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, 2009
Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, and medical office buildings (MOBs). As of June 30, 2009, the portfolio consisted of 50 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 | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $8.02 million | $15.90 million |
| Net Income | $4.80 million | $9.45 million |
| Earnings Per Share (Diluted) | $0.40 | $0.80 |
| Funds from Operations (FFO) | $8.46 million | $16.55 million |
| Net Cash Provided by Operating Activities | N/A | $12.33 million |
| Total Assets | $231.53 million (as of June 30, 2009) | N/A |
| Total Liabilities | $90.68 million (as of June 30, 2009) | N/A |
| Shareholders' Equity | $140.63 million (as of June 30, 2009) | N/A |
| Debt Outstanding | $52.3 million (Line of Credit) + $35.5 million (Mortgages/Loans) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by approximately $0.8 million (11%) for the quarter and $1.7 million (12%) for the six-month period compared to 2008. This growth was driven primarily by new MOBs (Palmdale Medical Plaza and Summerlin Hospital MOB III) and favorable changes at consolidated MOBs.
- Net Income Increase: Net income rose by $0.64 million (15%) for the quarter and $1.13 million (14%) for the six-month period. The primary driver was a significant increase in "Equity in income of unconsolidated LLCs," which grew from $0.43 million to $0.96 million for the quarter and from $1.04 million to $1.77 million for the six-month period.
- Expense Increases: Depreciation and amortization increased due to recently opened MOBs. Other operating expenses rose due to the opening of new facilities and increased maintenance costs. Interest expense increased due to higher average outstanding borrowings used to fund LLC investments.
- Balance Sheet: Total assets increased by $10.5 million from December 31, 2008, primarily due to increased investments in LLCs and real estate additions. Line of credit borrowings increased by $13.3 million during the six-month period.
Guidance, Outlook, Risks, and Unusual Items
- Outlook & Risks: Management notes that while general economic deterioration has not yet materially impacted results, continued deterioration could increase unemployment/uninsured rates, potentially lowering occupancy and bonus rentals. Credit market instability poses a risk to future financing.
- UHS Relationship Risk: Approximately 51-52% of consolidated revenue comes from UHS hospital facilities. UHS is currently under investigation by the DOJ regarding Medicare/Medicaid compliance at its South Texas Health System affiliates (including McAllen Medical Center). While UHS has recorded reserves, a settlement or adverse outcome could materially impact bonus rentals and property values.
- Development Pipeline: The Trust is actively developing several MOBs (e.g., Texoma Medical Plaza, Auburn Medical Office Building II) with significant equity and debt commitments. Some projects are consolidated, while others are accounted for under the equity method.
- Liquidity: The Trust maintains a $100 million revolving credit facility with $31.1 million available as of June 30, 2009. Management believes operating cash flow is sufficient to meet REIT distribution requirements.
- Dividends: A dividend of $0.595 per share was declared and paid on June 30, 2009.
Key Facts for Investor Verification
- Concentration Risk: Verify the financial health of Universal Health Services, Inc. (UHS), as over 50% of consolidated revenue is derived from UHS facilities, and UHS serves as the Trust's Advisor.
- Legal Contingency: Monitor the status of the DOJ investigation into UHS's South Texas Health System affiliates, which could impact bonus rental revenue from McAllen Medical Center.
- Debt Maturities: Review the maturity schedule of the $35.5 million in mortgage and construction loans, noting that the Summerlin Hospital MOB III construction loan matures in December 2009.
- LLC Performance: Assess the performance of unconsolidated LLCs, which contributed significantly to the increase in net income via equity earnings.
- Development Capital: Track the funding requirements for ongoing MOB construction projects, which have consumed significant cash in investing activities.