UNIVERSAL HEALTH REALTY INCOME TRUST Overview
We are a real estate investment trust ("REIT") that commenced operations in
1986. We invest in healthcare and human service related facilities currently
including acute care hospitals, behavioral health care hospitals, specialty
facilities, free-standing emergency departments, childcare centers and
medical/office buildings. As of
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six hospital facilities consisting of three acute care hospitals and three behavioral health care hospitals;
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four free-standing emergency departments ("FEDs");
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fifty-nine medical/office buildings, including four owned by unconsolidated limited liability companies ("LLCs")/limited liability partnerships ("LPs");
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four preschool and childcare centers;
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two specialty facilities that are currently vacant, and;
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one property comprised of vacant land located in
Forward Looking Statements and Certain Risk Factors
You should carefully review all of the information contained in this Quarterly
Report, and should particularly consider any risk factors that we set forth in
our Annual Report on Form 10-K for the year ended
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:
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Future operations and financial results of our tenants, and in turn ours, could be materially impacted by numerous factors and future developments. Such factors and developments include, but are not limited to, the impact of the COVID-19 pandemic and the volume of COVID-19 patients treated by the operators of our hospitals and other healthcare facilities; changes in patient volumes and payer mix caused by deteriorating macroeconomic conditions (including increases in uninsured and underinsured patients as the result of business closings and layoffs); potential disruptions to clinical staffing and shortages and disruptions related to supplies required for our tenants' employees and patients, including equipment, pharmaceuticals and medical supplies, potential increases to expenses incurred by our tenants related to staffing, supply chain or other expenditures; the impact of our indebtedness and the ability to refinance such indebtedness on acceptable terms; disruptions in the financial markets and the business of financial institutions which could impact our ability to access capital or increase associated borrowing costs; and changes in general economic conditions nationally and regionally in the markets our properties are located, including higher sustained rates of unemployment and underemployment levels and reduced consumer spending and confidence. Although COVID-19 has not previously had a material adverse impact on our financial results, we are not able to quantify the impact that these factors could have on our future financial results and therefore can provide no assurance that developments related to the COVID-19 pandemic will not have a material adverse impact on our future financial results as a result of it macroeconomic impact, including the risks of a global recession or a recession in one or more of our, or our operators key markets, the impact that may have on us and our tenants and our assessment of that impact, and any disruptions and inefficiencies in the supply chain.
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The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issues facing our healthcare provider tenants, including UHS. In some areas, the labor scarcity is putting a strain on the resources of our tenants and their staff, which has required them to utilize higher-cost temporary labor and pay premiums above standard compensation for essential workers. In addition to significantly increasing the labor cost of our tenants, the healthcare staffing shortage could also require the operators of our hospital facilities to limit the services provided which would have an adverse effect on their operating revenues. There may be significant declines in future bonus rental revenue earned on one acute care hospital leased to a subsidiary of UHS to the extent that the hospital experiences significant declines in patient volumes and revenues. These factors may result in the inability or unwillingness on the part of some of our tenants to make timely payment of their rent to us at current levels or to seek to amend or terminate their leases which, in turn, would have an adverse effect on our occupancy levels and our revenue and cash flow and the value of our properties, and potentially, our ability to maintain our dividend at current levels.
