Universal Health Realty Income Trust — Q3 2015 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare real estate investment trust investing in hospitals, free-standing emergency departments, medical office buildings, childcare centers and other human-service facilities. The filing covers the three and nine months ended September 30, 2015; financial statements are unaudited.
At September 30, 2015, the portfolio comprised 62 investments in 18 states: six hospitals, three free-standing emergency departments, 49 medical office buildings and four preschool or childcare centers. UHS is the principal tenant, advisor and employer of the Trust’s officers. UHS hospital leases represented approximately 25% of consolidated revenue for both the quarter and nine-month period.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $15.686 million | $15.258 million | $47.937 million | $43.863 million |
| Net income | $3.639 million | $28.141 million | $19.339 million | $35.323 million |
| Basic EPS | $0.27 | $2.18 | $1.46 | $2.74 |
| FFO | $9.404 million | $8.712 million | $28.378 million | $26.415 million |
| AFFO | $9.404 million | $8.910 million | $28.582 million | $26.716 million |
| Operating cash flow | Not separately provided | Not separately provided | $27.300 million | $23.889 million |
Reported net margin was approximately 23.2% in Q3 2015 and 40.3% for the first nine months, compared with approximately 184.4% and 80.5%, respectively, in the prior periods. The comparisons are distorted by large nonrecurring gains recorded in 2014.
Q3 operating expenses were $10.593 million, including $5.424 million of depreciation and amortization and $708,000 of advisory fees to UHS. Nine-month operating expenses were $33.009 million, including $16.817 million of depreciation and amortization and $2.067 million of advisory fees.
Material changes versus the prior comparable period
- Q3 revenue increased 2.8% year over year, while nine-month revenue increased 9.3% as reported. On an adjusted basis that adds the pre-consolidation results of certain LLCs to 2014, Q3 revenue decreased $96,000 and nine-month revenue increased $493,000.
- Q3 net income declined $24.5 million and nine-month net income declined $16.0 million, primarily because 2014 included a $25.1 million fair-value gain on the purchase of minority interests in majority-owned LLCs.
- Nine-month 2015 net income included an $8.742 million gain on a property exchange involving Sheffield Medical Building and two Atlanta-area medical office buildings.
- FFO increased 8.0% in Q3 and 7.4% for the nine months. AFFO increased 5.5% in Q3 and 7.0% for the nine months.
- Operating cash flow increased $3.411 million, or approximately 14.3%, for the first nine months.
- The Trust acquired two Texas free-standing emergency departments from UHS for approximately $12.8 million and acquired the Haas Medical Office Park for approximately $4.1 million. It also completed a property exchange and recorded the related gain.
Balance sheet, debt and liquidity
| Metric | September 30, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $438.652 million | $428.866 million |
| Net real estate investments | $393.236 million | $380.109 million |
| Cash and cash equivalents | $3.651 million | $3.861 million |
| Revolving credit borrowings | $114.350 million | $89.750 million |
| Mortgage and other notes payable | $115.853 million | $123.405 million |
| Total liabilities | $239.411 million | $224.285 million |
| Total equity | $199.241 million | $204.581 million |
- In March 2015, the Trust entered into a new $185 million revolving credit facility maturing in four years, with a one-year extension option and a potential $50 million capacity increase subject to lender approval.
- At September 30, 2015, revolving borrowings were $114.4 million, letters of credit were $5.2 million and available capacity was $65.5 million. The applicable LIBOR margin was 1.625% and the unused commitment fee was 0.25%.
- Fifteen consolidated mortgages were non-recourse to the Trust, with aggregate balances of approximately $115.5 million. All require monthly principal payments and include balloon payments at maturity.
- Management reported compliance with all credit agreement covenants. Reported covenant measures included total leverage of 44.2%, secured leverage of 20.8%, unencumbered leverage of 35.3% and fixed-charge coverage of 3.2x.
- In October 2015, the Trust borrowed $22.8 million under its credit facility to repay a $22.7 million mortgage of an unconsolidated LLC; the advance was made under a short-term member loan bearing 5.29% interest and maturing April 10, 2016.
Dividends, investments and cash flows
The Trust declared and paid $8.5 million, or $0.640 per share, in third-quarter dividends and $25.5 million, or $1.915 per share, during the first nine months. Management stated that operating cash flows, cash, available credit and capital-market access should provide sufficient resources for the next twelve months, including required REIT distributions.
- Investing cash outflows were $19.887 million for the first nine months, including $16.765 million for property acquisitions and $3.667 million for real estate additions.
- Financing cash outflows were $7.623 million, reflecting $24.6 million of net revolver borrowings, $7.383 million of mortgage repayments, $1.0 million of financing costs and $25.494 million of dividends.
- There were no shares issued under the ATM program during the first nine months of 2015. Since inception, the program had generated approximately $25.6 million of net proceeds from 580,900 shares.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance was provided.
- Management expects to fund capital expenditures, acquisitions and dividends through operating cash flow, available revolver capacity, potential equity issuance, refinancing and other debt sources, but cautioned that financing may not be available on acceptable terms.
- UHS lease renewals and purchase options are significant future considerations. Three acute-care hospital leases expire in December 2016, and UHS may renew or purchase facilities at appraised fair value. The two newly acquired FED leases have ten-year initial terms with renewal options and purchase rights.
- The Trust is materially dependent on UHS as tenant, advisor and provider of executive personnel. This creates concentration and related-party risks, including potential conflicts of interest.
- Key operating risks include healthcare reimbursement and regulatory changes, Medicare and Medicaid reductions, healthcare reform, tenant or operator performance, occupancy and rental-rate declines, competition, interest-rate changes, refinancing risk and the ability to maintain REIT qualification.
- Five unconsolidated LLCs had approximately $51.7 million of non-recourse mortgage debt. The Trust had additional equity and debt funding commitments to certain LLCs.
- Interest-rate caps with total notional value of $30 million expire in January 2017; no payments had been received under the caps through September 30, 2015.
- Management stated that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether UHS renews or exercises purchase options for the three hospital leases expiring in December 2016 and the related effect on rental revenue.
- Post-quarter refinancing and repayment activity, including the $22.8 million member loan and October 2015 mortgage maturities.
- Revolver utilization, remaining borrowing capacity, interest-rate exposure and compliance with financial covenants.
- Recurring FFO and AFFO performance excluding the 2015 property-exchange gain and the 2014 fair-value gains.
- Coverage of the $1.915 per-share nine-month dividend by recurring operating cash flow and future capital requirements.
- Performance, funding commitments and debt maturities of the five unconsolidated LLCs.
- Concentration of revenue and advisory relationships with UHS, including related-party governance safeguards.