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
hospitals, free-standing emergency departments, childcare centers and
medical/office buildings. As of
• seven hospital facilities consisting of three acute care, one behavioral
health care and three specialty hospitals (two of which are currently
vacant);
• four free-standing emergency departments ("FEDs");
• fifty-seven medical/office buildings, including five owned by
unconsolidated LLCs/LPs, and;
• four preschool and childcare centers.
Forward Looking Statements
This report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. 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:
• Future operations and financial results of our tenants, and in turn ours,
will likely be materially impacted by numerous factors and future
developments related to COVID-19. Such factors and developments include,
but are not limited to, the length of time and severity of the spread of
the pandemic; the volume of cancelled or rescheduled elective procedures
and the volume of COVID-19 patients treated by the operators of our
hospitals and other healthcare facilities; measures our tenants are taking
to respond to the COVID-19 pandemic; the impact of government and
administrative regulation, including travel bans and restrictions,
shelter-in-place or stay-at-home orders, quarantines, the promotion of
social distancing, business shutdowns and limitations on businessactivity; changes in patient volumes at our tenants' hospitals and other
healthcare facilities due to patients' general concerns related to the
risk of contracting COVID-19 from interacting with the healthcare system;
the impact of stimulus on the health care industry and our tenants;
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, particularly
personal protective equipment, or PPE; 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 as the result of the
COVID-19 pandemic which could impact our ability to access capital orincrease associated borrowing costs; and changes in general economic
conditions nationally and regionally in the markets our properties are
located resulting from the COVID-19 pandemic, including higher sustained
rates of unemployment and underemployment levels and reduced consumer
spending and confidence. There may be significant declines in future bonus
rental revenue earned on our hospital properties leased to subsidiaries of
UHS to the extent that each hospital continues to experience significant
decline 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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• Due to COVID-19 restrictions and its impact on the economy, we mayexperience a decrease in prospective tenants which could unfavorably
impact the volume of new leases, as well as the renewal rate of existing
leases. The COVID-19 pandemic may delay our construction projects which
could result in increased costs and delay the timing of opening and rentalpayments from those projects, although no such delays have yet occurred.
The COVID-19 pandemic could also impact our indebtedness and the ability
to refinance such indebtedness on acceptable terms, as well as risks
associated with disruptions in the financial markets and the business of
financial institutions as the result of the COVID-19 pandemic which could
impact us from a financing perspective; and changes in general economic
conditions nationally and regionally in the markets our properties are
located resulting from the COVID-19 pandemic. Recently, COVID-19
vaccinations have begun to be administered and while we expect thatadministration of vaccines will assist in easing the number of COVID-19
cases, the pace at which this is likely to occur is difficult to predict.
Although COVID-19 has not had a material adverse impact on our financial
results during 2020, we believe that developments related to the COVID-19
pandemic may potentially have a material adverse impact on our future
financial results.
• Recent legislation, including the Coronavirus Aid, Relief, and EconomicSecurity Act (the "CARES Act") and the Paycheck Protection Program and
Health Care Enhancement Act ("PPPHCE Act"), 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 and the PPPHCE Act, 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 and the PPPHCE Act, 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. 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 and the PPPHCE
Act.
• A substantial portion of our revenues are dependent upon one operator,
UHS, which comprised approximately 33%, 31% and 30% of our consolidated
revenues for the years ended
respectively. We cannot assure you that subsidiaries of UHS will renew the
leases on our three acute care hospitals (two of which are scheduled to
expire in December, 2021 and one of which is scheduled to expire in
December, 2026) and two FEDs at existing lease rates or fair market value
lease rates. In addition, if subsidiaries of UHS exercise their options to
purchase the respective leased hospital facilities and FEDs upon
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 4 tothe consolidated financial statements - Lease Accounting, for additional
information related to a potential transaction with a wholly-owned
subsidiary of UHS in connection with
Valley Campus.
• 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.
• 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.
• The potential indirect impact of the Tax Cuts and Jobs Act of 2017, signed
into law on December 22, 2017 , which makes significant changes to
corporate and individual tax rates and calculation of taxes, which could
potentially impact our tenants and jurisdictions, both positively andnegatively, in which we do business, as well as the overall investment
thesis for REITs.
• 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.
• Lost revenues resulting from the exercise of purchase options, lease
expirations and renewals and other transactions (see Note 4 to the
consolidated financial statements - Lease Accounting for additional
disclosure related to lease expirations and subsequent vacancies thatoccurred during the second and third quarters of 2019 on two hospital
facilities.
