.
- UHS-related concentration, related-party governance and conflicts of interest are significant risks. Hospital leases generally extend to December 2021, but renewal and purchase options could reduce future rental revenue.
- Other principal risks include healthcare reimbursement and regulatory changes, potential reductions in Medicare or Medicaid funding, operator performance, occupancy and rental-rate pressure, interest rates, refinancing availability, capital-market access, litigation and maintaining REIT qualification.
- Unconsolidated LLC/LP investments had $28.1 million of non-recourse mortgage debt at June 30, 2017. A $5.2 million FTX MOB Phase II loan was extended after quarter-end to October 1, 2017 and must be refinanced, repaid or supported through member funding.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Verify the recurring operating performance underlying the six-month results after excluding the $27.2 million gain.
- Assess UHS tenant and advisor concentration, including lease expirations, renewal terms, purchase options and related-party fees.
- Review the refinancing plan and interest-rate exposure for the revolving facility and mortgages maturing through 2018.
- Confirm the status and tax treatment of the Section 1031 exchange, restricted cash and any additional property acquisition.
- Evaluate dividend coverage using recurring operating cash flow and FFO rather than reported net income.
- Review the FTX MOB Phase II refinancing outcome and any required Trust funding.