Business Context and Reporting Period
Company: Universal Health Realty Income Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 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 June 30, 2010, the portfolio consisted of 52 real estate investments or commitments across 15 states. A significant portion of 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 (in thousands, except per share) | Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Total Revenues | $7,473 | $8,023 | $15,117 | $15,903 |
| Net Income | $4,274 | $4,802 | $8,801 | $9,448 |
| Diluted EPS | $0.35 | $0.40 | $0.73 | $0.80 |
| Funds from Operations (FFO) | $8,298 | $8,458 | $16,790 | $16,549 |
| Net Cash from Operating Activities | N/A | N/A | $12,311 | $12,273 |
| Total Assets | $225,708 | N/A | N/A | N/A |
| Total Liabilities | $85,558 | N/A | N/A | N/A |
| Shareholders' Equity | $139,955 | N/A | N/A | N/A |
| Debt (Line of Credit + Mortgages) | $67,278 | N/A | N/A | N/A |
Note: Debt figure combines Line of Credit borrowings ($58.8M) and Mortgage notes payable ($8.5M) from the balance sheet. Consolidated LLC debt is non-recourse.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $550,000 (6.9%) for the six months ended June 30, 2010, compared to the prior year. This was primarily due to decreases in base rental and tenant reimbursements at certain MOBs resulting from lower occupancy rates.
- Net Income Decrease: Net income fell by $647,000 (6.9%) for the six-month period. The decline is attributed to a $283,000 reduction in revenues and the absence of certain favorable adjustments recorded in the 2009 period.
- Deconsolidation: 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.
- Acquisitions: During the first six months of 2010, the Trust invested $5.1 million in debt and equity for a 95% interest in an LLC owning the North Valley Medical Plaza in Phoenix, Arizona.
- Dividends: A dividend of $0.605 per share was declared and paid in June 2010.
Outlook, Risks, and Management Commentary
- UHS Dependency: Approximately 54% of consolidated revenue for the six months ended June 30, 2010, was generated from leases with UHS subsidiaries. UHS is also the Trust's Advisor.
- UHS Acquisition Risk: UHS agreed to acquire Psychiatric Solutions, Inc. (PSI), requiring UHS to incur substantial indebtedness ($3.45 billion credit facilities). Management notes that while not directly impacted, UHS's increased leverage could adversely affect its ability to meet lease obligations, potentially reducing Trust revenues.
- Regulatory Issues (Southwest Healthcare System): A UHS subsidiary, Southwest Healthcare System (SWHCS), faced potential termination of its Medicare provider agreement and revocation of its hospital license by the California Department of Public Health. While an agreement with CMS abated the termination action in May 2010, resolution with the state is pending. Failure to resolve could materially impact bonus rentals and property value for the Inland Valley facility (book value $19.4 million).
- Lease Expirations: The master lease for Southern Crescent Centers I and II in Georgia expired in June 2010 and was not renewed. Management expects annual revenues from these properties could be reduced by up to $1 million annually starting July 2010.
- Liquidity: The Trust maintains a $100 million revolving credit facility with $20.75 million available as of June 30, 2010. Management believes operating cash flows are sufficient to fund dividends and capital expenditures.
Investor Verification Checklist
- UHS Financial Health: Verify the status of UHS's acquisition of PSI and its ability to service the new $3.45 billion debt load, given the Trust's heavy reliance on UHS for revenue.
- SWHCS Regulatory Status: Monitor the outcome of the California Department of Public Health license revocation proceedings for Southwest Healthcare System, which impacts the Inland Valley facility.
- Georgia Property Re-leasing: Track the re-leasing progress of the Southern Crescent Centers I and II in Georgia following the master lease expiration to assess the projected $1 million annual revenue reduction.
- Debt Maturities: Review the schedule for mortgage maturities in 2010 and 2011 (totaling over $87 million across consolidated and unconsolidated entities) to assess refinancing risks in the current credit environment.
- FFO vs. Net Income: Compare Funds from Operations ($16.8M for six months) against Net Income ($8.8M) to understand the impact of depreciation and amortization on the Trust's cash-generating ability.