• Our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund future growth of our business.
• 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,
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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 33% of our consolidated revenues during the year ended
encouraged to obtain and review the disclosures contained in the Legal
Proceedings section of Universal Health Services, Inc.'s Forms 10-Q and
10-K, as publicly filed with the
filings are the sole responsibility of UHS and are not incorporated by
reference herein.
• 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.
• The potential unfavorable impact on our business of the deterioration in
national, regional and local economic and business conditions, including a
further 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.
• A continuation in the deterioration in general economic conditions which
has resulted in increases in the number of people unemployed and/or
insured and likely increase the number of individuals without health
insurance; as a result, the operators of our facilities may experience
declines in patient volumes which could result in decreased occupancy
rates at our medical office buildings.
• A continuation of the worsening of the economic and employment conditions
in the United States will likely materially affect the business of our
operators, including UHS, which will likely unfavorably impact our future
bonus rentals (on the UHS hospital facilities) and may potentially have anegative impact on the future lease renewal terms and the underlying value
of the hospital properties.
• 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.
• The impact of property values and results of operations of severe weather
conditions, including the effects of hurricanes.
• Government regulations, including changes in the reimbursement levels
under the Medicare and Medicaid programs.
• 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 payors or
government programs, including Medicare (including, but not limited to,
the potential unfavorable impact of future reductions to Medicarereimbursements and Medicaid reimbursements (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.
• Pending limits for most federal agencies and programs aimed at reducing
budget deficits by
report released by the
provisions, the law resulted in across-the-board cuts to discretionary,
national defense and Medicare spending on
Medicare payment reductions of up to 2% per fiscal year with a uniform
percentage reduction across all Medicare programs. The Bipartisan Budget
Act of 2015, enacted on
Medicare reimbursement. The CARES Act suspended payment reductions between
2030. The CAA extended the suspension of payment reductions until March
31, 2021. We cannot predict whether
implemented Medicare payment reductions or what other federal budget
deficit reduction initiatives may be proposed by
forward. We also cannot predict the effect these enactments will have on
the operators of our properties (including UHS), and thus, our business.
• 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 andHealthcare and Education Reconciliation Act of 2010 (collectively referred
to as the "Legislation").
executive actions that will strengthen the Legislation and may reverse the
policies of the prior administration.
directed the issuance of final rules (i) enabling the formation of
association health plans that would be exempt from certain Legislation
requirements such as the provision of essential health benefits; (ii)
expanding the availability of short-term, limited duration health
insurance, (iii) eliminating cost-sharing reduction
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payments to insurers that would otherwise offset deductibles and other
out-of-pocket expenses for health plan enrollees at or below 250 percent
of the federal poverty level; (iv) relaxing requirements for state
innovation waivers that could reduce enrollment in the individual and
small group markets and lead to additional enrollment in short-term,
limited duration insurance and association health plans; (v) incentivizing
the use of health reimbursement arrangements by employers to permit
employees to purchase health insurance in the individual market, and; (vi)
directing the issuance of federal rulemaking by executive agencies to
increase transparency of healthcare price and quality information. The
uncertainty resulting from these Executive Branch policies has led toreduced Exchange enrollment in 2018 and 2019 and is expected to further
worsen the individual and small group market risk pools in future
years. It is also anticipated that these policies, to the extent that they
remain as implemented, may create additional cost and reimbursement
pressures on hospitals, including ours. In addition, while attempts to
repeal the entirety of the Legislation have not been successful to date, a
key provision of the Legislation was repealed as part of the Tax Cuts and
Jobs Act and on
stayed and has been appealed. On
of Appeals voted 2-1 to strike down the Legislation individual mandate as
unconstitutional and sent the case back to the
the mandate. On
during the 2020-2021 term, two consolidated cases, filed by the State of
Oral argument was heard on
2021. On
has withdrawn support for the challenge before the
unable to predict the final outcome of this matter which has caused
greater uncertainty regarding the future status of the Legislation. If all
or any parts of the Legislation are ultimately found to be
unconstitutional, it could have a material adverse effect on the business,
financial condition and results of operations of the operators of our
properties, and, thus, our business.
• Under the Legislation, hospitals are required to make public a list of
their standard charges, and effective
that this disclosure be in machine-readable format and include charges for
all hospital items and services and average charges for diagnosis-related
groups. On
Transparency Requirements for Hospitals to Make Standard Charges Public."
