Universal Health Realty Income Trust: 2020 Form 10-K Summary
Business Context and Reporting Period
Universal Health Realty Income Trust is a Maryland healthcare-focused REIT. The filing covers the fiscal year ended December 31, 2020, although the request metadata identifies 2020 Q4. The Trust owned or had commitments in 72 healthcare and human-service properties across 20 states as of February 25, 2021, including hospitals, medical office buildings, free-standing emergency departments, and childcare centers.
The portfolio is managed under an advisory agreement with UHS of Delaware, Inc., a subsidiary of Universal Health Services, Inc. UHS-related tenants generated approximately 33% of consolidated revenue in 2020, and UHS owned approximately 5.7% of the Trust’s shares.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $78.0 million | $77.2 million | Up 1.1% |
| Net income | $19.4 million | $19.0 million | Up $0.5 million |
| Diluted EPS | $1.41 | $1.38 | Up $0.03 |
| Funds from operations | $46.2 million | $44.0 million | Up 5.0% |
| Diluted FFO per share | $3.36 | $3.20 | Up $0.16 |
| Cash flow from operating activities | $44.2 million | $42.7 million | Up $1.6 million |
| Dividends paid | $38.0 million | $37.4 million | Up $0.6 million |
| Net real estate investments | $443.8 million | $432.5 million | Up $11.3 million |
| Total assets | $494.0 million | $488.8 million | Up $5.2 million |
| Total indebtedness | $295.1 million | $273.7 million | Up $21.4 million |
Net income represented approximately 24.9% of revenue, while FFO represented approximately 59.3% of revenue. The filing does not present a single consolidated operating margin measure.
Revenue included $24.6 million from UHS facilities and $51.6 million from non-related parties. UHS bonus rent increased to $6.1 million from $5.6 million. The annual dividend increased to $2.76 per share from $2.72.
Cash and cash equivalents were $5.7 million at year-end. The $350 million revolving credit facility had $236.2 million drawn, $5.6 million of letters of credit outstanding, and $108.2 million of available capacity. The facility matures in March 2022, subject to extension options for the Revolving A Facility. Consolidated non-recourse mortgage debt totaled approximately $58.9 million.
The Trust reported compliance with all credit facility covenants. At December 31, 2020, total leverage was 44.8%, unencumbered leverage was 41.4%, and fixed-charge coverage was 4.7x against covenant limits of less than 60%, less than 60%, and greater than 1.50x, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly despite the full-year effect of two hospital lease expirations in 2019. Corpus Christi and Evansville remained vacant throughout 2020, reducing 2020 revenue by approximately $2.0 million versus the prior comparable period.
- Interest expense declined to $8.3 million from $10.5 million, primarily because the average borrowing cost under the revolving credit agreement declined to 1.8% from 3.5%, partly offset by higher average borrowings.
- 2019 included $2.0 million of gains from real estate sales; there were no comparable gains in 2020.
- Investing cash outflows increased to $27.2 million from $16.5 million, primarily due to $28.3 million of real estate additions and $2.3 million for the Sand Point Medical Properties acquisition.
- Capital activity included approximately $22.2 million of construction costs for the Clive, Iowa behavioral health hospital. The 100-bed facility was substantially completed in December 2020, with an estimated initial annual rent of approximately $2.5 million.
- The Sand Point Medical Properties building in Michigan was acquired for approximately $2.2 million and was fully leased under a 15-year double-net lease.
- The Trust amended its revolving credit agreement in June 2020, increasing commitments from $300 million to $350 million, and began a $100 million ATM equity program. Approximately $270,000 of net proceeds was raised under the ATM program during 2020.
- Medical office building leasing activity included 39 new or renewed leases covering approximately 30% of the relevant rentable square footage. Renewal rates decreased approximately 1% from expiring leases, while tenant improvement costs increased to approximately $18 per square foot from $15.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that COVID-19 did not have a material adverse effect on 2020 results and that tenants representing approximately 99% of occupied square footage had paid rent through December 31, 2020. However, the filing warns that future tenant operations, rent collections, bonus rent, occupancy, property values, refinancing, and dividends could be adversely affected.
- COVID-19-related CARES Act grants received by UHS hospitals contributed to bonus rent recognized in 2020. The filing does not provide a separate quantified amount of bonus rent attributable to these grants.
- UHS is considering terminating or not renewing the Southwest Healthcare System, Inland Valley Campus lease at its December 31, 2021 expiration. UHS may propose substitution properties of substantially equivalent fair value or exercise its purchase option. No outcome is assured.
- Wellington Regional Medical Center and Kindred Hospital Chicago Central also have leases scheduled to expire in 2021. Kindred did not generate sufficient operating income to cover rent in 2020 or 2019, and renewal at current rates is uncertain.
- UHS may renew, purchase, or decline to renew certain facilities, potentially reducing future revenue if replacement leases or reinvestment returns are less favorable.
- The Trust remains highly dependent on UHS, government healthcare reimbursement, and healthcare-sector operating performance. Changes to Medicare, Medicaid, the Affordable Care Act, price-transparency requirements, surprise-billing rules, or other regulation could affect tenants’ ability to pay rent.
- The $236.2 million revolving credit balance represents a significant refinancing exposure at or before March 2022. The filing also identifies LIBOR phaseout and transition risk for the revolving facility and interest-rate derivatives.
- The Trust had five unconsolidated LLC or LP investments with non-controlling ownership interests ranging from 33% to 95%. These entities had $39.7 million of non-recourse third-party debt, including construction and refinancing obligations.
- Two hospital properties remained vacant following 2019 lease expirations, creating ongoing carrying costs and potential renovation or re-leasing expenditures.
- The audit report was unqualified. The critical audit matter involved assessing the carrying value of net real estate investments, which totaled $443.8 million and depended on assumptions regarding occupancy, rental rates, capital needs, and holding periods.
Most Important Facts for Investors to Verify
- Progress and final terms of the proposed UHS substitution, renewal, or purchase transaction for Inland Valley, and the status of the Wellington and Kindred leases expiring in 2021.
- Ability to refinance or extend the $236.2 million revolving credit balance maturing in March 2022 on acceptable terms.
- Current rent collection, occupancy, tenant credit quality, and any COVID-19-related rent deferrals or concessions.
- Lease-up plans, renovation requirements, and expected economics for the vacant Evansville and Corpus Christi hospital properties.
- Operating performance and debt maturities of the unconsolidated LLCs and LPs, including the $12.3 million Grayson Properties II construction loan and other non-recourse debt.
- Impact of UHS hospital patient volumes and CARES Act-related revenue on future bonus rent.
- Whether the Trust can maintain dividends while funding capital expenditures, acquisitions, debt repayments, and required REIT distributions.
- Exposure to interest-rate changes, LIBOR replacement terms, and the $3.8 million net liability recorded for interest-rate swaps.