Business Context and Reporting Period
Company: Universal Health Realty Income Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, behavioral healthcare facilities, and medical office buildings (MOBs). As of March 31, 2010, the portfolio consisted of 52 real estate investments or commitments across 15 states. A significant portion of revenue is derived from leases with Universal Health Services, Inc. (UHS), which also serves as the Trust's Advisor.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $7,644,000 | $7,880,000 |
| Net Income | $4,527,000 | $4,646,000 |
| Diluted EPS | $0.37 | $0.39 |
| Funds from Operations (FFO) | $8,492,000 | $8,091,000 |
| Net Cash from Operating Activities | $6,052,000 | $5,735,000 |
| Net Cash Used in Investing Activities | ($11,557,000) | ($9,500,000) |
| Net Cash from Financing Activities | $3,634,000 | $4,677,000 |
| Cash and Cash Equivalents (End of Period) | $1,167,000 | $1,530,000 |
| Total Assets | $223,117,000 | $228,825,000 |
| Total Liabilities | $84,652,000 | $87,641,000 |
| Line of Credit Borrowings | $59,900,000 | $48,800,000 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $236,000 (3.0%) compared to Q1 2009. This was driven by a decrease in base rental income from UHS facilities ($3.29M vs $3.46M) and tenant reimbursements from non-related parties.
- Net Income Decrease: Net income fell by $119,000 (2.6%) to $4.53 million. The decline was primarily attributed to a decrease in equity income from unconsolidated LLCs and lower total revenues, partially offset by a reduction in net interest expense.
- Deconsolidation Impact: The Summerlin Medical Office Building III was deconsolidated effective January 1, 2010, as the master lease threshold was met. It is now accounted for under the equity method. This change had no material impact on net income but affected cash flow presentation.
- Investing Activity: Net cash used in investing activities increased to $11.6 million (from $9.5 million) due to significant advances to LLCs ($7.7 million) and equity investments ($2.4 million), alongside a $1.9 million cash decrease due to the deconsolidation of the Summerlin III LLC.
- Debt Utilization: Borrowings on the revolving line of credit increased by $11.1 million to fund investments and advances to LLCs. Total line of credit borrowings stood at $59.9 million.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: A quarterly dividend of $0.60 per share ($7.3 million aggregate) was declared and paid on March 31, 2010.
- Regulatory Risk (Southwest Healthcare System): UHS subsidiary Southwest Healthcare System (SWHCS) received notification from CMS of an intent to terminate its Medicare provider agreement effective June 1, 2010, and from the California Department of Public Health (CDPH) of a plan to revoke its hospital license. UHS intends to appeal. Failure to resolve these matters could materially adversely affect bonus rentals and property values for the Inland Valley facility (book value $19.5 million).
- Healthcare Reform: The passage of the Patient Protection and Affordable Care Act (PPACA) introduces uncertainty regarding reimbursement levels and operational costs for facility operators, which could impact future revenues.
- Asset Impairment Watch: The Trust noted a potential risk regarding the Southern Crescent Centers I and II in Georgia. A master lease expires in June 2010, and if not renewed, annual revenues could be reduced by up to $1 million starting July 2010.
- Advisory Fee Increase: The advisory fee to UHS was increased from 0.60% to 0.65% of average invested real estate assets effective 2010, resulting in an additional annual expense of approximately $134,000.
Investor Verification Checklist
- UHS Dependency: Verify the financial health of Universal Health Services, Inc., as UHS facilities accounted for approximately 54% of consolidated revenue in Q1 2010.
- SWHCS Regulatory Status: Monitor the outcome of the appeals regarding the Medicare termination and license revocation for Southwest Healthcare System, which impacts the Inland Valley Regional Medical Center.
- Debt Maturities: Review the schedule of mortgage maturities for unconsolidated LLCs, with $38.6 million due in 2010, to assess refinancing risks.
- Lease Expirations: Confirm the status of the master lease renewal for Southern Crescent Centers I and II, expiring June 2010, which poses a potential $1 million annual revenue risk.
- Liquidity Position: Assess the $14.7 million remaining capacity on the $97.35 million revolving credit facility against upcoming capital commitments and debt maturities.