Universal Health Realty Income Trust: 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013; it is an annual 10-K rather than a quarterly filing. Universal Health Realty Income Trust is a Maryland REIT investing in healthcare and human-service facilities. As of February 28, 2014, the portfolio included 58 investments or commitments in 16 states: seven hospitals, 47 medical office buildings and four preschool or childcare centers.
The Trust is closely related to Universal Health Services, Inc. (UHS). UHS subsidiaries leased four of the seven hospitals, UHS served as the external advisor, and all Trust officers were UHS employees. UHS accounted for 36% of consolidated revenue in 2013.
Key financial metrics
| Metric | 2013 | 2012 | Change or comment |
|---|---|---|---|
| Total revenue | $54.3 million | $54.0 million reported; $53.3 million as adjusted | Approximately 1.9% increase versus adjusted 2012 |
| Net income | $13.2 million | $19.5 million | Down $6.3 million, primarily because 2012 included $8.5 million of property-divestiture gains |
| Diluted EPS | $1.04 | $1.54 | Declined with net income |
| Funds from operations | $35.0 million | $34.3 million | Increased $675,000 |
| Adjusted FFO | $35.2 million | $35.0 million | Increased approximately $198,000 |
| Operating cash flow | $31.3 million | $30.8 million | Increased $511,000 |
| Net cash used in investing | $13.5 million | $8.6 million | Higher investments, advances and acquisitions |
| Net cash used in financing | $17.5 million | $30.8 million | Lower net cash use, including increased equity issuance and borrowings |
| Dividends per share | $2.495 | $2.460 | Increased approximately 1.4% |
Revenue consisted primarily of base rent, bonus rent and tenant reimbursements. UHS facilities generated approximately 30% of consolidated revenue in both 2013 and 2012. The weighted-average hospital coverage ratio improved to 6.3 in 2013 from 5.9 in 2012.
At December 31, 2013, total assets were $373.1 million, net real estate investments were $297.7 million, investments in and advances to LLCs were $39.2 million, cash was $3.3 million and total equity was $165.6 million. Consolidated indebtedness, including debt premium, was approximately $200.0 million.
Debt, liquidity and capital resources
- The $150 million revolving credit facility had $93.7 million outstanding and $8.7 million of letters of credit, leaving $47.6 million of available capacity at year-end. The facility matures July 24, 2015.
- The Trust had 12 non-recourse mortgages with a combined principal balance of approximately $105.5 million. One $9.2 million mortgage was scheduled to mature in 2014, and the revolving credit balance was scheduled for repayment or refinancing in 2015.
- Debt-to-total-capital was 36.0%, debt service coverage was 19.1 times and debt-to-cash-flow was 2.21 times, compared with covenants of less than 55%, greater than 4.00 times and less than 3.50 times, respectively. The Trust was in compliance with all covenants.
- Contractual obligations totaled approximately $228.9 million, including debt principal, estimated interest and $7.5 million of equity and debt financing commitments to LLC investments.
- Management stated that operating cash flow, cash, available revolver capacity, the ATM equity program and capital-market access were expected to fund operating needs, investments, debt requirements and REIT distributions for the next 12 months, subject to financing-market conditions.
Material changes versus the prior comparable period
- Revenue increased modestly, driven mainly by medical office buildings acquired in 2013 and late 2012, partly offset by decreases at certain properties.
- Net income fell because 2012 included $8.5 million of gains from divestitures of properties held by unconsolidated LLCs. There were no comparable divestiture gains in 2013.
- FFO increased despite lower GAAP net income, reflecting the removal of nonrecurring 2012 gains and adjustments for depreciation and amortization.
- Advisory fees paid or payable to UHS increased to $2.4 million from $2.1 million. No incentive advisory fees were paid in 2013, 2012 or 2011.
- The Trust acquired two medical office buildings in 2013 for approximately $4.7 million: Ward Eagle Office Village and 5004 Poole Road MOB.
- Palmdale Medical Properties was deconsolidated effective July 1, 2013 after expiration of its UHS master lease and was thereafter accounted for under the equity method. Management stated that the change had no material impact on 2013 net income or FFO.
- In the fourth quarter, the Trust issued 154,713 shares under a $50 million at-the-market program at an average price of $41.71, generating approximately $6.0 million of net proceeds. Approximately $43.5 million of gross issuance capacity remained at year-end.
- Medical office building lease renewals covering approximately 8% of the relevant rentable square footage were completed in 2013; renewal rates declined approximately 6% from expiring leases. Weighted-average tenant improvement costs were approximately $17 per square foot.
Guidance, outlook, risks and unusual items
No quantitative earnings or revenue guidance was provided. Management expects to finance capital expenditures, acquisitions and dividends through operating cash flow and additional debt or equity capital. Future dividend levels will depend on property results, capital commitments, debt repayments and REIT distribution requirements.
- UHS concentration and related-party risk: UHS guarantees and cross-defaults the hospital leases, but also controls the advisory relationship and employs the Trust’s officers. UHS has renewal, purchase and right-of-first-refusal provisions on the hospital properties.
- Lease expirations: The Bridgeway lease, representing $930,000 of annual minimum rent, was scheduled to expire in December 2014. Four UHS hospital leases were scheduled to expire in December 2016, with aggregate annual minimum rent of approximately $11.2 million.
- Healthcare reimbursement: Medicare sequestration, Medicaid reductions, healthcare reform, private-payor pricing pressure, licensing requirements and regulatory enforcement could weaken tenants’ operating performance and rent-paying capacity.
- Occupancy and leasing: Several MOBs had significant 2014 lease expirations, and certain markets experienced vacancy and competitive pressure. Expiring rents may not be renewed at current rates.
- Financing and interest-rate exposure: Variable-rate debt was approximately $123.4 million, and management estimated that a 1% change in interest rates would affect annual net income by approximately $1.8 million. Interest-rate caps covered a total notional amount of $10 million at year-end; additional $20 million caps were entered into in the first quarter of 2014.
- Unconsolidated LLCs: These investments had approximately $80.1 million of non-recourse third-party debt and scheduled maturities, including approximately $41.5 million in 2015. The Trust also had $7.5 million of remaining equity and debt commitments.
- Insurance and property risk: Two California properties held through unconsolidated LLCs, representing approximately $16.3 million of invested or advanced capital, lacked economically viable earthquake insurance.
- Unusual items: 2013 included approximately $200,000 of transaction costs related to 2013 and early 2014 acquisitions. The major prior-period unusual items were the $8.5 million of 2012 divestiture gains and the $28.6 million 2011 gain from purchasing minority interests in LLCs.
Most important facts for investors to verify
- Review the full consolidated financial statements and notes for the composition, maturity and refinancing plan for approximately $200 million of consolidated indebtedness.
- Assess UHS dependence, including its 36% share of 2013 consolidated revenue, lease expirations, renewal options, purchase rights and advisory fees.
- Reconcile GAAP net income and EPS with FFO and AFFO, and distinguish recurring rental performance from prior-period property-sale gains.
- Evaluate 2014 and 2015 lease expirations, MOB occupancy, renewal spreads and tenant-improvement requirements.
- Review the liquidity impact of the 2015 revolver maturity, the $7.5 million of LLC commitments and non-recourse debt maturities at unconsolidated affiliates.
- Confirm the effect of the January 2014 acquisitions of two MOBs and the purchase of minority interests in Palmdale and Sparks LLCs, including the expected first-quarter 2014 gain and consolidation changes.
- Consider Medicare and Medicaid reimbursement changes, healthcare regulation, competition, labor costs, tenant credit quality and uninsured earthquake exposure when assessing future rent coverage and property values.