This rule took effect on
also make public their payor-specific negotiated rates, minimum negotiated
rates, maximum negotiated rates, and cash for all items and services,
including individual items and services and service packages, that could
be provided by a hospital to a patient. Failure to comply with these
requirements may result in daily monetary penalties.
• As part of the CAA,
limiting patient balance billing in certain circumstances. The CAA
addresses surprise medical bills stemming from emergency services,
out-of-network ancillary providers at in-network facilities, and air
ambulance carriers. The legislation prohibits surprise billing when
out-of-network emergency services or out-of-network services at anin-network facility are provided, unless informed consent is received. In
these circumstances providers are prohibited from billing the patient for
any amounts that exceed in-network cost-sharing requirements. The
legislation requires implementing regulations within a year of enactment.
• 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 adecrease 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.
• 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.
• 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,
County,
Valley Campus, a 130-bed acute care hospital.
• Changes in, or inadvertent violations of, tax laws and regulations and
other factors than can affect REITs and our status as a REIT.
• 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.
• Our ownership interest in five 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 theequivalent proportionate Transfer Price. The closing of the transfer must
occur within 60 to 90 days of the acceptance by the Non-Offering Member.
• Fluctuations in the value of our common stock.
• Other factors referenced herein or in our other filings with the
Securities and Exchange Commission .
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
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following: Purchase Accounting for Acquisition of Investments in Real Estate: Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with current accounting guidance, we account for our property acquisitions as acquisitions of assets, which requires the capitalization of acquisition costs to the underlying assets and prohibits the recognition of goodwill or bargain purchase gains. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above market rate assumed loans, or loan discounts, in the case of below market assumed loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate. The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacement costs adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are also determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on management's determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property based on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and unreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. 37 -------------------------------------------------------------------------------- In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases. Asset Impairment: We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market price of the property, a change in the expected holding period for the property, a significant adverse change in how the property is being used or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of the property, or a history of operating or cash flow losses of the property. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the real estate investment's use and eventual disposition and compare that estimate to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether the carrying value of a property is recoverable, our strategy of holding properties over the long-term directly decreases the likelihood of their carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test, the affected assets must be reduced to their fair value. We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs that a market participant would use based on the highest and best use of the asset, which is similar to the income approach that is commonly utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside broker opinions of value or third party appraisals. In considering whether to classify a property as held for sale, we consider factors such as whether management has committed to a plan to sell the property, the property is available for immediate sale in its present condition for a price that is reasonable in relation to its current value, the sale of the property is probable, and actions required for management to complete the plan indicate that it is unlikely that any significant changes will made to the plan. If all the criteria are met, we classify the property as held for sale. Upon being classified as held for sale, depreciation and amortization related to the property ceases and it is recorded at the lower of its carrying amount or fair value less cost to sell. The assets and related liabilities of the property are classified separately on the consolidated balance sheets for the most recent reporting period. Only those assets held for sale that constitute a strategic shift or that will have a major effect on our operations are classified as discontinued operations. An other than temporary impairment of an investment in an unconsolidated LLC is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flow. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income. Federal Income Taxes: No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, and intend to continue to remain so qualified. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to shareholders. As a REIT, we generally will not be subject to federal, state or local income tax on income that we distribute as dividends to our shareholders. We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary income plus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax has been reflected in the financial statements as no tax was due. 38 -------------------------------------------------------------------------------- Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording of provision for investment losses.
Results of Operations
Year ended
For the year endedDecember 31, 2020 , net income was$19.4 million as compared to$19.0 million during 2019. The$483,000 increase was primarily attributable to:
•
facilities located in
occurred on
has remained vacant since the respective date of lease expiration);
•
primarily due to a decrease in our average cost of borrowings under our
revolving credit agreement, partially offset by an increase in our average
outstanding borrowings;
•
the sale of the Kings Crossing II MOB and the sale of a parcel of land;
•
leased to subsidiaries of UHS;
•
expense, and;
•
income experienced at various properties.
