Universal Health Realty Income Trust — 2013 Q2 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2013, filed August 8, 2013. The Trust is a healthcare real estate investment trust owning or investing in hospitals, medical office buildings, rehabilitation and behavioral-health facilities, and childcare centers. As of June 30, 2013, it reported 55 real estate investments or commitments across 15 states.
Universal Health Services, Inc. (UHS) is the principal tenant and provides advisory and management services through a subsidiary. UHS-leased hospital facilities generated approximately 30% of consolidated revenue. Including unconsolidated affiliates, UHS hospital leases represented approximately 22% of combined revenue.
Financial performance and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $13.5 million | $13.7 million | $27.4 million | $27.0 million |
| Net income | $2.9 million | $2.5 million | $6.4 million | $12.0 million |
| Basic and diluted EPS | $0.23 | $0.19 | $0.50 | $0.95 |
| Funds from operations | $8.4 million | $8.2 million | $17.3 million | $16.4 million |
| Adjusted funds from operations | $8.4 million | $8.4 million | $17.5 million | $17.1 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $15.7 million | $14.6 million |
Second-quarter net income margin was approximately 21.8%, compared with 18.1% in the prior-year quarter. Six-month net income margin was approximately 23.3%, compared with 44.4% in the prior-year period; the comparison was distorted by a $7.4 million gain on an unconsolidated LLC property divestiture recorded in the first half of 2012.
At June 30, 2013, total assets were $380.6 million, including $310.3 million of net real estate investments, $33.2 million invested in or advanced to LLCs, and $3.1 million of cash and cash equivalents. Total liabilities were $212.1 million and shareholders’ equity was $168.5 million.
Debt included $90.4 million drawn under the $150 million revolving credit facility and $114.1 million of mortgage and other notes payable, including approximately $113.1 million of non-recourse mortgages before the net debt premium. Available revolving capacity, net of $10.3 million of letters of credit, was $49.3 million. The Trust was in compliance with all debt covenants.
The Trust declared and paid dividends of $0.625 per share in the second quarter and $1.245 per share for the first six months. Six-month dividends of $15.8 million exceeded reported net income but were supported by operating cash flow, noncash expenses, and other cash sources.
Material changes versus the prior comparable period
- Second-quarter revenue decreased $164,000, or approximately 1.2%, primarily because lower non-related-party tenant reimbursements offset revenue from a recently acquired medical office building.
- Six-month revenue increased $370,000, or approximately 1.4%, primarily from the medical office building acquired in the fourth quarter of 2012.
- Second-quarter net income increased $474,000, or approximately 19%, due mainly to lower depreciation and amortization, lower transaction costs, and improved property-level results.
- Six-month net income declined $5.6 million, or approximately 47%, principally because the prior-year period included a $7.4 million gain on the sale of an LLC-owned medical office building.
- Six-month FFO increased $903,000, or approximately 5.5%, and AFFO increased $385,000, or approximately 2.3%, despite the decline in reported net income.
- Operating cash flow increased $1.0 million year over year to $15.7 million. Investing cash use decreased to $6.6 million from $7.8 million, while financing cash use decreased to $9.0 million from $15.3 million.
- On June 6, 2013, the Trust acquired the approximately 4,400-square-foot 5004 Poole Road medical office building in Denison, Texas, for approximately $625,000. Forney Medical Plaza II, owned through an unconsolidated LLC, opened in April 2013.
- The advisory fee paid to UHS increased to $1.2 million for the first six months from $1.1 million, reflecting the fee increase effective January 1, 2013, from 0.65% to 0.70% of average invested real estate assets.
Guidance, outlook, risks and unusual items
Management stated that operating cash flows, cash on hand, available revolver capacity, and access to capital markets should provide sufficient resources for operating, investing, financing needs, and REIT distributions over the next 12 months. No formal earnings guidance was provided.
The Palmdale Medical Properties master lease with a UHS subsidiary expired effective July 1, 2013. The LLC will thereafter be accounted for under the equity method rather than consolidated. Management expects an unfavorable effect on net income and FFO but does not expect a material effect on financial condition or liquidity.
A $6.2 million Palmdale mortgage was extended for 90 days and was expected to be refinanced by October 31, 2013. If refinancing could not be obtained on reasonable terms, the LLC could consider alternative financing, potentially including Trust borrowings under the revolving facility.
Key risks include concentration of revenue and related-party relationships with UHS, potential conflicts arising from UHS serving as advisor and employing all officers, healthcare reimbursement and regulatory changes, Medicare and Medicaid reductions, UHS indebtedness and credit quality, lease expirations and renewals, access to capital, interest-rate and refinancing risk, real estate market conditions, competition, REIT qualification requirements, and litigation or regulatory matters.
Two California properties held through unconsolidated LLCs lacked earthquake insurance because available coverage was not considered economically reasonable. The filing also disclosed $10.3 million of standby letters of credit and additional equity and debt financing commitments to LLC investments.
Important facts for investors to verify
- UHS concentration: approximately 30% of consolidated revenue came from UHS hospital leases, and UHS also provides advisory and management services.
- Palmdale master-lease expiration, accounting change, expected earnings impact, and refinancing status after June 30, 2013.
- Near-term debt maturities, including the Palmdale loan and other mortgage maturities, together with refinancing terms and interest-rate exposure.
- Sustainability of dividends relative to operating cash flow, FFO/AFFO, capital expenditures, debt repayments, and LLC funding commitments.
- Available revolver capacity, covenant headroom, letters of credit, and the ability to access capital markets on acceptable terms.
- Effects of healthcare reimbursement changes, UHS financial condition, tenant concentration, occupancy, bonus rentals, and lease renewals.
- Performance and funding requirements of unconsolidated LLCs, including non-recourse debt, construction loans, and potential member buy-sell provisions.