Universal Health Realty Income Trust — Q2 2021 Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare real estate investment trust that owns and leases hospitals, behavioral health facilities, specialty hospitals, free-standing emergency departments, medical and general office buildings, and childcare centers. The filing covers the unaudited three and six months ended June 30, 2021, compared with the corresponding 2020 periods. As of July 31, 2021, the portfolio comprised 72 investments or commitments across 20 states.
UHS is a significant related party: a UHS subsidiary serves as the Advisor, all officers are UHS employees, and UHS-related tenants generated approximately 36% of consolidated revenue in 2021 versus 32% in 2020.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $20.9 million | $19.3 million | $41.6 million | $38.5 million |
| Net income | $6.6 million | $4.7 million | $12.2 million | $9.3 million |
| Net margin | 31.7% | 24.4% | 29.3% | 24.0% |
| Diluted EPS | $0.48 | $0.34 | $0.89 | $0.67 |
| Funds from operations | $12.6 million | $11.4 million | $25.4 million | $22.6 million |
| FFO per diluted share | $0.92 | $0.83 | $1.84 | $1.64 |
| Cash flow from operations | Not separately provided | Not separately provided | $25.4 million | $23.2 million |
Revenue increased 8.3% in the quarter and 8.0% for the six-month period. UHS-facility lease revenue increased to $7.3 million in the quarter and $14.4 million year to date, including bonus rent of $1.6 million and $3.3 million, respectively. Non-related-party lease revenue increased modestly to $13.1 million in the quarter and $26.2 million year to date.
Operating expenses were $13.9 million in the quarter and $27.4 million year to date. Depreciation and amortization was $7.0 million and $13.7 million, respectively. Net interest expense was $2.2 million in the quarter and $4.3 million year to date. Comprehensive income was $6.1 million in the quarter and $15.0 million year to date, including changes in the fair value of cash-flow hedges.
Liquidity, debt and capital resources
- Cash and cash equivalents were $9.7 million at June 30, 2021, compared with $5.7 million at December 31, 2020.
- Revolving credit borrowings were $258.2 million, up from $236.2 million at year-end 2020. Letters of credit totaled $5.1 million, leaving $86.7 million of available capacity under the credit facility in place at quarter-end.
- On July 2, 2021, the revolving facility was amended and increased from $350 million to $375 million and extended to July 2, 2025, with options for two additional six-month extensions.
- Non-recourse mortgage notes payable were $57.9 million net at June 30, 2021. The mortgages had a gross balance of $58.2 million, weighted average interest rates of approximately 4.3%, and maturities beginning in 2022.
- Total debt carrying value was approximately $316.4 million, with estimated fair value of $319.3 million. Total leverage was 46.0%, secured leverage was 8.2%, unencumbered leverage was 43.2%, and fixed-charge coverage was 4.8x, all within covenant requirements.
- Operating cash flow exceeded dividends paid by approximately $6.2 million during the first six months. Dividends were $0.70 per share in the second quarter and $1.395 per share for the first six months.
- The Trust had three interest-rate swaps with aggregate notional value of $140 million. Their fair value was a net liability of approximately $1.0 million at June 30, 2021. Management estimated that a 1% change in interest rates would affect net income by approximately $1.2 million, assuming other factors remain constant.
Material changes versus the prior comparable period
- Net income increased 41% in the quarter and 32% year to date, helped by higher property income, increased UHS bonus rent, the Clive Behavioral Health facility, and a $1.3 million gain on the sale of the Children’s Clinic at Springdale.
- FFO increased 11% in the quarter and 12% year to date, while FFO per diluted share increased to $0.92 and $1.84, respectively.
- Interest expense increased $167,000 in the quarter because of higher average borrowings, higher swap expense, and lower capitalized interest. Year-to-date interest expense was approximately flat because lower revolving-credit borrowing costs offset higher average borrowings and swap expense.
- The Trust acquired the Fire Mesa office building in Las Vegas for approximately $12.9 million. The property is fully leased to a UHS subsidiary through August 2027, subject to renewal options.
- The Trust sold the Children’s Clinic at Springdale for approximately $3.2 million net of closing costs, generating the $1.3 million gain.
- Investing cash outflows increased to $23.2 million from $11.3 million, primarily due to the Fire Mesa acquisition, real estate additions, investments in unconsolidated entities, and a $3.5 million member loan.
- Operating cash flow increased to $25.4 million from $23.2 million, while cash provided by financing activities shifted to $1.8 million from cash used of $11.7 million, primarily because of increased revolving-credit borrowings.
Guidance, outlook, risks and unusual items
No formal earnings or revenue guidance is provided. Management stated that operating cash flows, cash balances, available credit capacity, and access to capital markets are expected to provide sufficient resources for operating, investing, financing needs, and REIT distributions for the next twelve months, although financing may not be available on acceptable terms.
- UHS concentration: UHS-related tenants represented approximately 36% of consolidated revenue. The relationship also creates related-party and potential conflict-of-interest considerations.
- Southwest Healthcare System, Inland Valley Campus: UHS plans to terminate the lease at its December 31, 2021 expiration. UHS may purchase the property at appraised fair value, but the parties are pursuing a proposed exchange for two healthcare properties. Completion remains subject to due diligence and definitive agreements.
- Other lease expirations: Wellington Regional Medical Center and Kindred Hospital Chicago Central leases were scheduled to expire December 31, 2021; Kindred indicated it would not renew. McAllen Medical Center expires in December 2026. Two hospital properties in Evansville and Corpus Christi remained vacant.
- COVID-19: The filing states that the pandemic had no material effect on reported 2021 results to date, but future patient volumes, bonus rent, tenant credit quality, occupancy, refinancing access, and property values remain exposed to pandemic-related developments.
- Capital markets and interest rates: The Trust relies significantly on variable-rate revolving debt and must refinance or address mortgage maturities beginning in 2022. Interest-rate swaps reduce but do not eliminate exposure.
- Transactions after quarter-end: The Trust agreed to purchase the remaining 5% interest in Grayson Properties, LP, potentially resulting in 100% ownership of Texoma Medical Plaza. It also classified Auburn Medical Office Building II as held for sale, but the buyer could terminate the agreement. A planned sale of a vacant Corpus Christi property was terminated in July 2021.
- Tax-deferred exchanges: The Fire Mesa acquisition and related dispositions are part of anticipated Section 1031 like-kind exchange transactions; failure to complete the transactions within statutory deadlines could create adverse tax consequences.
Investor verification checklist
- Verify the final structure and valuation of the proposed Inland Valley Campus property substitution or any UHS purchase after December 31, 2021.
- Monitor renewal, replacement leasing, vacancy, and potential disposition outcomes for Wellington, Kindred, Evansville, Corpus Christi, and other facilities with near-term lease events.
- Reconcile UHS-related revenue concentration and review UHS filings for tenant operating performance, litigation, regulatory matters, and lease-credit risks.
- Confirm completion and accounting treatment of the Grayson Properties minority-interest purchase and the Auburn Medical Office Building II sale.
- Assess refinancing requirements for the 2022 mortgage maturities and the impact of variable-rate debt, swap settlements, and future credit-market conditions.
- Review dividend sustainability against operating cash flow, capital expenditures, acquisitions, debt repayments, and REIT distribution requirements.