Business Context and Reporting Period
Company: Universal Health Realty Income Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
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 September 30, 2008, the portfolio consisted of 48 real estate investments or commitments across 14 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 Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $7.43 million | $21.64 million |
| Net Income | $4.21 million | $12.52 million |
| Diluted EPS | $0.35 | $1.05 |
| Funds from Operations (FFO) | $7.59 million | $22.37 million |
| Net Cash from Operating Activities | N/A | $16.69 million |
| Total Assets | $215.19 million | N/A |
| Total Liabilities | $62.41 million | N/A |
| Shareholders' Equity | $152.63 million | N/A |
| Debt (Line of Credit + Mortgages) | $42.64 million | N/A |
| Cash and Equivalents | $1.53 million | N/A |
Note: Revenue includes base rental, bonus rental, and tenant reimbursements. Interest expense for the nine months ended September 30, 2008, was $1.69 million.
Material Changes vs. Prior Period
- Net Income Decline: Net income for the nine months ended September 30, 2008, decreased by $5.69 million (31%) compared to the same period in 2007. This decline was primarily driven by the absence of one-time gains recorded in 2007, including a $2.27 million gain on the sale of a medical office building (discontinued operations) and a $1.75 million gain from the Chalmette asset exchange.
- Revenue Growth: Total revenues increased slightly by $0.62 million (3%) for the nine-month period compared to 2007, driven by base rental increases and new acquisitions.
- Increased Expenses: Interest expense increased by $0.46 million for the nine-month period due to higher average outstanding borrowings used to fund acquisitions and LLC investments. Depreciation and amortization also increased by $0.54 million.
- Equity in Income of LLCs: Equity in income from unconsolidated limited liability companies decreased by $0.73 million, largely due to reserves established for tenant receivables in Las Vegas MOBs and the absence of a $0.25 million gain on property sales recorded in 2007.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to meet short-term liquidity requirements through working capital and operating cash flows. The Trust maintains a $100 million revolving credit facility with $39.8 million available as of September 30, 2008. Dividends of $0.585 per share were paid in June and September 2008.
Risks and Contingencies
- UHS Dependency: Approximately 56% of consolidated revenues for the nine months ended September 30, 2008, were generated from leases with UHS facilities. UHS is also the Trust's Advisor.
- Government Investigation: UHS is under investigation by the Department of Justice and the Office of Inspector General regarding compliance with Medicare/Medicaid rules at its South Texas Health System affiliates (including McAllen Medical Center). While criminal prosecution against UHS is not currently pursued, the outcome could materially impact bonus rentals and lease renewals.
- Market Conditions: Deteriorating economic and credit market conditions pose risks to occupancy rates at MOBs and the ability to finance future growth.
- Insurance: Three LLCs owning properties in California could not obtain earthquake insurance at economically beneficial rates.
Unusual Items
The 2007 comparative period included significant non-recurring gains: a $2.27 million gain from the sale of the Fresno-Herndon Medical Plaza and a $1.75 million gain from the Chalmette asset exchange. These items are not present in the 2008 results.
Investor Verification Checklist
- UHS Financial Health: Verify the status of the DOJ investigation into UHS's South Texas Health System and its potential impact on McAllen Medical Center's revenue and bonus rent payments.
- Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, specifically the tangible net worth and financial ratio requirements.
- LLC Performance: Review the specific performance of the Las Vegas MOBs where reserves were established for tenant receivables due to clinic closures.
- Lease Renewals: Monitor the upcoming lease expirations for major UHS facilities (e.g., McAllen, Wellington, Inland Valley) scheduled for December 2011.
- Construction Progress: Track the completion and leasing status of new developments, including the Palmdale Medical Plaza and Summerlin Medical Office Building III.