Total revenues increased$847,000 , or 1.1%, during 2020 as compared to 2019. The increase was due to: (i) an aggregate net increase of$1.71 million experienced at various properties; (ii) a$565,000 increase in the bonus rentals; (iii) a$311,000 increase resulting from an MOB that was acquired during the fourth quarter of 2019, partially offset by; (iv) a$1.74 million decrease resulting from the revenues recorded during 2019 in connection with two hospital facilities that had lease expirations and vacancies in June and September of 2019 (see Note 4 to the consolidated financial statements, Lease Accounting). Included in our other operating expenses are expenses related to the consolidated medical office buildings and two vacant hospital facilities (as discussed herein), which totaled$19.8 million and$19.1 million for the years endedDecember 31, 2020 and 2019, respectively. Our operating expenses for 2020 and 2019 include expenses associated with the lease expirations at two of our hospital facilities, which are currently vacant, of approximately$677,000 and$370,000 in the aggregate for the years endedDecember 31, 2020 and 2019, respectively. 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 of 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 tenant reimbursement revenue in our consolidated statements of income. 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, as reflected on the attached Supplemental Schedules, in accordance with standards established by theNational Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO adjusts for the effects of gains, such as gains on transactions during the periods presented. To the extent a REIT recognizes a gain or loss with respect to the sale of incidental assets, such as the sale of land peripheral to operating properties, the REIT has the option to exclude or include such gains and losses in the calculation of FFO. We have opted to exclude gains and losses from sales of incidental assets in our calculation of FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) an alternative to cash flow from operating activities determined in accordance with GAAP; (iii) a measure of our liquidity, or; (iv) an indicator of funds available for our cash needs, including our ability to make cash distributions to shareholders. 39 -------------------------------------------------------------------------------- Below is a reconciliation of our reported net income to FFO for 2020 and 2019 (in thousands): 2020 2019 Net income$ 19,447 $ 18,964
Depreciation and amortization expense on consolidated investments
25,581 25,870
Depreciation and amortization expense on unconsolidated affiliates 1,202
1,141
Gains on sales of real estate assets - (1,951 ) Funds From Operations$ 46,230 $
44,024
Weighted average number of shares outstanding - Diluted 13,765
13,752
Funds From Operations per diluted share$ 3.36 $
3.20
Our FFO increased$2.2 million , or$.16 per diluted share, during 2020 as compared to 2019 due to: (i) a favorable impact of$2.3 million , or$.17 per diluted share, resulting from a decrease in interest expense, primarily due to a decrease in our average cost of borrowings pursuant to our revolving credit agreement, partially offset by an increase in our average outstanding borrowings; (ii) a favorable impact of$565,000 , or$.04 per diluted share, resulting from an increase in bonus rentals; (iii) other combined net increases of$1.4 million , or$.10 per diluted share, partially offset by; (iv) an unfavorable impact of$2.0 million , or$.15 per diluted share, related to the above-mentioned vacancies at two of our hospitals as a result of lease expirations onJune 1, 2019 andSeptember 30, 2019 (excluding the related interest expense impact). During 2020, we had a total of 39 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 30% of the aggregate rentable square feet of these properties (21% related to renewed leases and 9% related to new leases). During 2019, we had a total of 62 new or renewed leases related to the medical office buildings, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 24% of the aggregate rentable square feet of these properties (17% related to renewed leases and 7% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, decreased by approximately 1% during 2020 and remained relatively unchanged during 2019. The weighted-average tenant improvement costs associated with new or renewed leases was approximately$18 and$15 per square foot during 2020 and 2019, respectively. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 3% of base rental revenue over the term of the leases during 2020 and 2% of base rental revenue over the term of the leases during 2019. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.9% and 0.4% of the future aggregate base rental revenue over the lease terms during 2020 and 2019, respectively. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. 40
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Year ended
For the year ended
•
recovery proceeds received in excess of property damage write-offs recorded
during 2018;
•
interruption insurance recovery proceeds received recorded during 2018,
including approximately
•
connection with a lease termination agreement entered into during the second
quarter of 2018 related to a single tenant MOB located in Texas that
terminated a lease that was scheduled to expire in July, 2020;
•
the sale of the Kings Crossing II MOB and the sale of a parcel of land;
•
located in
30, 2019), that was entered into at a substantially increased lease rate as
compared to the original lease which expired on
•
hospital facility located in
•
facilities, and;
•
expense due primarily to increases in our average outstanding borrowings,
and average cost of borrowings, pursuant to our revolving credit agreement.
