Universal Health Realty Income Trust — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare-focused REIT that owns and leases hospitals, medical office buildings, free-standing emergency departments, childcare centers and other human-service facilities. The filing covers the three and nine months ended September 30, 2019, and was filed November 8, 2019.
As of October 31, 2019, the portfolio included 71 investments in 20 states, including two properties under construction. UHS-related tenants represented approximately 30% of consolidated revenue in the third quarter and 31% for the first nine months. A UHS subsidiary also serves as the Trust’s advisor, and the Trust’s officers are UHS employees.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $19.9 million | $18.8 million | $58.3 million | $57.5 million |
| Net income | $4.7 million | $4.4 million | $13.1 million | $19.8 million |
| Net margin | 23.4% | 23.2% | 22.5% | 34.4% |
| Diluted EPS | $0.34 | $0.32 | $0.95 | $1.44 |
| Funds from operations | $11.4 million | $10.7 million | $33.3 million | $34.2 million |
| FFO per diluted share | $0.83 | $0.78 | $2.42 | $2.49 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $31.7 million | $33.2 million |
Revenue increased 5.5% in the third quarter and 1.4% for the first nine months. Third-quarter net income increased 6.4%, while nine-month net income declined 33.7% primarily because 2018 included $4.5 million of hurricane insurance recoveries in excess of property write-downs and $1.2 million of business interruption recoveries.
Third-quarter income before equity income and interest expense was $6.9 million, or approximately 34.5% of revenue. Nine-month income before those items was $19.7 million, or approximately 33.7% of revenue. Depreciation and amortization was $6.4 million in the third quarter and $19.6 million for the first nine months.
Balance sheet, debt and liquidity
- Total assets were $483.9 million at September 30, 2019, substantially unchanged from $483.8 million at December 31, 2018.
- Cash and cash equivalents were $6.5 million, compared with $5.0 million at year-end 2018.
- Revolving credit borrowings were $205.7 million, up from $196.4 million, leaving $94.3 million of availability under the $300 million facility. The facility matures in March 2022, with two six-month extension options.
- Non-recourse mortgage notes payable were $61.2 million, compared with $64.9 million at year-end 2018. Total reported debt, including revolver borrowings, was approximately $266.8 million.
- The Trust was in compliance with all credit facility covenants. September 30 leverage measures included total leverage of 42.0%, secured leverage of 9.4%, unencumbered leverage of 38.6% and fixed-charge coverage of 4.0x.
- Net cash used in investing activities was $7.9 million, including $7.5 million of real estate additions and $798,000 invested in unconsolidated entities.
- Net cash used in financing activities was $22.4 million, including $28.0 million of dividends, $3.8 million of mortgage repayments and $9.3 million of net revolver borrowings.
- The Trust declared and paid $0.68 per share for the third quarter and $2.035 per share for the first nine months. Management stated that operating cash flows, cash, borrowing capacity and capital-market access were sufficient for the next twelve months, including REIT distribution requirements.
Material changes versus the prior comparable period
- Third-quarter results benefited from a short-term Evansville, Indiana hospital lease that generated $842,000 of quarterly revenue versus $178,000 under the prior lease. The lease expired September 30, 2019, and the facility is now vacant.
- The Corpus Christi, Texas hospital lease expired June 1, 2019, and the facility is vacant. Management is marketing both properties for new tenants and warned that extended vacancies, lower rents or renovation costs could materially affect results.
- UHS hospital bonus rental revenue increased by $212,000 in the third quarter and $428,000 for the first nine months.
- Interest expense increased $179,000 in the third quarter and $763,000 for the first nine months, primarily because of higher average revolver borrowings and borrowing costs.
- The first nine months of 2019 included a $250,000 gain on land sale, while the first nine months of 2018 included significant Hurricane Harvey insurance recoveries.
- In September 2019, the Trust adopted ASC 842 lease accounting, recognizing approximately $9.0 million of right-of-use land assets and corresponding ground lease liabilities. The adoption did not require an opening retained-earnings adjustment.
Development, outlook and risks
The Trust committed up to $17.9 million to a 95%-owned, unconsolidated medical office building in Denison, Texas, expected to open in late 2020; approximately $700,000 had been funded at September 30, 2019. It also invested approximately $3.6 million in a behavioral health hospital under construction in Clive, Iowa. The project is estimated to cost $37.5 million, with estimated initial annual rent of approximately $2.7 million, and is expected to be completed in fall 2020.
No formal earnings, FFO or revenue guidance was provided. Management stated that future dividend levels will depend on operating results, capital commitments, debt repayments and REIT distribution requirements. The filing states that available liquidity is expected to fund operating, investing and financing needs for the next twelve months, but cautions that future financing may not be available on acceptable terms.
- Concentration with UHS creates tenant, counterparty and related-party risks. UHS has renewal, purchase and right-of-first-refusal rights on certain facilities, and lease expirations for two UHS hospitals occur in 2021 and another in 2026.
- Healthcare reimbursement, Medicare and Medicaid changes, regulatory requirements, healthcare legislation and the financial condition of operators could reduce tenant demand and rental payments.
- Interest-rate and LIBOR-transition risks affect the revolving credit facility and derivatives. The Trust entered into a $50 million interest-rate swap effective September 16, 2019, at a fixed rate of 1.144%, maturing in September 2024.
- Vacancies, competition, occupancy and rental-rate pressure could reduce property cash flow and values.
- The Trust faces refinancing and capital-access risk, as well as risks associated with development commitments and non-controlling investments in five unconsolidated LLCs/LPs.
- Hurricane Harvey-related reconstruction was substantially completed by June 2018; 2018 insurance proceeds create a significant nonrecurring comparison benefit.
Important facts for investors to verify
- Whether the vacant Evansville and Corpus Christi hospital properties are re-leased, sold or require material renovation spending.
- The renewal or purchase decisions and credit quality of UHS-related tenants, which account for roughly 30% to 31% of revenue.
- Revolver utilization, interest costs, covenant headroom and the March 2022 maturity and extension options.
- Funding requirements, construction progress, lease commencement and expected returns for the Clive and Denison development projects.
- Whether operating cash flow continues to cover dividends and planned capital expenditures without increasing leverage.
- The effect of the LIBOR transition and future interest-rate movements on debt service and derivative cash flows.
- The comparability of reported net income and FFO, particularly the absence of 2018 Hurricane Harvey insurance recoveries and other unusual items.