Universal Health Realty Income Trust — Q2 2020 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT investing in and leasing hospitals, behavioral health facilities, medical office buildings, free-standing emergency departments, childcare centers and related properties. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the same periods in 2019.
As of July 31, 2020, the Trust reported 71 real estate investments or commitments in 20 states. UHS-related tenants accounted for approximately 32% of consolidated revenue in both the second quarter and first six months of 2020. A UHS subsidiary also serves as the Trust’s advisor, and the Trust’s officers are UHS employees.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $19.3 million | $19.3 million | $38.5 million | $38.4 million |
| Net income | $4.7 million | $4.3 million | $9.3 million | $8.5 million |
| Diluted EPS | $0.34 | $0.31 | $0.67 | $0.62 |
| FFO | $11.4 million | $11.0 million | $22.6 million | $21.9 million |
| FFO per diluted share | $0.83 | $0.80 | $1.64 | $1.60 |
| Cash flow from operations | Not separately provided | Not separately provided | $23.2 million | $21.5 million |
Q2 net margin was approximately 24.4%, compared with approximately 22.1% in the prior-year quarter. Six-month net margin was approximately 24.0%, compared with approximately 22.0% in 2019. Interest expense declined to $2.0 million in Q2 and $4.3 million for the first six months, primarily because of lower borrowing costs, partially offset by higher average revolving-credit borrowings.
At June 30, 2020, total assets were $486.6 million, cash and cash equivalents were $6.3 million, and total equity was $166.2 million. Net real estate investments were $435.6 million. Dividends declared and paid during the second quarter were approximately $9.5 million, or $0.69 per share; six-month dividends were $18.9 million, or $1.375 per share.
Debt, liquidity and capital resources
- The revolving credit facility was expanded from $300 million to $350 million in June 2020. It matures in March 2022 and includes two possible six-month extensions.
- Revolving credit borrowings were $221.3 million, with $5.6 million of letters of credit and $123.1 million of available capacity at June 30, 2020.
- Non-recourse mortgage notes payable were $59.9 million, compared with $60.7 million at December 31, 2019. Total debt carrying value was approximately $281.5 million; estimated fair value was $283.6 million.
- The Trust reported compliance with all debt covenants. Total leverage was 43.6%, secured leverage 9.0%, unencumbered leverage 40.2%, and fixed-charge coverage 4.3x.
- Cash provided by operations exceeded dividends paid by approximately $4.3 million during the first six months of 2020.
- The Trust initiated a $100 million at-the-market equity program. It issued 2,704 shares in the second quarter for approximately $270,000 of net proceeds and incurred approximately $435,000 of program-related fees and expenses.
Material changes versus the prior comparable period
- Revenue was essentially flat year over year: down 0.2% in Q2 and up 0.1% for the first six months.
- Net income increased $439,000 in Q2 and $781,000 for the first six months. Lower interest expense more than offset lost revenue from two hospitals whose leases expired in 2019 and which remained vacant.
- FFO increased $396,000 in Q2 and $663,000 for the first six months, despite the two vacant hospitals.
- Operating cash flow increased $1.8 million to $23.2 million, while investing cash use increased to $11.3 million from $3.0 million, primarily due to construction and equity investments.
- Real estate additions were $13.3 million, including $10.1 million for the Clive, Iowa behavioral health hospital and improvements to medical office buildings.
- Accumulated other comprehensive loss increased to $4.9 million from income of $1.0 million at year-end 2019, primarily reflecting unrealized losses on cash-flow hedges.
Development, outlook, risks and unusual items
The Trust is constructing a 108-bed behavioral health hospital in Clive, Iowa, with an estimated total project cost of $37.5 million and estimated initial annual rent of approximately $2.7 million. Completion was expected in late 2020 or early 2021. The Trust had invested approximately $17.4 million as of June 30, 2020. It also owns a 95% non-controlling interest in the Texoma Medical Plaza II project in Denison, Texas, which was scheduled for completion in late 2020; 61% of the space was leased after a new third-party lease was executed.
Management stated that COVID-19 had not materially adversely affected results through June 30, 2020. Tenants representing approximately 98% of occupied square footage had paid June rent, and substantially all tenants had resumed operations. However, four childcare centers were closed from mid-March to mid-June, rent-deferral requests were under review, and management warned that the pandemic could materially adversely affect future results through reduced healthcare volumes, tenant liquidity, rent collections, bonus rents, leasing activity, construction timing and refinancing conditions.
Bonus rent from the three UHS-leased acute-care hospitals included amounts attributable to CARES Act grants. Future bonus rent could decline if patient volumes and hospital revenues weaken. The Trust also identified significant concentration risk related to UHS, lease-renewal and purchase options, two vacant hospitals, healthcare reimbursement and regulatory changes, interest rates, refinancing needs, real estate conditions, litigation involving UHS, and continued access to capital.
The Trust entered into three interest-rate swaps with aggregate notional amounts of $140 million. Their fair value was a net liability of $4.9 million at June 30, 2020, and the filing estimates that a 1% change in applicable interest rates would affect net income by approximately $812,500. Management believes existing cash, operating cash flow, available credit and capital-market access are sufficient for the next 12 months, but notes that financing may not be available on acceptable terms.
Most important facts for investors to verify
- Whether COVID-19 causes sustained tenant defaults, rent deferrals, reduced occupancy or lower UHS hospital bonus rents after June 30, 2020.
- The leasing or disposition strategy and carrying costs for the vacant Corpus Christi and Evansville hospital properties.
- UHS tenant concentration, upcoming hospital lease expirations in December 2021, renewal terms and purchase options.
- Progress, final costs, completion dates and lease commencements for the Clive behavioral health hospital and Texoma Medical Plaza II.
- Availability and pricing of refinancing before the March 2022 revolving-credit maturity and the impact of variable interest rates.
- Dividend sustainability relative to operating cash flow, required REIT distributions, capital commitments and debt repayments.
- The potential effect of the $4.9 million derivative liability and future changes in LIBOR or successor reference rates.