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The
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Recent legislation, including the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act"), the Paycheck Protection Program and Health Care
Enhancement Act ("PPPHCE Act") and the American Rescue Plan Act of 2021
("ARPA"), has provided grant funding to hospitals and other healthcare providers
to assist them during the COVID-19 pandemic. There is a high degree of
uncertainty surrounding the implementation of the CARES Act, the PPPHCE Act and
ARPA, and the federal government may consider additional stimulus and relief
efforts, but we are unable to predict whether additional stimulus measures will
be enacted or their impact. There can be no assurance as to the total amount of
financial and other types of assistance our tenants will receive under the CARES
Act, the PPPHCE Act and the ARPA, and it is difficult to predict the impact of
such legislation on our tenants' operations or how they will affect operations
of our tenants' competitors. There can be no assurance as to whether our tenants
would be required to repay any previously granted funding, due to noncompliance
with grant terms or otherwise. Moreover, we are unable to assess the extent to
which anticipated negative impacts on our tenants (and, in turn, us) arising
from the COVID-19 pandemic will be offset by amounts or benefits received or to
be received under the CARES Act, the PPPHCE Act and the ARPA. The
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A substantial portion of our revenues are dependent upon one operator, UHS,
which comprised approximately 40% and 41% of our consolidated revenues for the
three-month periods ended
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We cannot assure you that subsidiaries of UHS will renew the leases on the hospital facilities and free-standing emergency departments, upon the scheduled expirations of the existing lease terms. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities and FEDs, and do not enter into a substitution arrangement upon
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expiration of the lease terms or otherwise, our future revenues and results of
operations could decrease if we were unable to earn a favorable rate of return
on the sale proceeds received, as compared to the rental revenue currently
earned pursuant to these leases. Please see Note 2 to the consolidated financial
statements - Relationship with Universal Health Services, Inc. ("UHS") and
Related Party Transactions, for additional information related to a lease
renewal between us and
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In certain of our markets, the general real estate market has been unfavorably impacted by increased competition/capacity and decreases in occupancy and rental rates which may adversely impact our operating results and the underlying value of our properties.
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A number of legislative initiatives have recently been passed into law that may result in major changes in the health care delivery system on a national or state level to the operators of our facilities, including UHS. No assurances can be given that the implementation of these new laws will not have a material adverse effect on the business, financial condition or results of operations of our operators.
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The potential indirect impact of the Tax Cuts and Jobs Act of 2017, signed into
law on
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A subsidiary of UHS is our Advisor and our officers are all employees of a wholly-owned subsidiary of UHS, which may create the potential for conflicts of interest.
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Lost revenues resulting from the exercise of purchase options, lease expirations and renewals and other transactions (see Note 7 to the condensed consolidated financial statements - Lease Accounting for additional disclosure related to lease expirations and subsequent vacancies that occurred during the second and third quarters of 2019 and the fourth quarter of 2021 on three specialty hospital facilities, one of which is in the process of being demolished).
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Potential unfavorable tax consequences and reduced income resulting from an inability to complete, within the statutory timeframes, anticipated tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code, if, and as, applicable from time-to-time.
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Our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund future growth of our business.
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The outcome and effects of known and unknown litigation, government
investigations, and liabilities and other claims asserted against us, UHS or the
other operators of our facilities. UHS and its subsidiaries are subject to legal
actions, purported shareholder class actions and shareholder derivative cases,
governmental investigations and regulatory actions and the effects of adverse
publicity relating to such matters. Since UHS comprised approximately 40% of our
consolidated revenues during the three months ended
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Failure of UHS or the other operators of our hospital facilities to comply with governmental regulations related to the Medicare and Medicaid licensing and certification requirements could have a material adverse impact on our future revenues and the underlying value of the property.
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The potential unfavorable impact on our business of the deterioration in national, regional and local economic and business conditions, including a worsening of credit and/or capital market conditions, which may adversely affect our ability to obtain capital which may be required to fund the future growth of our business and refinance existing debt with near term maturities.
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A deterioration in general economic conditions which may result in increases in the number of people unemployed and/or insured and likely increase the number of individuals without health insurance. Under these circumstances, the operators of our facilities may experience declines in patient volumes which could result in decreased occupancy rates at our medical office buildings.
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A worsening of the economic and employment conditions in
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In 2021, the rate of inflation in
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results of operations will be dependent upon how long the elevated inflation levels persist and the extent to which the rate of inflation further increases, if at all, neither of which we are able to predict. If elevated levels of inflation were to persist or if the rate of inflation were to accelerate, expenses of our tenants, and our direct operating expenses that are not passed on to our tenants, could increase faster than anticipated and may require utilization of our and our tenants' capital resources sooner than expected. Further, given the complexities of the reimbursement landscape in which our tenants operate, their payers may be unwilling or unable to increase reimbursement rates to compensate for inflationary impacts. This may impact their ability and willingness to make rental payments. In addition, the increased interest rates on our borrowings and increased construction costs could affect our ability to make additional attractive investments. As such, the effects of inflation may unfavorably impact our future expenses and rental revenue and may potentially have a negative impact on the future lease renewal terms, the underlying value of our properties, our ability to access the capital markets on favorable terms and to grow our portfolio and the value of our common shares.