Total revenues increased$1.0 million , or 1.3%, during 2019 as compared to 2018. The increase was due primarily to: (i) a$563,000 increase in the bonus rental revenue generated on the UHS hospital facilities; (ii) a$718,000 increase resulting from the increased rental rate in connection with a short-term lease covering the period ofJune 1, 2019 throughSeptember 30, 2019 on a hospital facility located inEvansville, Indiana , that was vacated onSeptember 30, 2019 (see Note 4 to the consolidated financial statements, Lease Accounting), and; (iii) a$428,000 decrease resulting from theJune 1, 2019 lease expiration and tenant vacancy at a hospital facility located inCorpus Christi, Texas , (see Note 4 to the consolidated financial statements, Lease Accounting). Included in our other operating expenses are expenses related to the consolidated medical office buildings and two vacant hospital facilities (as discussed herein), which totaled$19.1 million and$18.6 million for the years endedDecember 31, 2019 and 2018, respectively. Our operating expenses for 2019 include expenses associated with the lease expirations at two of our hospital facilities, which are currently vacant, of approximately$370,000 in the aggregate for the year endedDecember 31, 2019 . 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 of 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 tenant reimbursement revenue in our consolidated statements of income. During 2019, we had a total of 62 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 24% of the aggregate rentable square feet of these properties (17% related to renewed leases and 7% related to new leases). During 2018, we had a total of 34 new or renewed leases related to the medical office buildings, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 17% of the aggregate rentable square feet of these properties (14% related to renewed leases and 3% related to new leases). 41 -------------------------------------------------------------------------------- Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, remained relatively unchanged during 2019 and decreased 3% during 2018. The weighted-average tenant improvement costs associated with new or renewed leases was approximately$15 and$10 per square foot during 2019 and 2018, respectively. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 2% of base rental revenue over the term of the leases during 2019 and 4% of base rental revenue over the term of the leases during 2018. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.4% and 0.5% of the future aggregate base rental revenue over the lease terms during 2019 and 2018, respectively. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. Below is a reconciliation of our reported net income to FFO for 2019 and 2018 (in thousands): 2019 2018 Net income$ 18,964 $ 24,196
Depreciation and amortization expense on consolidated investments
25,870 24,337
Depreciation and amortization expense on unconsolidated affiliates 1,141
1,036
Hurricane insurance recovery proceeds in excess of damaged property write-downs
- (4,535 )
Gains on sales of real estate assets (1,951 ) -
Funds From Operations$ 44,024 $
45,034
Weighted average number of shares outstanding - Diluted 13,752
13,722
Funds From Operations per diluted share$ 3.20 $ 3.28 Our FFO decreased$1.0 million , or$.08 per diluted share, during 2019 as compared to 2018 due primarily to: (i) a decrease of approximately$1.7 million , or$.12 per diluted share, resulting from a lease termination agreement entered into during 2018 on a single-tenant medical office building located inTexas (this agreement terminated a lease that was scheduled to expire in July, 2020); (ii) a decrease of approximately$500,000 , or$.04 per diluted share, resulting from business interruption insurance recovery proceeds recorded during 2018 that related to the period of August through December of 2017; (iii) an increase of approximately$400,000 , or$.03 per diluted share, consisting of non-recurring repairs and remediation expenses incurred during 2018 at one of our medical office buildings; (iv) an increase of approximately$563,000 , or$.04 per diluted share, resulting from an increase in bonus rent from UHS hospital facilities, and; (v) other combined net increase of approximately$275,000 , or$.02 per diluted share. Hurricane Harvey Impact In lateAugust 2017 , five of our medical office buildings located in theHouston, Texas area, incurred extensive water damage as a result of Hurricane Harvey. Until various times during the second quarter of 2018, these properties were temporarily closed and non-operational as we continued to reconstruct and restore them to operational condition. As ofJune 30, 2018 , reconstruction on all of the occupied space in these properties had been completed and operations had resumed. During the first quarter of 2018, pursuant to the terms of a global settlement with our commercial property insurance carrier, we received$5.5 million of additional insurance recovery proceeds bringing the aggregate hurricane-related insurance recoveries to$12.5 million . The aggregate insurance recovery proceeds, which are net of applicable deductibles, covered substantially all of the costs incurred related to the remediation, repair and reconstruction of each of these properties as well business interruption recoveries for the lost income related to each of these properties during the period they were non-operational. Included in our financial results for the year endedDecember 31, 2018 are hurricane insurance recoveries of approximately$4.5 million consisting of recovery proceeds in excess of the damaged property write-downs. Additionally, during 2018, we recorded approximately$1.2 million of hurricane business interruption insurance recoveries in connection with the damage sustained from Hurricane Harvey. Included in this amount, which covered the period of late August, 2017 through the second quarter of 2018 (after satisfaction of the applicable deductibles), was approximately$500,000 related to the period of August, 2017 through December, 2017. 42
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Other Operating Results Interest Expense: Reflected below are the components of our interest expense which amounted to$8.3 million during 2020,$10.5 million during 2019 and$10.0 million during 2018 (amounts in thousands): 2020 2019 2018 Revolving credit agreement$ 4,608 $ 7,551 $ 6,834 Mortgage interest 2,600 2,701 2,821 Interest rate caps income, net - (122 ) (a.) (288 ) (a.) Interest rate swaps expense/(income), net 737 (b.) (108 ) (c.)
