Universal Health Realty Income Trust — Q3 2020 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2020. The Trust is a REIT that invests in and leases healthcare and human-service facilities, including hospitals, behavioral-health facilities, free-standing emergency departments, medical office buildings and childcare centers. As of October 31, 2020, it reported 71 real estate investments or commitments across 20 states.
UHS-related tenants generated approximately 34% of consolidated revenue in the quarter and 33% for the nine-month period. A UHS subsidiary also serves as the Trust’s advisor, and all officers are UHS employees.
Financial performance and key metrics
| ($ in thousands, except per share data) | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $19,692 | $19,866 | $58,180 | $58,304 |
| Net income | $5,193 | $4,653 | $14,447 | $13,126 |
| Basic EPS | $0.38 | $0.34 | $1.05 | $0.96 |
| Diluted EPS | $0.38 | $0.34 | $1.05 | $0.95 |
| FFO | $11,882 | $11,363 | $34,476 | $33,294 |
| FFO per diluted share | $0.86 | $0.83 | $2.50 | $2.42 |
- Revenue declined 0.9% in the quarter and 0.2% year to date, primarily because two hospitals became vacant after lease expirations in 2019.
- Net income increased 11.6% in the quarter and 10.1% year to date. Net margins were approximately 26.4% versus 23.4% in Q3 2019 and 24.8% versus 22.5% for the nine-month periods.
- Interest expense declined to $2.0 million from $2.7 million in the quarter and to $6.3 million from $8.1 million year to date, primarily due to lower revolving-credit borrowing costs.
- Net cash provided by operating activities was $32.8 million for the first nine months, compared with $31.7 million in 2019.
- Cash and cash equivalents were $6.3 million at September 30, 2020, compared with $6.1 million at December 31, 2019.
- Dividends declared and paid were $0.69 per share in Q3 and $2.065 per share for the first nine months, totaling approximately $28.4 million year to date.
Balance sheet, debt and liquidity
| ($ in thousands) | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $490,621 | $488,789 |
| Net real estate investments | $439,199 | $432,507 |
| Revolving credit borrowings | $227,100 | $212,950 |
| Non-recourse mortgage notes, net | $59,387 | $60,744 |
| Total equity | $162,394 | $181,734 |
- The revolving credit facility was increased from $300 million to $350 million in June 2020 and matures in March 2022, subject to extension options for part of the facility.
- Available borrowing capacity was $117.3 million after $227.1 million of borrowings and $5.6 million of letters of credit.
- Management reported compliance with all debt covenants. September 30, 2020 ratios included 44.0% total leverage, 8.8% secured leverage, 40.6% unencumbered leverage and 4.5x fixed-charge coverage.
- Cash invested in real estate additions was $18.8 million year to date, including construction expenditures for the Clive, Iowa behavioral-health hospital. Investing cash outflows were $16.8 million.
- Interest-rate swaps had a combined notional amount of $140 million and a net liability fair value of $4.7 million at September 30, 2020.
Material changes versus the prior comparable period
- Net income and FFO increased despite lower revenue, primarily due to lower interest expense, higher UHS hospital bonus rents and other net operating changes.
- Two hospitals in Evansville, Indiana, and Corpus Christi, Texas, remained vacant following 2019 lease expirations. Their lost revenue reduced 2020 net income by approximately $0.9 million in Q3 and $2.1 million for the first nine months, compared with the 2019 periods.
- UHS hospital bonus rents increased by $252,000 in Q3 and $303,000 year to date.
- The Trust commenced a $100 million at-the-market equity program in Q2 2020. It issued 2,704 shares for approximately $270,000 of net proceeds in Q2 and issued no shares under the program in Q3.
- Real estate investments increased during the period as construction progressed on the Clive behavioral-health hospital and the Texoma Medical Plaza II project.
- Other comprehensive income included a $5.7 million year-to-date unrealized loss on cash-flow hedges, compared with a $429,000 gain in the 2019 period.
Outlook, management commentary, risks and unusual items
- Management stated that COVID-19 had not materially adversely affected results through September 30, 2020; tenants representing approximately 99% of occupied square footage had paid rent through that date. However, future effects remain uncertain and could be material.
- COVID-19 risks include reduced patient volumes, cancelled elective procedures, tenant liquidity pressure, rent deferrals, higher operating costs, staffing and supply-chain disruptions, refinancing challenges and weaker real estate markets. The filing does not provide a specific earnings or revenue forecast.
- The three UHS acute-care hospital leases generated approximately 23% of Q3 revenue. Bonus rents include amounts attributable to hospital revenues associated with CARES Act grants, and future bonus rents could decline if hospital volumes or revenues weaken.
- UHS is considering early termination of the Southwest Healthcare System, Inland Valley Campus lease, which currently expires December 31, 2021. UHS may propose a substantially equivalent substitution property or may have the right to purchase the property at fair market value. Management cannot predict the outcome.
- Two other UHS hospital leases also expire in December 2021, while the McAllen Medical Center lease expires in December 2026. UHS has purchase and renewal rights under the applicable agreements.
- Short-term rent-deferral requests from some medical-office tenants were under review; the Trust could not estimate the eventual amount of concessions.
- The Clive behavioral-health hospital had approximately $25.0 million invested as of September 30, 2020, with estimated total project cost of $37.5 million, expected completion in late 2020 or early 2021, and estimated initial annual rent of approximately $2.7 million.
- Texoma Medical Plaza II was under construction and expected to open in late 2020. The Trust had committed up to $4.8 million but had funded none of that commitment as of September 30, 2020.
- Several non-recourse mortgage loans of unconsolidated ventures mature in 2021, including a $4.8 million loan scheduled for February 2021 and a $13.4 million loan scheduled for September 2021; the ventures intend to refinance.
Important facts for investors to verify
- Whether UHS terminates, substitutes or purchases the Inland Valley Campus property and the effect on recurring rent and bonus rent.
- Lease renewal, occupancy and rent-collection trends at the vacant Evansville and Corpus Christi hospitals and the Kindred Hospital Chicago Central facility.
- COVID-19 effects on tenant operations, patient volumes, CARES Act support, rent deferrals and future bonus rents.
- Refinancing or repayment plans for the $227.1 million revolving-credit balance, the March 2022 facility maturity and upcoming venture mortgage maturities.
- Construction completion, lease-up and funding requirements for the Clive behavioral-health hospital and Texoma Medical Plaza II.
- Sustainability of the $0.69 quarterly dividend in light of capital expenditures, debt maturities and potential tenant or lease disruption.
- Exposure to UHS, which accounted for approximately one-third of consolidated revenue and provides the Trust’s advisory services.