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Real estate market factors, including without limitation, the supply and demand of office space and market rental rates, changes in interest rates as well as an increase in the development of medical office condominiums in certain markets.
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The impact of property values and results of operations of severe weather conditions, including the effects of hurricanes.
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Government regulations, including changes in the reimbursement levels under the Medicare and Medicaid programs.
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The issues facing the health care industry that affect the operators of our facilities, including UHS, such as: changes in, or the ability to comply with, existing laws and government regulations; unfavorable changes in the levels and terms of reimbursement by third party payers or government programs, including Medicare (including, but not limited to, the potential unfavorable impact of future reductions to Medicare reimbursements resulting from the Budget Control Act of 2011, as discussed in the next bullet point below) and Medicaid (most states have reported significant budget deficits that have, in the past, resulted in the reduction of Medicaid funding to the operators of our facilities, including UHS); demographic changes; the ability to enter into managed care provider agreements on acceptable terms; an increase in uninsured and self-pay patients which unfavorably impacts the collectability of patient accounts; decreasing in-patient admission trends; technological and pharmaceutical improvements that may increase the cost of providing, or reduce the demand for, health care, and; the ability to attract and retain qualified medical personnel, including physicians.
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The Budget Control Act of 2011 imposed annual spending limits for most federal
agencies and programs aimed at reducing budget deficits by
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An increasing number of legislative initiatives have been passed into law that
may result in major changes in the health care delivery system on a national or
state level. Legislation has already been enacted that has eliminated the
penalty for failing to maintain health coverage that was part of the original
Patient Protection and Affordable Care Act (the "ACA").
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California v. Texas that the plaintiffs in the matter lacked standing to bring
their constitutionality claims. On
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There can be no assurance that if any of the announced or proposed changes described above are implemented there will not be negative financial impact on the operators of our hospitals, which material effects may include a potential decrease in the market for health care services or a decrease in the ability of the operators of our hospitals to receive reimbursement for health care services provided which could result in a material adverse effect on the financial condition or results of operations of the operators of our properties, and, thus, our business.
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Competition for properties include, but are not limited to, other REITs, private investors and firms, banks and other companies, including UHS. In addition, we may face competition from other REITs for our tenants.
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The operators of our facilities face competition from other health care
providers, including physician owned facilities and other competing facilities,
including certain facilities operated by UHS but the real property of which is
not owned by us. Such competition is experienced in markets including, but not
limited to,
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Changes in, or inadvertent violations of, tax laws and regulations and other factors that can affect REITs and our status as a REIT, including possible future changes to federal tax laws that could materially impact our ability to defer gains on divestitures through like-kind property exchanges.
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The individual and collective impact of the changes made by the CARES Act on REITs and their security holders are uncertain and may not become evident for some period of time; it is also possible additional legislation could be enacted in the future as a result of the COVID-19 pandemic which may affect the holders of our securities.
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Should we be unable to comply with the strict income distribution requirements applicable to REITs, utilizing only cash generated by operating activities, we would be required to generate cash from other sources which could adversely affect our financial condition.