-
Amortization of financing fees 765 637
648
Amortization of fair value of debt (52 ) (52 ) (50 ) Capitalized interest on major projects (395 ) (74 ) - Other interest - - 12 Interest expense, net$ 8,263 $ 10,533 $ 9,977 (a.) Represents interest paid to us by the counterparties pursuant to two interest rate caps with a combined notional amount of$60 million , which expired inMarch 2019 .
(b.) Represents net interest paid by us to the counterparties pursuant to
three interest rates SWAPs with a combined notional amount of $140
million .
(c.) Represents net interest paid to us by the counterparties pursuant to an
interest rates SWAPs with a notional amount of $50 million .
Interest expense decreased $2.27 million during 2020 to $8.26 million as
compared to $10.53 million during 2019. The decrease was primarily due to: (i) a
$2.9 million decrease in the interest expense on our revolving credit agreement
resulting from a decrease in our average cost of borrowings pursuant to our
revolving credit agreement (1.8% during 2020 as compared to 3.5% during 2019),
partially offset by an increase in our average outstanding borrowings ($219.1
million during 2020 as compared to $198.3 million during 2019); (ii) a $967,000
net increase in interest expense related to interest rate swaps/caps; (iii) a
$101,000 decrease in mortgage interest expense, resulting primarily from the
repayment of a mortgage loan during the second quarter of 2019; (iv) a $321,000
decrease in interest expense due to an increase in capitalized interest on major
projects, due primarily to the increased construction cost expenditures made
during 2020 made in connection with the Clive Behavioral Health facility, and;
(v) a $128,000 increase due to an increase in amortization of financing fees.
Interest expense increased $556,000 during 2019 to $10.53 million as compared to
$9.98 million during 2018. The increase was primarily due to: (i) a $717,000
increase in interest expense on our revolving credit agreement resulting from an
increase in our average cost of borrowings pursuant to our revolving credit
agreement (3.5% during 2019 as compared to 3.3% during 2018), as well as an
increase in our average outstanding borrowings ($198.3 million during 2019 as
compared to $191.4 million during 2018); (ii) a $58,000 net increase in interest
expense related to interest rate swaps/caps; (iii) a $120,000 decrease in
mortgage interest expense, resulting primarily from the repayment of a mortgage
loans during 2018 and 2019, and; (iv) $99,000 of other combined net decreases in
interest expense.
COVID-19 Impact
The COVID-19 pandemic began to significantly impact the United States in
mid-March, 2020. As a result of various policies implemented by the federal and
state governments, and varying by individual state, many non-essential
businesses in the nation were closed for varying time periods. We believe that
by June 30, 2020 , substantially all of our tenants had resumed operations of
their businesses.
Tenants representing approximately 99% of our occupied square footage have paid
their rents through December 31, 2020 . Although COVID-19 has not had a material
adverse impact on our results of operations through December 31, 2020 , we
believe that the potentially adverse impact that the pandemic may have on our
future operations and financial results of our tenants, and in turn ours, will
depend upon many factors, most of which are beyond our, or our tenants', ability
to control or predict. Since the underlying businesses in each of our properties
are operated by the tenants, we can provide no assurance that the businesses
will continue to operate in the future, or stay current with their lease
obligations.
Since the bonus rents earned by us on the three acute care hospitals leased to
wholly-owned subsidiaries of Universal Health Services, Inc., are computed based
upon a computation that compares each hospital's current quarter revenue to the
corresponding quarter in the base year, we could experience significant declines
in future bonus rental revenue earned on these properties should those hospitals
experience significant declines in patient volumes and revenues. These hospitals
believe that, to the extent that they experience revenue declines and increased
expenses resulting from the COVID-19 pandemic, as ultimately measured over the
life of the pandemic, they are eligible for emergency fund grants as provided
for by the Coronavirus Aid, Relief, and Economic Security Act
43
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("CARES Act"). Our financial statements for the year ended December 31, 2020
include bonus rental attributable to revenues recorded by these three hospitals
in connection with CARES Act grants.
