UNIVERSAL HEALTH REALTY INCOME TRUST quarterly report, Q1 FY2021

Universal Health Realty Income Trust — Q1 2021 Form 10-Q Summary

Business context and reporting period

Universal Health Realty Income Trust is a healthcare real estate investment trust that owns or invests in acute-care, behavioral-health and specialty hospitals, free-standing emergency departments, medical office buildings, and childcare facilities. The filing covers the unaudited three months ended March 31, 2021, with comparison to March 31, 2020. As of April 30, 2021, the portfolio included 72 investments or commitments across 20 states.

Universal Health Services, Inc. and its subsidiaries are significant related parties: UHS-related tenants generated approximately 36% of consolidated revenue in Q1 2021, and a UHS subsidiary provides advisory and management services. UHS owned approximately 5.7% of the Trust’s shares.

Financial performance and key metrics

Metric	Q1 2021	Q1 2020	Change
Total revenue	$20.699 million	$19.207 million	+7.8%
Net income	$5.586 million	$4.554 million	+22.7%
Basic and diluted EPS	$0.41	$0.33	+$0.08
Net income margin	27.0%	23.7%	+3.3 percentage points
Funds from operations	$12.735 million	$11.220 million	+13.5%
FFO per diluted share	$0.92	$0.82	+$0.10
Cash provided by operating activities	$11.250 million	$10.137 million	+11.0%

UHS-facility lease revenue increased to $7.132 million from $5.881 million, including bonus rent of $1.695 million versus $1.380 million.
Non-related-party lease revenue increased to $13.092 million from $12.842 million.
Interest expense declined to $2.133 million from $2.309 million, primarily because of a lower average borrowing cost, partially offset by higher average borrowings.
Other comprehensive income was $3.348 million, compared with an other comprehensive loss of $4.671 million in Q1 2020, reflecting changes in the fair value of cash-flow hedges.
Cash and cash equivalents were $6.171 million at March 31, 2021, compared with $5.742 million at December 31, 2020.

Liquidity, debt and capital resources

The $350 million revolving credit facility had $247.650 million outstanding and $5.6 million of letters of credit at March 31, 2021, leaving $96.7 million of available capacity. The facility is scheduled to mature in March 2022, subject to extension options for the Revolving A Facility.
Non-recourse mortgage notes payable totaled $58.403 million, net of financing fees and debt premium. Total debt carrying value was approximately $306.4 million; estimated fair value was approximately $309.2 million.
The Trust was in compliance with all debt covenants. Key March 31, 2021 measures included total leverage of 45.3% versus a maximum of 60%, secured leverage of 8.5% versus 30%, unencumbered leverage of 43.3% versus 60%, fixed-charge coverage of 4.8x versus a minimum of 1.50x, and tangible net worth of $147.654 million versus a minimum of $125 million.
Investing cash outflows were $12.218 million, including $6.974 million of real estate additions, a $3.5 million member loan to an unconsolidated LP, $1.544 million of LLC investments and a $200,000 property deposit.
Financing activities provided $1.397 million, primarily from $11.450 million of net revolving-credit borrowings, offset by $9.564 million of dividends and $510,000 of mortgage repayments.
The Trust declared and paid $0.695 per share, or approximately $9.6 million, in Q1 2021 versus $0.685 per share, or approximately $9.4 million, in Q1 2020. Operating cash flow exceeded dividends paid by approximately $1.7 million.
Management stated that operating cash flow, cash, available revolver capacity and capital-market access are expected to provide sufficient resources for operating, investing and financing needs over the next 12 months, including required REIT distributions. No assurance was provided that future financing will be available on acceptable terms.

Material changes versus the prior comparable period

Revenue, net income, EPS, FFO and operating cash flow all improved year over year, driven principally by the completed Clive Behavioral Health facility, higher UHS bonus rent and increased income at various properties.
Average revolving-credit borrowings increased to $239.2 million from $213.2 million, while the average borrowing cost declined to 1.3% from 2.8%.
The Clive Behavioral Health facility was substantially completed in December 2020 and began generating lease revenue; it contributed to both revenue growth and higher depreciation and amortization.
There were no acquisitions or dispositions in either Q1 2021 or Q1 2020.
The Trust invested $3.5 million in an unconsolidated LP loan after the LP repaid a $4.7 million mortgage at maturity in February 2021. The LP’s loan from the Trust bears interest at 7.25% and matures March 1, 2023.
No shares were issued under the $100 million ATM program during Q1 2021. Since inception, 2,704 shares had been issued for approximately $270,000 of net proceeds.

Outlook, risks, contingencies and unusual items

No quantitative earnings or revenue guidance was provided.
UHS plans to terminate the lease on Southwest Healthcare System’s Inland Valley Campus at December 31, 2021. UHS may purchase the property at appraised fair value or exchange it for proposed substitute properties. The Independent Trustees approved the proposed substitution subject to due diligence and definitive agreements. The property generated approximately $1.1 million of lease revenue in Q1 2021.
Leases on Wellington Regional Medical Center and the Inland Valley Campus are scheduled to expire in December 2021. UHS has notified the Trust that it does not intend to renew the Inland Valley lease, and the Trust cannot assure renewal of other UHS leases at current or fair-market rates.
The lease on Kindred Hospital Chicago Central expires December 31, 2021, and the tenant has notified the Trust that it does not intend to renew. The facility generated approximately $390,000 of Q1 2021 lease revenue.
Hospital properties in Evansville, Indiana, and Corpus Christi, Texas, remained vacant. Continued vacancies, lower replacement rents or required renovation expenditures could materially reduce future results.
COVID-19 did not materially affect operations or financial results in Q1 2021 according to the filing, but management continues to identify risks involving tenant patient volumes, bonus rent, collections, occupancy, staffing, reimbursement, capital access and refinancing.
Interest-rate exposure remains material. The Trust had three interest-rate swaps with aggregate notional amounts of $140 million and a net fair-value liability of $467,000. Management estimated that a 1% change in interest rates would affect net income by approximately $1.1 million, based on debt outstanding at March 31, 2021.
UHS concentration, related-party governance and potential conflicts of interest are significant structural risks because UHS is both a major tenant and the Trust’s advisor and provides its officers.
Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting. The filing states that there were no material changes to the risk factors disclosed in the 2020 Form 10-K.

Important facts for investors to verify

Completion of definitive agreements and due diligence for the proposed Inland Valley Campus property substitution, including valuation and expected rental economics.
Renewal, replacement leasing or potential purchase of the UHS hospital and FED properties with leases expiring in 2021 and 2026.
Re-leasing progress and expected economics for Kindred Hospital Chicago Central and the two long-vacant hospital properties.
Refinancing or extension plans for the revolving credit facility, which matures in March 2022, and the effect of variable interest rates on cash flow.
Future bonus-rent trends and tenant financial performance, particularly UHS, which accounted for approximately 36% of Q1 2021 consolidated revenue.
Whether operating cash flow remains sufficient to fund dividends and capital requirements while maintaining REIT qualification and debt-covenant compliance.