Universal Health Realty Income Trust — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2017. The Trust is a healthcare and human-services real estate investment trust with 68 investments in 20 states as of October 31, 2017, including hospitals, medical office buildings, free-standing emergency departments and childcare centers. Four unconsolidated LLC/LP investments are accounted for under the equity method.
UHS-related properties remain significant: leases to UHS hospital subsidiaries represented approximately 22% of consolidated revenue in both the third quarter and first nine months of 2017. A UHS subsidiary also serves as the Trust’s advisor, and all officers are UHS employees.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $18.2 million | $16.8 million | $54.1 million | $49.5 million |
| Net income | $4.0 million | $3.8 million | $39.6 million | $12.8 million |
| Diluted EPS | $0.29 | $0.28 | $2.91 | $0.95 |
| FFO | $10.5 million | $10.1 million | $31.7 million | $30.7 million |
| FFO per diluted share | $0.77 | $0.74 | $2.33 | $2.29 |
| Net cash from operating activities | Not separately provided | Not separately provided | $33.6 million | $29.8 million |
Revenue increased 8.3% in the quarter and 9.3% year to date, primarily reflecting acquisitions, property-level growth and higher tenant reimbursements. Approximate net income margin was 21.8% in Q3 2017 versus 22.7% in Q3 2016; the nine-month margin was 73.1% versus 25.8%, with the 2017 comparison heavily affected by a $27.2 million transaction gain. FFO, a non-GAAP measure, increased 3.9% in the quarter and 3.3% year to date.
The Trust declared and paid dividends of $9.0 million, or $0.66 per share, in the third quarter and $26.9 million, or $1.975 per share, during the first nine months. Management stated that property operating cash flow was sufficient to fund dividends during the period.
Balance Sheet, Debt and Liquidity
- September 30, 2017 total assets were $499.0 million, including $450.5 million of net real estate investments, versus $524.8 million at December 31, 2016.
- Cash and cash equivalents were $3.9 million.
- Revolving credit borrowings were $176.7 million under a $250 million facility; $1.5 million of letters of credit reduced available capacity to $71.8 million.
- Consolidated non-recourse mortgage notes payable were $83.5 million net, compared with $114.2 million at year-end 2016.
- Total liabilities were $285.7 million and total equity was $213.3 million at September 30, 2017.
- The Trust was in compliance with all credit agreement covenants. Reported covenant metrics included total leverage of 41.6%, secured leverage of 12.8%, unencumbered leverage of 38.1% and fixed-charge coverage of 3.7x.
- Operating cash flow increased to $33.6 million from $29.8 million. Investing cash flow was positive $39.6 million, primarily because of $65.2 million of proceeds from the St. Mary’s disposition. Financing cash flow was negative $73.2 million, reflecting debt repayments and $26.9 million of dividends.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income increased $142,000, primarily from higher property income, lower transaction costs and acquired properties, partly offset by higher interest expense and lower equity income from unconsolidated LLCs.
- Nine-month net income increased $26.8 million, principally because of the $27.2 million gain on the Arlington Medical Properties transaction.
- The Trust acquired the Health Center at Hamburg for approximately $4.7 million and the Las Palmas Del Sol Emergency Center for approximately $4.2 million. Both were fully leased under triple-net arrangements.
- The Trust completed the Henderson Medical Plaza in April 2017 and had invested $14.3 million in its development and construction by September 30, 2017.
- St. Mary’s Professional Office Building was divested in March 2017 through a planned like-kind exchange transaction. The transaction generated approximately $57.3 million of aggregate net cash proceeds to the Trust, including repayment of a $21.4 million member loan.
- The Trust issued 127,499 shares through its ATM program during the first nine months, generating approximately $9.1 million of net proceeds. The program’s aggregate sales threshold was met as of September 30, 2017.
- Interest expense increased by $157,000 in the quarter and $885,000 year to date, reflecting higher average borrowing costs.
Guidance, Outlook, Risks and Unusual Items
Management expects to fund operations, acquisitions, capital expenditures and dividends through operating cash flow, cash on hand, the revolving facility, mortgage refinancing or additional debt and equity issuance. Management believes these resources are sufficient for the next twelve months, while acknowledging that future financing may not be available on acceptable terms.
Hurricane Harvey damaged and closed five Houston-area medical office buildings. The properties were expected to remain closed through the remainder of 2017 and into the first half of 2018. The Trust recorded approximately $3.4 million of hurricane-related expenses and an offsetting $3.4 million of probable insurance recoveries, of which $1.5 million had been received by September 30. No business-interruption recovery had been recorded. Management stated that additional expenses and recoveries could be material, and the ultimate timing and amount of insurance proceeds remained uncertain.
Near-term refinancing requirements included a $10.8 million mortgage repaid in October 2017 using the revolving facility, a $6.1 million mortgage scheduled to mature in December 2017 for which management intended to seek a new $9.4 million loan, and additional mortgages maturing from January through May 2018. The revolving credit facility matures in March 2019, subject to an extension option.
Key risks include reliance on UHS and lease renewals or purchase options, healthcare reimbursement and regulatory changes, tenant occupancy and rental-rate pressure, interest-rate and refinancing risk, severe weather, access to capital, related-party conflicts, REIT qualification requirements and the potential impact of litigation or investigations involving UHS.
The Trust adopted new business-combination guidance effective January 1, 2017 without an expected significant impact. It expected to adopt revenue guidance on January 1, 2018 using the modified retrospective approach and did not expect a significant impact because most rental income is excluded. Lease accounting guidance becomes effective January 1, 2019; its impact was still under evaluation.
Most Important Facts for Investors to Verify
- Verify the ultimate cost, reopening timeline and insurance recoveries related to Hurricane Harvey, including business-interruption claims.
- Monitor UHS lease renewals, purchase options and the concentration of revenue and advisory relationships with UHS.
- Review refinancing outcomes for mortgages maturing in late 2017 and 2018 and the March 2019 revolving-credit maturity.
- Separate recurring operating performance and FFO from the nonrecurring $27.2 million Arlington transaction gain.
- Assess whether dividends remain covered by recurring consolidated and unconsolidated property cash flow after capital expenditures and debt repayments.
- Review the impact of healthcare legislation, Medicare and Medicaid reimbursement changes, occupancy trends and local medical-office competition.
- Confirm the effects of pending accounting standards, future equity issuance and any changes in credit facility covenant compliance.