UNIVERSAL HEALTH REALTY INCOME TRUST quarterly report, Q1 FY2015

Universal Health Realty Income Trust — Q1 2015 Form 10-Q Summary

Business Context and Reporting Period

Unaudited quarterly results for the three months ended March 31, 2015. The Trust is a healthcare and human-services REIT owning or investing in hospitals, free-standing emergency departments, medical office buildings and childcare facilities. As of March 31, 2015, the portfolio comprised 61 investments across 18 states. Five jointly owned medical-office-building LLCs remained unconsolidated and were accounted for under the equity method.

Universal Health Services, Inc. (UHS) is the principal tenant and, through a subsidiary, the Trust’s advisor. UHS hospital leases represented approximately 25% of consolidated revenue in Q1 2015, and UHS-related entities also occupied portions of other properties.

Key Financial Metrics

Metric	Q1 2015	Q1 2014	Change
Total revenue	$16.2 million	$14.3 million	+$1.9 million
Net income	$3.7 million	$3.8 million	-$0.1 million
Basic and diluted EPS	$0.28	$0.29	-$0.01
Income before equity income, interest and gains	$5.2 million	$4.9 million	+$0.4 million
Funds from operations	$9.5 million	$8.9 million	+$0.6 million
Adjusted funds from operations	$9.6 million	$8.9 million	+$0.6 million
Net cash from operating activities	$8.2 million	$7.0 million	+$1.3 million

Reported net income margin was approximately 22.8% versus 26.4% in the prior-year quarter. The decline primarily reflected the absence of a $316,000 fair-value gain recorded in Q1 2014 and higher depreciation and amortization. On an “as adjusted” basis for the 2014 consolidation changes, revenue increased $416,000 and net income declined $78,000.

Base rental revenue from non-related parties increased to $8.9 million from $7.2 million.
UHS bonus rental revenue increased to $1.2 million from $1.2 million, an increase of approximately $68,000 on an as-adjusted basis.
Depreciation and amortization increased to $5.5 million from $4.8 million.
Advisory fees paid or payable to UHS increased to $666,000 from $610,000.
Net interest expense increased on a reported basis to $2.1 million from $2.0 million, but decreased on an as-adjusted basis due partly to mortgage repayments and lower-cost revolving-credit borrowings.

Balance Sheet, Debt and Liquidity

Total assets were $441.6 million at March 31, 2015, compared with $428.9 million at December 31, 2014.
Cash and cash equivalents were $4.0 million.
Revolving-credit borrowings were $116.0 million, compared with $89.8 million at year-end 2014.
Fifteen non-recourse mortgages totaled $117.1 million, excluding a $468,000 debt premium. Consolidated debt therefore totaled approximately $233.1 million, excluding the debt premium.
On March 27, 2015, the Trust replaced its prior facility with a $185 million revolving credit agreement maturing in four years, with a one-year extension option and a potential $50 million capacity increase.
Available revolver capacity was $63.1 million after borrowings and $5.9 million of letters of credit. The applicable March 31, 2015 LIBOR margin was 1.625% and the unused commitment fee was 0.25%.
The Trust was in compliance with all debt covenants. Reported total leverage was 48.9%, secured leverage was 23.2%, unencumbered leverage was 38.8% and fixed-charge coverage was 3.1x.

Cash Flow, Dividends and Capital Allocation

Operating cash flow was $8.2 million, compared with $7.0 million in Q1 2014.
Investing cash use was $20.5 million, including $16.8 million for property acquisitions, $2.2 million for real-estate additions and $2.3 million for the purchase of minority interests in majority-owned LLCs.
Financing cash flow was $12.3 million, primarily from $26.3 million of net revolving-credit borrowings, partly offset by $5.7 million of mortgage repayments, $913,000 of financing costs and $8.4 million of dividends.
The Trust declared and paid a quarterly dividend of $0.635 per share, totaling $8.4 million, compared with $0.625 per share and $8.1 million in Q1 2014.
Operating cash generated by properties was approximately $8.2 million, about $200,000 below dividends paid during the quarter; management stated that dividends and capital requirements are funded from aggregate cash flows, borrowings, equity issuance and other sources.

Material Changes Versus the Prior Comparable Period

Q1 2015 revenue growth reflected acquisitions, increased bonus rent and tenant reimbursements, partly offset by the loss of revenue from The Bridgeway, sold to UHS on December 31, 2014 for $17.3 million.
The Trust acquired the Haas Medical Office Park in Iowa for approximately $4.1 million and two UHS-operated Texas emergency departments for approximately $12.8 million. The emergency departments generate approximately $900,000 of annual initial rent and have ten-year leases with six five-year renewal options.
Higher depreciation and amortization followed the 2014 purchase of minority interests in six LLCs and the resulting consolidation of those properties.
The Trust entered into a larger, longer-dated revolving credit facility and increased borrowings to fund acquisitions and repay mortgages.
No shares were issued under the ATM program during Q1 2015, although approximately $1.1 million of proceeds from shares issued in late 2014 were received during the quarter.

Outlook, Risks and Unusual Items

Management did not provide numerical earnings or revenue guidance. Management believes operating cash flow, cash, available revolver capacity and access to capital markets are sufficient to fund operations, acquisitions, capital expenditures, debt obligations and REIT distributions for the next twelve months, while cautioning that future financing may not be available on acceptable terms.

Two unconsolidated LLC mortgages, totaling approximately $23.1 million and $5.5 million, mature in October 2015 and August 2017, respectively. The Trust expects the October 2015 loan to be refinanced; failure to refinance could require additional equity or revolver borrowings.
UHS may renew or purchase certain leased hospitals and emergency departments at lease expirations. Nonrenewals or purchases could reduce future rental revenue.
The Bridgeway disposition removed approximately $1.1 million of annual historical revenue, operating cash flow and FFO contribution.
UHS concentration, the related-party advisory relationship and the fact that all officers are UHS employees create tenant, governance and conflict-of-interest risks.
Healthcare reimbursement changes, Medicare and Medicaid reductions, healthcare reform developments, operator performance, competition, occupancy, rental rates and interest rates could adversely affect property values and cash flows.
Two California medical-office buildings could not obtain earthquake insurance at economically favorable rates.
The Trust’s interest-rate caps had a combined $30 million notional amount and expire in January 2017; no counterparty payments had been received through March 31, 2015.
The Trust remains subject to REIT distribution requirements and must distribute at least 90% of real-estate investment taxable income to maintain REIT status.

Important Facts for Investors to Verify

Confirm the October 2015 refinancing status and terms for the Arlington Medical Properties mortgage, including any required Trust funding.
Monitor UHS lease renewals, purchase options and the effect of The Bridgeway sale on recurring revenue and FFO.
Reconcile reported revenue, FFO and AFFO with the Trust’s treatment of consolidated versus unconsolidated LLCs.
Assess dividend coverage using recurring operating cash flow after capital expenditures, debt repayments and acquisition spending.
Track revolver utilization, covenant headroom, interest-rate exposure and the $5.9 million of outstanding letters of credit.
Evaluate exposure to UHS as tenant, advisor and employer of the Trust’s officers, including related-party governance safeguards.