Business Context and Reporting Period
Universal Health Realty Income Trust, a healthcare and human-services real estate investment trust, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The portfolio comprised 55 real estate investments or commitments in 15 states, including hospitals, medical office buildings and childcare centers. The filing was signed November 8, 2012.
UHS is the principal tenant and provides advisory services. UHS hospital leases represented approximately 29% of consolidated revenue for the third quarter and 30% for the first nine months of 2012. The Trust had 12,685,646 common shares outstanding at October 31, 2012.
Key Financial Metrics
| Metric | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
|---|---|---|---|---|
| Revenue | $13.6 million | $7.4 million | $40.6 million | $20.8 million |
| Net income | $3.0 million | $3.3 million | $15.0 million | $11.2 million |
| Basic and diluted EPS | $0.24 | $0.26 | $1.18 | $0.88 |
| Net margin | 21.9% | 45.3% | 36.8% | 53.6% |
| FFO | $9.0 million | $7.9 million | $25.5 million | $24.0 million |
| AFFO | $9.0 million | $8.3 million | $26.1 million | $24.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $22.4 million | $15.8 million |
At September 30, 2012, total assets were $388.0 million, including net real estate investments of $309.2 million, investments in and advances to LLCs of $38.9 million, and cash of $3.2 million.
Debt included $83.0 million drawn on the revolving credit facility and $116.2 million of mortgage and other notes payable, including a $1.4 million debt premium. The mortgages were non-recourse to the Trust, with a reported principal balance of $114.8 million excluding the premium. The revolving facility had $53.4 million of available capacity after borrowings and letters of credit.
The Trust paid dividends of $7.8 million, or $0.615 per share, in the third quarter and $23.3 million, or $1.84 per share, during the first nine months. Management stated that property operating cash flow of $25.1 million exceeded dividends paid during the first nine months by approximately $1.7 million.
Material Changes Versus the Prior Comparable Period
- Reported third-quarter revenue increased $6.2 million, while revenue on an adjusted comparable basis increased $1.6 million. Nine-month reported revenue increased $19.8 million, or $6.4 million on an adjusted comparable basis.
- Net income declined $362,000 in the third quarter, primarily because of higher depreciation and amortization and interest expense. Nine-month net income increased $3.8 million, primarily because of a $7.4 million divestiture gain.
- Higher depreciation and amortization reflected fair-value step-ups associated with consolidating eleven previously noncontrolling LLC investments and additional properties acquired in 2011 and the first quarter of 2012.
- FFO increased approximately $1.2 million in the third quarter and $1.4 million for the first nine months. AFFO increased approximately $736,000 and $1.5 million, respectively.
- Operating cash flow increased $6.6 million year over year. Investing cash use declined to $9.0 million from $29.7 million, while financing changed from $13.7 million of net inflow to $22.0 million of net outflow, principally because of higher mortgage repayments and dividends.
- The Trust acquired the approximately $30.4 million PeaceHealth Medical Clinic in January 2012, funded partly with approximately $22.4 million of assumed third-party debt. It also recorded $8.1 million of net proceeds and a $7.4 million gain from the Canyon Springs Medical Plaza divestiture.
Guidance, Outlook, Risks and Unusual Items
- Management expected to refinance the $6.2 million BRB mortgage by its January 31, 2013 maturity and the $6.3 million Palmdale mortgage by its July 31, 2013 maturity. Alternative financing, including revolver borrowings, may be used if refinancing is not available on reasonable terms.
- Management believed operating cash flow, cash, available revolver capacity and capital-market access were sufficient for the next twelve months, including required REIT distributions, but cautioned that financing may not be available on acceptable terms.
- The $150 million revolving facility matures July 24, 2015. The Trust was in compliance with all covenants, including debt-to-total-capital of 31.4% versus a maximum of 55%, debt-service coverage of 29.24x versus a minimum of 5.00x, and debt-to-cash-flow of 1.30x versus a maximum of 3.50x.
- After September 30, 2012, the Trust received approximately $12.1 million from the Centinela Medical Building Complex divestiture, including repayment of an $8.0 million member loan. The related gain was expected to be recorded in the fourth quarter and was not expected to be material.
- The Trust committed up to $2.5 million to develop Forney Medical Plaza II, expected to open in the first quarter of 2013.
- Key risks include dependence on UHS, related-party governance and advisory arrangements, UHS operating and credit conditions, healthcare reimbursement and regulatory changes, Medicare and Medicaid reductions, tenant occupancy and credit risk, interest rates, refinancing requirements, real estate market conditions, and litigation or governmental investigations.
- Three LLC-owned California properties were not covered by earthquake insurance because available pricing was considered uneconomic. The Trust also had $13.6 million of outstanding letters of credit and additional equity and debt financing commitments.
Important Facts for Investors to Verify
- Verify recurring operating performance excluding the $7.4 million divestiture gain and the effects of acquisitions, LLC consolidations, fair-value depreciation and transaction costs.
- Assess dividend coverage using operating cash flow, FFO/AFFO, capital expenditures, debt amortization and cash distributions from unconsolidated LLCs.
- Review refinancing plans and terms for the 2012 and 2013 mortgage maturities, as well as revolver availability and covenant headroom.
- Evaluate concentration and related-party exposure to UHS, including hospital lease renewals, UHS guarantees, advisory fees and potential conflicts of interest.
- Confirm the status and funding requirements of LLC investments, construction commitments, letters of credit and non-recourse debt maturities.
- Reconcile reported results with adjusted comparable results because the 2012 and 2011 periods are materially affected by acquisitions, divestitures and changes in LLC consolidation.