Business Context and Reporting Period
Company: Universal Health Realty Income Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2011
Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, behavioral healthcare facilities, and medical office buildings (MOBs). A significant portion of its revenue is derived from leases with subsidiaries of Universal Health Services, Inc. ("UHS"), which also serves as the Trust's Advisor.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $6,676,000 | $7,644,000 |
| Net Income | $4,128,000 | $4,527,000 |
| Earnings Per Share (Diluted) | $0.33 | $0.37 |
| Funds from Operations (FFO) | $8,281,000 | $8,492,000 |
| Net Cash Provided by Operating Activities | $5,166,000 | $6,052,000 |
| Total Assets | $221,686,000 | $216,135,000 (Dec 31, 2010) |
| Total Liabilities | $79,581,000 | $70,625,000 (Dec 31, 2010) |
| Line of Credit Borrowings | $62,000,000 | $52,600,000 (Dec 31, 2010) |
| Available Borrowing Capacity | $21,500,000 | N/A |
| Dividends Paid | $7,655,000 | $7,254,000 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $968,000 (12.7%) compared to Q1 2010. On an "As Adjusted" basis (excluding the deconsolidated Summerlin II MOB), revenue decreased by $327,000. This was primarily due to the expiration of a master lease on an MOB in Georgia in June 2010, decreased revenue from a vacant MOB in Las Vegas, and lower tenant reimbursements due to decreased occupancy.
- Net Income Decrease: Net income fell by approximately $400,000 (8.8%) to $4.1 million. The decline was driven by the loss of the Georgia MOB lease revenue and operating losses at specific MOBs in Las Vegas and Phoenix.
- Expense Fluctuations: Depreciation and amortization increased by $47,000 (As Adjusted) due to renovations at consolidated MOBs. Interest expense increased by $58,000 (As Adjusted) due to higher average borrowings and increased rates on specific loans.
- Debt Utilization: Borrowings on the revolving line of credit increased by $9.4 million during the quarter to fund advances to LLCs and real estate investments.
Guidance, Outlook, and Risks
Management Commentary: Management continues to actively market available space in vacant properties, including the 80% vacant MOB in Georgia and properties in Las Vegas and Phoenix. The Trust expects to finance capital expenditures and dividends through internally generated funds, borrowings, or equity issuances.
Key Risks and Contingencies:
- Concentration Risk: Approximately 62% of consolidated revenue is derived from UHS hospital facilities. UHS's financial health, including its increased indebtedness from the acquisition of Psychiatric Solutions, Inc., directly impacts the Trust's revenue.
- Regulatory Issues: Southwest Healthcare System (a UHS subsidiary operating Inland Valley Regional Medical Center, a Trust property) is under review by CMS and the California Department of Public Health regarding Medicare certification and licensure. Failure to achieve compliance could materially impact bonus rentals and property value.
- Refinancing Risk: Several LLC mortgages mature in 2011 and 2012. While management believes terms are within market criteria, inability to refinance on reasonable terms could require increased equity investment.
- Economic Conditions: Deterioration in economic conditions could lead to higher unemployment and uninsured rates, reducing patient volumes and occupancy at medical office buildings.
Investor Verification Checklist
- UHS Financial Health: Verify the financial stability of Universal Health Services, Inc., given its status as the primary tenant and Advisor.
- Southwest Healthcare System Status: Monitor the outcome of the CMS and CDPH reviews for Inland Valley Regional Medical Center, as non-compliance could affect bonus rent revenue.
- Occupancy Rates: Track leasing progress for the vacant MOB in Georgia and the under-occupied properties in Las Vegas and Phoenix.
- Debt Maturities: Review the refinancing status of LLC mortgages maturing in 2011 (e.g., Santa Fe Scottsdale, Banburry Medical Properties).
- Dividend Coverage: Assess the sustainability of the $0.605 per share dividend given the decline in operating cash flow and net income.