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Our ownership interest in four LLCs/LPs in which we hold non-controlling equity
interests. In addition, pursuant to the operating and/or partnership agreements
of the four LLCs/LPs in which we continue to hold non-controlling ownership
interests, the third-party member and the Trust, at any time, potentially
subject to certain conditions, have the right to make an offer ("Offering
Member") to the other member(s) ("Non-Offering Member") in which it either
agrees to: (i) sell the entire ownership interest of the Offering Member to the
Non-Offering Member ("Offer to Sell") at a price as determined by the Offering
Member ("Transfer Price"), or; (ii) purchase the entire ownership interest of
the Non-Offering Member ("Offer to Purchase") at the equivalent proportionate
Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i)
purchase the entire ownership interest of the Offering Member at the Transfer
Price, or; (ii) sell its entire ownership interest to the Offering Member at the
equivalent proportionate Transfer Price. The closing of the transfer must occur
within 60 to 90 days of the acceptance by the Non-Offering Member. Please see
Note 5 to the condensed consolidated financial statements - Summarized Financial
Information of Equity Affiliates for additional disclosure related to a fourth
quarter, 2021 transaction between us and the minority partner in
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Fluctuations in the value of our common stock, which, among other things could be affected by the current increasing interest rate environment..
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Other factors referenced herein or in our other filings with the
Given these uncertainties, risks and assumptions, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition, including the operating results of our lessees and the facilities leased to subsidiaries of UHS, could differ materially from those expressed in, or implied by, the forward-looking statements.
Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies or estimates from those disclosed in our 2022 Annual Report on Form 10-K.
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Results of Operations
During the three-month period ended
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a decrease of
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a decrease of
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an increase of
Revenues increased
A large portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses or included in base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as lease revenue in our condensed consolidated statements of income.
Included in our other operating expenses (excluding ground lease expenses) are
expenses related to the consolidated medical office buildings and three vacant
specialty facilities (one of which is in the process of being demolished)
amounting to
Funds from operations ("FFO") is a widely recognized measure of performance for
Real Estate Investment Trusts ("REITs"). We believe that FFO and FFO per diluted
share, which are non-GAAP financial measures, are helpful to our investors as
measures of our operating performance. We compute FFO in accordance with
standards established by the
Below is a reconciliation of our reported net income to FFO for the three-month
periods ended
Three Months Ended
March 31,
2023 2022
Net income $ 4,459 $ 5,405 Depreciation and amortization expense on consolidated
investments 6,618 6,709
Depreciation and amortization expense on unconsolidated
affiliates 293 295 Funds From Operations$ 11,370 $ 12,409
Weighted average number of shares outstanding - Diluted 13,803 13,785 Funds From Operations per diluted share
$ 0.82 $ 0.90
Our FFO decreased
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Other Operating Results Interest Expense:
As reflected in the schedule below, interest expense was
Three Months Three Months
Ended Ended
March 31, March 31,
2023 2022
Revolving credit agreement $ 4,495 $ 1,168
Mortgage interest 438 612
Interest rate swaps (income)/expense, net (a.) (1,227 ) 287
Amortization of financing fees 171 178
Amortization of fair value of debt (12 ) (13 )
Capitalized interest on major projects (149 ) (21 )
Other interest (19 ) 11
Interest expense, net $ 3,697 $ 2,222
(a.)
Represents interest paid (to us)/by us to the counterparties pursuant to three
interest rate SWAPs with a combined notional amount of
Interest expense increased by
Disclosures Related to Certain Facilities
Please refer to Note 7 to the consolidated financial statements - Lease
Accounting, for additional information regarding certain of our vacant specialty
hospital facilities consisting of
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was
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an unfavorable change of
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an unfavorable change of
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an unfavorable change of
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a favorable change of
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other combined net favorable change of
Net cash used in investing activities
Net cash used in investing activities was
During the three-month period ended
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unconsolidated LLCs, and; (iii)
During the three-month period ended
Net cash used in financing activities
Net cash used in financing activities was
During the three-month period ended
During the three-month period ended
During 2020, we commenced an at-the-market ("ATM") equity issuance program,
pursuant to the terms of which we may sell, from time-to-time, common shares of
our beneficial interest up to an aggregate sales price of
Additional cash flow and dividends paid information for the three-month periods
ended
As indicated on our condensed consolidated statement of cash flows, we generated
net cash provided by operating activities of
We declared and paid dividends of
As indicated in the cash flows from investing activities and cash flows from
financing activities sections of the statements of cash flows, there were
various other sources and uses of cash during the three months ended
In determining and monitoring our dividend level on a quarterly basis, our
management and
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We expect to finance all capital expenditures and acquisitions and pay dividends
utilizing internally generated and additional funds. Additional funds may be
obtained through: (i) borrowings under our
We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our revolving credit agreement and access to the capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including providing sufficient capital to allow us to make distributions necessary to enable us to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
Credit facilities and mortgage debt
Management routinely monitors and analyzes the Trust's capital structure in an effort to maintain the targeted balance among capital resources including the level of borrowings pursuant to our revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debt secured by the real property of our properties and our level of equity including consideration of additional equity issuances pursuant to our ATM equity issuance program. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projected occupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust's current stock price, the capital resources required for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of the Trust's current balance of revolving credit agreement borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust's growth.
