Universal Health Realty Income Trust — Form 10-Q Summary
Business context and reporting period
Universal Health Realty Income Trust is a healthcare and human-services real estate investment trust with 65 investments across 20 states as of September 30, 2016. Its portfolio included six hospitals, three free-standing emergency departments, 52 medical office buildings and four preschool or childcare centers. The filing covers the three and nine months ended September 30, 2016; financial statements are unaudited.
UHS is the principal tenant and provides advisory and administrative services through a subsidiary. UHS hospital leases represented approximately 23% of consolidated third-quarter revenue and 24% of consolidated nine-month revenue. Three UHS acute-care hospital leases were renewed for five years through December 2021 at existing rates.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $16.8 million | $15.7 million | $49.5 million | $47.9 million |
| Net income | $3.8 million | $3.6 million | $12.8 million | $19.3 million |
| Diluted earnings per share | $0.28 | $0.27 | $0.95 | $1.45 |
| Funds from operations | $10.1 million | $9.4 million | $30.7 million | $28.4 million |
| FFO per diluted share | $0.74 | $0.71 | $2.29 | $2.13 |
- Net income margin was approximately 22.7% in Q3 2016 versus 23.2% in Q3 2015, and 25.8% for the first nine months versus 40.3% in the prior-year period.
- Net cash provided by operating activities increased to $29.8 million from $27.3 million for the first nine months.
- Dividends paid totaled $26.2 million, or $1.945 per share, for the first nine months; third-quarter dividends were $8.8 million, or $0.65 per share.
- Cash and cash equivalents were $4.0 million at September 30, 2016, compared with $3.9 million at December 31, 2015.
- Total assets increased to $510.4 million from $458.5 million, primarily reflecting acquisitions and capital investments. Net real estate investments were $432.4 million.
- Line-of-credit borrowings were $192.3 million, and consolidated non-recourse mortgage debt was approximately $107.8 million. Total consolidated debt was approximately $300.1 million before debt-related adjustments.
- The $250 million revolving credit facility had $55.0 million of available capacity after borrowings and letters of credit. The facility matures in March 2019, with a potential one-year extension.
- The Trust was in compliance with all debt covenants. Reported covenant measures included total leverage of 47.8%, secured leverage of 17.6%, unencumbered leverage of 48.7% and fixed-charge coverage of 3.7x.
Material changes versus the prior comparable period
- Third-quarter revenue increased $1.1 million, or approximately 7%, primarily from property acquisitions, higher tenant reimbursements and increased equity-method income.
- Third-quarter net income increased $179,000, despite $331,000 of transaction costs incurred in 2016.
- Nine-month net income declined $6.6 million, primarily because 2015 included an $8.7 million gain on a property exchange. Higher interest expense and transaction costs also reduced 2016 earnings.
- Nine-month FFO increased $2.3 million, or approximately 8%, because the prior-year property-exchange gain was excluded from FFO and property-level operating performance improved.
- The Trust acquired three properties for approximately $52.2 million: Frederick Memorial Hospital Crestwood, Chandler Corporate Center III and Madison Professional Office Building. No properties were divested.
- Investing cash outflows increased to $64.2 million from $19.9 million, driven by acquisitions, $7.1 million of real estate additions and $5.5 million of investments in unconsolidated LLCs.
- Financing activities provided $34.6 million, including $50.1 million of net revolving-credit borrowings and $13.4 million of net ATM equity proceeds, compared with $7.6 million of financing cash outflows in the prior-year period.
- The Trust issued 249,016 shares under its ATM program during 2016 for approximately $13.2 million of net proceeds. Approximately $9.5 million of gross issuance capacity remained at September 30, 2016.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or revenue guidance. Management stated that operating cash flow, cash, available revolver capacity and access to capital markets were expected to provide sufficient resources for operating, investing and financing needs for the next twelve months, including required REIT distributions.
- Approximately $52.2 million of 2016 acquisitions were financed through a combination of borrowings and equity issuance. Management expects to use internal cash flow and additional financing for capital expenditures, acquisitions and dividends.
- The Trust committed up to $21.1 million for the Henderson Medical Plaza and had invested $4.6 million at September 30, 2016. Completion was scheduled for the first quarter of 2017.
- Four consolidated mortgages totaling approximately $42.2 million were scheduled to mature within twelve months, beginning with a $10.5 million loan in December 2016. Management expected to refinance these obligations through new mortgage debt or the revolving credit facility.
- Interest-rate caps with aggregate notional amounts of $60 million became effective or were scheduled to become effective around the expiration of existing caps; existing caps had generated no payments through September 30, 2016.
- Key risks include dependence on UHS, lease renewal and purchase-option risk, healthcare reimbursement and regulatory changes, real estate occupancy and rental-rate pressure, interest-rate and refinancing risk, access to capital, and the ability to maintain REIT qualification.
- UHS and its subsidiaries are both a major tenant and the Trust’s advisor, creating related-party and potential conflict-of-interest considerations. Advisory fees were $2.4 million for the first nine months, and no incentive fees were paid.
- Five unconsolidated LLCs/LPs held non-controlling interests in medical office buildings. These entities had approximately $28.5 million of non-recourse mortgage debt and $21.9 million of advances payable to the Trust at September 30, 2016.
- No material changes to previously disclosed risk factors or market-risk disclosures were reported. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm the refinancing or repayment outcome for mortgages maturing from December 2016 through 2017 and the resulting interest expense.
- Monitor revolver utilization, covenant compliance, available capacity and future ATM equity issuance, including potential dilution.
- Assess the sustainability of dividends relative to operating cash flow, capital expenditures, acquisitions and debt maturities.
- Evaluate UHS tenant concentration, lease renewals through and after December 2021, purchase options and related-party advisory arrangements.
- Track completion, leasing and contribution of the Henderson Medical Plaza and operating performance of the 2016 acquisitions.
- Review FFO alongside GAAP net income and cash flow; FFO is a non-GAAP measure and is not equivalent to liquidity or cash available for distributions.