Universal Health Realty Income Trust — Q1 2012 Form 10-Q
Business context and reporting period
Universal Health Realty Income Trust is a healthcare and human-services REIT investing in hospitals, medical office buildings, clinics, rehabilitation and behavioral-health facilities, and childcare centers. The filing covers the three months ended March 31, 2012, and was signed May 8, 2012. At quarter-end, the Trust had 54 real estate investments or commitments in 15 states. UHS is the principal tenant, advisor, and employer of the Trust’s officers.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $13.351 million | $6.676 million | +$6.675 million |
| Net income | $9.514 million | $4.128 million | +$5.386 million |
| Diluted EPS | $0.75 | $0.33 | +$0.42 |
| Net cash from operating activities | $7.007 million | $5.166 million | +$1.841 million |
| Funds from operations | $8.179 million | $8.281 million | -$0.102 million |
| Adjusted FFO | $8.699 million | $8.281 million | +$0.418 million |
| Dividends paid | $7.728 million | $7.655 million | +$0.073 million |
Reported net income margin was approximately 71%, substantially elevated by a $7.375 million gain on the divestiture of a property owned by an unconsolidated LLC. Revenue included $3.756 million of base rent from UHS facilities, $6.732 million of base rent from non-related parties, and $1.116 million of UHS bonus rent. UHS hospital leases represented approximately 31% of consolidated revenue, compared with 62% in the prior-year quarter.
Cash and cash equivalents were $3.789 million at March 31, 2012, compared with $11.649 million at December 31, 2011. Investing activities used $7.120 million, including the PeaceHealth Medical Clinic acquisition and an $8.0 million advance to an unconsolidated LLC. Financing activities used $7.747 million after dividends and mortgage repayments.
Total assets were $395.453 million and total equity was $190.916 million at quarter-end. Outstanding revolving-credit borrowings were $80.2 million, with $57.1 million of availability after $12.7 million of letters of credit. Consolidated non-recourse mortgages totaled approximately $115.8 million. The Trust reported compliance with all credit-facility covenants, including debt to total capital of 29.6%, debt-service coverage of 31.98x, and debt to cash flow of 1.34x.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the consolidation of eleven LLCs after the Trust acquired the minority interests in December 2011, plus medical office building and clinic acquisitions completed in 2011 and Q1 2012.
- The PeaceHealth Medical Clinic was acquired in January 2012 for approximately $30.4 million, including assumed financing of approximately $22.4 million. It contributed $531,000 of revenue and approximately $63,000 of net income before transaction costs during the quarter.
- Canyon Springs Medical Plaza was divested in February 2012 through an unconsolidated LLC, generating approximately $8.1 million of net cash proceeds and a $7.4 million gain.
- Depreciation and amortization increased to $5.220 million from $1.503 million, primarily because of higher asset bases from LLC consolidation and recent acquisitions. Interest expense increased to $2.023 million from $378,000 because of higher borrowings, a higher revolving-credit cost, and assumed acquisition debt.
- On an adjusted comparable basis, excluding the impact of LLC consolidation, 2012 revenue was $2.323 million above the prior-year period. Management reported pro forma 2012 revenue of approximately $13.5 million and pro forma net income of approximately $2.7 million, or $0.21 per diluted share, excluding the gain and acquisition transaction costs.
Outlook, risks, contingencies, and unusual items
Management stated that operating cash flows, cash, available revolver capacity, and remaining ATM equity capacity should provide sufficient resources for the next twelve months, including required REIT distributions. The ATM program had approximately $25.9 million of gross issuance capacity remaining at March 31, 2012; no shares were issued under the program during the quarter.
Three mortgage loans totaling approximately $20.2 million were scheduled to mature in 2012. Management expected to refinance them on reasonable terms or use the revolving facility or other financing alternatives if refinancing was unavailable. A separate $12.4 million floating-rate mortgage was amended and extended in April 2012 at LIBOR plus 3.25%.
- Revenue concentration with UHS, including dependence on UHS’s financial condition and ability to meet lease obligations.
- Potential effects of healthcare reform, Medicare and Medicaid reimbursement reductions, uninsured patients, regulatory compliance, and changes in patient volumes on tenants and bonus rent.
- Access to capital markets and refinancing risk, including the possibility of higher borrowing costs or unavailable financing.
- Three California LLC properties lacked economically available earthquake insurance.
- Related-party governance and potential conflicts because UHS provides advisory services and employs all Trust officers.
- Lease expirations, purchase options, property values, competition, economic conditions, litigation, and REIT qualification and distribution requirements.
Investor verification points
- Separate recurring operating performance from the $7.4 million divestiture gain and the $520,000 acquisition transaction cost.
- Review FFO and AFFO rather than relying solely on reported EPS; reported net income was materially affected by unusual items and consolidation changes.
- Verify refinancing progress for the 2012 mortgage maturities and the April 2012 amendment of the floating-rate loan.
- Assess UHS concentration, related-party arrangements, lease guarantees, and the effect of UHS’s operating and financial performance on rent collections.
- Monitor cash balances, dividend coverage, LLC advances and commitments, letters of credit, and remaining borrowing and ATM capacity.
- Evaluate the impact of healthcare reimbursement changes, regulatory developments, tenant credit quality, and uninsured earthquake exposure on property cash flows and valuations.