Universal Health Realty Income Trust — 1Q 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The Trust is a healthcare and human-service facility REIT with 71 investments or commitments in 20 states as of April 30, 2020, including hospitals, free-standing emergency departments, medical office buildings, and preschool/childcare centers. The portfolio is reported as one operating segment.
UHS-related tenants generated approximately 32% of consolidated revenue in the quarter, and the three UHS-leased hospitals generated approximately 22% of consolidated revenue. A UHS subsidiary provides advisory services, and the Trust’s officers are UHS employees.
Key financial metrics
| Metric | 1Q 2020 | 1Q 2019 | Change |
|---|---|---|---|
| Revenue | $19.207 million | $19.112 million | +$95,000; +0.5% |
| Net income | $4.554 million | $4.212 million | +$342,000; +8.1% |
| Basic and diluted EPS | $0.33 | $0.31 | +$0.02 |
| Funds from operations | $11.220 million | $10.953 million | +$267,000; +2.4% |
| FFO per diluted share | $0.82 | $0.80 | +$0.02 |
| Net cash from operating activities | $10.137 million | $8.633 million | +$1.504 million |
| Dividends paid | $9.424 million, or $0.685/share | $9.279 million, or $0.675/share | +$145,000; +$0.010/share |
Net income margin was approximately 23.7% in 1Q 2020 versus approximately 22.0% in 1Q 2019. FFO is a non-GAAP measure and is not presented as a substitute for GAAP net income, operating cash flow, or liquidity.
- Lease revenue from UHS facilities increased to $5.881 million from $5.793 million; bonus rent was $1.380 million versus $1.394 million.
- Lease revenue from non-related parties increased to $12.842 million from $12.731 million.
- Depreciation and amortization declined to $6.380 million from $6.708 million.
- Interest expense declined to $2.309 million from $2.692 million, primarily because the average cost of revolving-credit borrowings fell to 3.0% from 3.8%, partially offset by higher average borrowings.
- Total assets were $489.134 million and total equity was $172.440 million at March 31, 2020.
- Cash and cash equivalents were $5.667 million at March 31, 2020, compared with $6.110 million at December 31, 2019.
Debt, liquidity, and capital expenditures
- Revolving credit borrowings were $219.2 million under a $300 million facility, leaving $80.8 million available at March 31, 2020. The facility is scheduled to mature in March 2022, with two six-month extension options.
- Non-recourse mortgage notes payable were $60.326 million, net. Total reported debt was approximately $279.5 million before considering other adjustments.
- Debt covenant compliance remained strong: total leverage was 42.6% versus a 60% limit, fixed-charge coverage was 4.1x versus a 1.50x minimum, and tangible net worth was $158.691 million versus a $125 million minimum.
- Investing cash outflows increased to $6.989 million from $1.838 million, including $5.521 million of real estate additions and $1.468 million invested in unconsolidated LLCs.
- The Trust invested approximately $11.5 million through March 31, 2020 in the Clive, Iowa behavioral health hospital project, estimated at $37.5 million with expected initial annual rent of approximately $2.7 million.
- The Trust had invested approximately $4.0 million in Texoma Medical Plaza II and had committed up to $17.9 million, subject to potential reduction if third-party construction financing is obtained.
- Management stated that operating cash flow, cash, available revolver capacity, and capital-market access were expected to provide sufficient resources for the next 12 months, while noting that financing on acceptable terms is not assured.
Material changes versus the prior comparable period
- Net income and FFO increased despite the loss of rent from two hospital properties that became vacant after lease expirations in 2019. The vacancies reduced quarterly results by approximately $559,000.
- The 2019 period included a $250,000 gain on sale of land; no comparable gain was recorded in 2020.
- Operating cash flow improved by $1.5 million, primarily due to higher net income and timing of bonus-rent collections.
- Capital spending increased substantially because of construction of the Clive behavioral health hospital, development of Texoma Medical Plaza II, and tenant improvements.
- Other comprehensive loss was $4.671 million in 1Q 2020, compared with $132,000 in 1Q 2019, primarily reflecting unrealized losses on cash-flow hedges. Comprehensive loss was $117,000.
- The Trust entered into a $55 million interest-rate swap in March 2020 and a $35 million swap in January 2020. The aggregate swap notional amount was $140 million at quarter-end, and the swaps had a net liability fair value of $3.7 million.
Outlook, commentary, risks, and unusual items
COVID-19 did not materially affect reported first-quarter results because most March rent was due at the beginning of the month. However, patient volumes at the three acute-care hospitals and likely other healthcare properties declined significantly during the second half of March and continued to be reduced through April.
- Management expects significant declines in future bonus rent from the three UHS-leased acute-care hospitals if reduced patient volumes and hospital revenues continue.
- As of April 22, 2020, tenants representing approximately 13% of rentable square feet under lease at the medical office buildings had not paid April rent, and rent-deferral requests covered approximately 13% of such leased space. The ultimate amount of concessions was not estimable.
- All four preschool/childcare centers were closed due to government regulations, had not paid April rent as of April 22, and had submitted short-term rent-deferral requests.
- Management stated that COVID-19 developments were likely to materially affect 2020 financial performance but could not quantify the impact. Risks include lower tenant revenues, rent deferrals or defaults, vacancies, lower bonus rent, construction delays, higher borrowing costs, refinancing risk, and reduced property values.
- The Trust is materially dependent on UHS as a tenant, guarantor, advisor, and source of management personnel. Lease renewals and potential purchase options for UHS-leased properties could affect future revenue.
- Two hospital properties remained vacant, and continued vacancy, lower replacement rents, or required renovation costs could materially reduce future results.
- The Trust had no acquisitions or dispositions during the first quarter of 2020.
- Management stated that no material internal-control changes occurred and concluded that disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Subsequent-quarter collections, rent deferrals, concessions, tenant defaults, and occupancy trends, particularly for medical office buildings and childcare centers.
- Actual changes in UHS hospital patient volumes, bonus rent, lease renewals, and any exercise of purchase options.
- Liquidity and covenant headroom as COVID-19 effects develop, including the March 2022 revolver maturity and refinancing needs.
- Construction progress, costs, financing, lease-up, and opening dates for the Clive behavioral health hospital and Texoma Medical Plaza II.
- Whether CARES Act and related government assistance received by tenants offsets operating pressure and affects rent-paying capacity.
- The sustainability of the $0.685 quarterly dividend given projected cash flow, capital commitments, debt maturities, and potential rent disruptions.