Throughout the common areas of many properties in our portfolio, we have
implemented COVID-19 risk mitigating actions such as, enhanced cleaning
protocols including supplemental cleaning and sanitizing of high-touch points,
limiting points of entry at certain facilities, and coordinating with health
care providers to assess or screen patients prior to entering certain of our
MOBs.
Disclosures Related to Certain Hospital Facilities
Please refer to Note 4 to the consolidated financial statements - Lease
Accounting, for additional information regarding certain of our hospital
facilities including
Effects of Inflation Inflation has not had a material impact on our results of operations over the last three years. However, since the healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures, as are supply and other costs, we and the operators of our hospital facilities cannot predict the impact that future economic conditions may have on our/their ability to contain future expense increases. Depending on general economic and labor market conditions, the operators of our hospital facilities may experience unfavorable labor market conditions, including a shortage of nurses which may cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Their ability to pass on increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit their ability to increase prices. Therefore, there can be no assurance that these factors will not have a material adverse effect on the future results of operations of the operators of our facilities which may affect their ability to make lease payments to us. Most of our leases contain provisions designed to mitigate the adverse impact of inflation. Our hospital leases require all building operating expenses, including maintenance, real estate taxes and other costs, to be paid by the lessee. In addition, certain of the hospital leases contain bonus rental provisions, which require the lessee to pay additional rent to us based on increases in the revenues of the facility over a base year amount. In addition, most of our MOB leases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, insurance and real estate taxes. These provisions may reduce our exposure to increases in operating costs resulting from inflation. To the extent that some leases do not contain such provisions, our future operating results may be adversely impacted by the effects of inflation.
Liquidity and Capital Resources
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• A favorable change of
plus/minus the adjustments to reconcile net income to net cash provided by
operating activities (depreciation and amortization, amortization related to
above/below market leases, amortization of debt premium, amortization of
deferred financing costs, stock-based compensation and gains on sales of
real estate assets), as discussed above;
• an unfavorable change of
due to the timing of disbursements;
• a favorable change of $295,000 in lease receivables;
• a favorable change of
prepaid rents, and;
• other combined net unfavorable changes of $704,000 .
44
--------------------------------------------------------------------------------
Net cash used in investing activities
Net cash used in investing activities was
2020:
During 2020,
• spent
behavioral health care hospital located in
substantially completed and received a temporary certificate of occupancy
in late December, 2020, and tenant improvements at various MOBs;
• spent $3.2 million in equity investments in unconsolidated LLCs;
• spent
building in late
financial statements -
and;
• received
million of cash proceeds generated from a construction loan obtained by
Grayson Properties II during the second quarter of 2020.
2019:
During 2019,
• spent
• spent approximately $12.3 million for capital additions to real estate
investments, including $5.9 million related to the construction of the
above-mentioned facility located in Clive, Iowa , as well as tenant
improvements at various MOBs;
• spent approximately
Medicine Center, as discussed in Note 3 to the consolidated financial
statements -
• received
our unconsolidated LLCs (
• received approximately
sales of real estate assets consisting of an MOB located in
Texas , and a parcel of land.
Net cash used in financing activities
Net cash used in financing activities was
2020:
The
• paid
• received
of credit;
• paid
• paid
including amendment fees, and;
• paid
income tax withholding obligations related to stock-based compensation.
2019:
The
• received
of credit;
• received
interest;
• paid
income tax withholding obligations related to stock-based compensation;
• paid$37.4 million of dividends; 45
--------------------------------------------------------------------------------
• paid $4.2 million on mortgage notes payable that are non-recourse to us,
including the repayment of $2.5 million related to a previously
outstanding mortgage note payable on one property that was funded
utilizing borrowings under our revolving credit agreement, and;
• paid $35,000 of financing costs.
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• an unfavorable change of approximately
net income plus/minus the adjustments to reconcile net income to net cash
provided by operating activities (depreciation and amortization,
amortization of debt premium, stock-based compensation, hurricane insurance
recovery proceeds in excess of damaged property write-downs and gains on
sales of real estate assets), as discussed above. This decrease was due
primarily to
lease termination agreement on a single-tenant MOB located in Texas , that
terminated a lease that was scheduled to expire in July, 2020;
• an unfavorable change of
deferred and prepaid rents, primarily resulting from cash received in 2018
from various tenants as reimbursement for their share of the cost of
certain tenant improvements;
• a favorable change of $711,000 in lease and other receivables;
• a favorable change of $299,000 in leasing costs paid;
• a favorable change of $1.3 million in accrued expenses and other
liabilities due to timing of disbursements, and;
• other combined net favorable changes of $796,000 .
