Universal Health Realty Income Trust (NYSE: UHT) is a real estate investment trust (REIT) that has been investing in healthcare and human service-related facilities since 1986. The company's portfolio consists of 76 real estate investments or commitments located across 21 states, including acute care hospitals, behavioral health care hospitals, specialty facilities, free-standing emergency departments, childcare centers, and medical/office buildings.
Business Overview
UHT's primary business is investing in and leasing healthcare and human service facilities through direct ownership or through joint ventures. The company actively manages its portfolio of healthcare and human service facilities and may from time to time make decisions to sell lower-performing properties not meeting its long-term investment objectives. The proceeds of sales are typically reinvested in new developments or acquisitions, which the company believes will meet its planned rate of return.UHT's portfolio is located throughout the United States, with no individual property meeting the requirements to be considered its own segment. The company's revenue and net income are generated from the operation of its investment portfolio. As of March 31, 2024, UHT had investments in four jointly-owned limited liability companies (LLCs)/limited partnerships (LPs) that own medical office buildings.
Financials
For the full year 2023, UHT reported annual net income of $15.4 million, annual revenue of $95.6 million, annual operating cash flow of $43.5 million, and annual free cash flow of $35.9 million.In the first quarter of 2024, the company generated net income of $5.3 million, up from $4.5 million in the same period of 2023. Revenues increased by 8.2% to $25.1 million, driven by an aggregate net increase in income generated at various properties, including the increased revenues from a newly constructed medical office building in Reno, Nevada, and an acquisition in McAllen, Texas.
Funds from operations (FFO), a key metric for REITs, increased by $1.0 million to $12.4 million in the first quarter of 2024, compared to $11.4 million in the same period of 2023. The increase was primarily due to the higher net income and an increase in depreciation and amortization expense.
Diversified Portfolio and Tenant Base
UHT's portfolio is diversified across various healthcare and human service-related facilities. As of March 31, 2024, the company's investments include:- Six hospital facilities (three acute care and three behavioral health care) - Four free-standing emergency departments - 60 medical/office buildings, including four owned by unconsolidated LLCs/LPs - Four preschool and childcare centers - One specialty facility that is currently vacant - One vacant parcel of land in Chicago, Illinois
The company's tenant base is also diversified, with approximately 41% of its consolidated revenues during the first quarter of 2024 generated from UHS-related tenants, and the remaining 59% from non-related parties.
Relationship with Universal Health Services (UHS)
A significant portion of UHT's revenues are derived from leases with subsidiaries of Universal Health Services, Inc. (UHS), a leading healthcare provider. As of March 31, 2024, the combined revenues generated from the leases on the three acute care and three behavioral health care hospital facilities leased to subsidiaries of UHS accounted for approximately 24% of UHT's consolidated revenues.In addition to the six UHS hospital facilities, UHT has 21 properties consisting of medical/office buildings, including one newly constructed medical office building and one acquired during 2023, that are either wholly or jointly-owned by the company and include tenants that are subsidiaries of UHS. The aggregate revenues generated from UHS-related tenants comprised approximately 41% of UHT's consolidated revenues during the first quarter of 2024.
Risks and Challenges
UHT faces several risks and challenges, including:- Dependence on UHS: A substantial portion of UHT's revenues are dependent on one operator, UHS, which comprised approximately 41% of its consolidated revenues in the first quarter of 2024. The company cannot assure that UHS subsidiaries will renew the leases on the hospital facilities and free-standing emergency departments upon expiration.
- Interest Rate Environment: The increase in interest rates has significantly increased UHT's interest expense, reducing its net income and cash provided by operations. This could also affect the company's ability to make additional attractive investments.
- Inflation Impacts: Elevated inflation levels have impacted UHT's tenants, primarily in personnel costs, and the company anticipates further impacts on other cost areas within the next twelve months.
- Staffing Shortages: The nationwide shortage of nurses and other clinical staff has been a significant operating issue facing UHT's healthcare provider tenants, including UHS.
- Regulatory Changes: Potential changes in healthcare legislation and reimbursement levels could have a material adverse effect on the financial condition or results of operations of the operators of UHT's properties.
Liquidity
As of March 31, 2024, UHT had $7.7 million in cash and cash equivalents and $41.3 million of available borrowing capacity under its $375 million revolving credit agreement, after $333.7 million in outstanding borrowings. The company also had various non-recourse mortgage notes payable totaling $32.5 million.UHT believes that its operating cash flows, cash and cash equivalents, available borrowing capacity, and access to the capital markets provide sufficient capital resources to fund its operating, investing, and financing requirements for the next twelve months, including making distributions necessary to maintain its REIT status.
Outlook
UHT has not provided any specific financial guidance for the full year 2024. However, the company has noted that the increase in interest rates has significantly impacted its interest expense, reducing net income and cash provided by operations. Additionally, the company has expressed concerns about the persistent inflation and its potential impact on its tenants' businesses and results of operations.Despite these challenges, UHT remains focused on actively managing its diversified portfolio of healthcare and human service-related facilities, seeking opportunities to reinvest in new developments or acquisitions that meet its planned rate of return, and maintaining its strong relationships with key tenants like UHS.