On
Borrowings under the Credit Agreement will bear interest annually at a rate equal to, at our option, at either LIBOR (for one, three, or six months) or the Base Rate, plus in either case, a specified margin depending on our ratio of debt to total capital, as determined by the formula set forth in the Credit Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and 0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for LIBOR loans and 0.25% for Base Rate loans. The Credit Agreement defines "Base Rate" as the greatest of (a) the Administrative Agent's prime rate, (b) the federal funds effective rate plus 1/2 of 1% and (c) one month LIBOR plus 1%. The Trust will also pay a quarterly revolving facility fee ranging from 0.15% to 0.35% (depending on the Trust's ratio of debt to asset value) on the revolving committed amount of the Credit Agreement. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods.
The margins over LIBOR, Base Rate and the facility fee are based upon our total
leverage ratio. At
At
The Credit Agreement contains customary affirmative and negative covenants,
including limitations on certain indebtedness, liens, acquisitions and other
investments, fundamental changes, asset dispositions and dividends and other
distributions. The Credit Agreement also contains restrictive covenants
regarding the Trust's ratio of total debt to total assets, the fixed charge
coverage ratio, the ratio of total secured debt to total asset value, the ratio
of total unsecured debt to total unencumbered asset value, and minimum tangible
net worth, as well as customary events of default, the occurrence of which may
trigger an acceleration of amounts then outstanding under the Credit Agreement.
We are in compliance with all of the covenants in the Credit Agreement at
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The following table includes a summary of the required compliance ratios, giving
effect to the covenants contained in the Credit Agreement (dollar amounts in
thousands):
March 31, December 31,
Covenant 2023 2022
Tangible net worth $ 125,000 $ 213,293 $ 219,654
Total leverage < 60% 43.4 % 42.9 %
Secured leverage < 30% 5.0 % 5.6 %
Unencumbered leverage < 60% 42.7 % 41.8 %
Fixed charge coverage > 1.50x 4.0x 4.3x
As indicated on the following table, we have various mortgages, all of which are
non-recourse to us, included on our condensed consolidated balance sheet as of
Outstanding
Balance
(in thousands) Interest Maturity
Facility Name (a.) Rate Date
2704 North Tenaya Way fixed rate
mortgage loan (b.) $ 6,209 4.95 % November, 2023
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan (b.) 12,474 4.03 % April, 2024
Tuscan Professional Building fixed rate
mortgage loan 1,558 5.56 % June, 2025
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 8,136 3.95 % January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan 11,964 4.42 % September, 2033
Total, excluding net debt premium and
net financing fees 40,341
Less net financing fees (250 )
Plus net debt premium 28
Total mortgages notes payable,
non-recourse to us, net $ 40,119
(a.)All mortgage loans require monthly principal payments through maturity and either fully amortize or include a balloon principal payment upon maturity. (b.) This loan is scheduled to mature within the next twelve months at which time we will either refinance pursuant to a new mortgage loan or repay the mortgage balance in full utilizing borrowings under our Credit Agreement.
On
At
Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact on interest incurred or cash flow.
Off Balance Sheet Arrangements
As of
Acquisition and Divestiture Activity
Please see Note 4 to the consolidated financial statements.
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