Net cash used in investing activities
Net cash used in investing activities was$16.5 million during 2019 as compared to$8.0 million during 2018. The factors contributing to the$16.5 million of net cash used in investing activities during 2019 are detailed above.
2018:
During 2018,
• spent
• spent approximately
consisting primarily of hurricane related repairs at certain MOBs and
tenant improvements at various MOBs;
• spent approximately
statements - New Construction , Acquisitions and Dispositions;
• spent $192,000 for hurricane related remediation expenses;
• received
our unconsolidated LLCs (
• received approximately
excess of damaged property write-downs.
Net cash used in financing activities
Net cash used in financing activities was$25.1 million during 2019, as compared to$33.3 million during 2018. The factors contributing to the$25.1 million of net cash used in financing activities during 2019 are detailed above.
2018:
The
• received
of credit;
• received
refinancing that are non-recourse to us (these proceeds were utilized to
repay outstanding borrowings under our revolving credit facility);
46
--------------------------------------------------------------------------------
• received
interest;
• paid $36.8 million of dividends;
• repaid
(one of which was subsequently refinanced with a new $13.0 million
mortgage), and;
• paid $1.7 million of financing costs related to the revolving credit
agreement and a new mortgage note payable that is non-recourse to us.
Additional cash flow and dividends paid information for 2020, 2019 and 2018:
As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of$44.2 million during 2020,$42.7 million during 2019 and$42.9 million during 2018. As also indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation, hurricane insurance recovery proceeds in excess of damaged property write-downs (as applicable) and gains on sales of real estate assets (as applicable), are the primary differences between our net income and net cash provided by operating activities for each year. We declared and paid dividends of$38.0 million during 2020,$37.4 million during 2019 and$36.8 million during 2018. During 2020, the$44.2 million of net cash provided by operating activities was approximately$6.2 million greater than the$38.0 million of dividends paid during 2020. During 2019, the$42.7 million of net cash provided by operating activities was approximately$5.2 million greater than the$37.4 million of dividends paid during 2019. During 2018, the$42.9 million of net cash provided by operating activities was approximately$6.1 million greater than the$36.8 million of dividends paid during 2018. 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 each of the last three years. From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs, as outlined above. In determining and monitoring our dividend level on a quarterly basis, our management andBoard of Trustees consider many factors in determining the amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain our REIT status; (ii) the current and projected operating results of our properties, including those owned in LLCs, and; (iii) our future capital commitments and debt repayments, including those of our LLCs. Based upon the information discussed above, as well as consideration of projections and forecasts of our future operating cash flows, management and theBoard of Trustees have determined that our operating cash flows have been sufficient to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to our projected future results of operations. 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 existing$350 million revolving credit agreement (which had$108.2 million of available borrowing capacity, net of outstanding borrowings and letters of credit as ofDecember 31, 2020 ); (ii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by our consolidated and unconsolidated LLCs/LPs; (iii) the issuance of equity pursuant to our at-the-market ("ATM") equity issuance program, and/or; (iv) the issuance of other long-term debt. 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. 47
--------------------------------------------------------------------------------
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$350 million 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. InJune 2020 , we entered into the first amendment (the "First Amendment") to the revolving credit agreement ("Credit Agreement"), pursuant to which, among other things, an additional tranche of revolving credit commitments in the amount of$50 million , designated as the "Revolving B Facility", was established thereby increasing the aggregate revolving credit commitment to$350 million from$300 million . The Credit Agreement, as amended, which is scheduled to mature inMarch 2022 , provides for a revolving credit facility in an aggregate principal amount of$350 million , including a$40 million sublimit for letters of credit and a$30 million sublimit for swingline/short-term loans. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in and liens on all equity interests in certain of the Trust's wholly-owned subsidiaries. The remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to giving effect to the First Amendment, has been designated as the "Revolving A Facility". Borrowings made pursuant to the Revolving A Facility will bear interest, at our option, at one, two, three or six-month LIBOR plus an applicable margin ranging from 1.10% to 1.35% or at the Base Rate plus an applicable margin ranging from 0.10% to 0.35%. The Credit Agreement defines "Base Rate" as the greater 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%. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving A Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtDecember 31, 2020 , the applicable margin over the LIBOR rate was 1.20%, the margin over the Base Rate was 0.20%, and the facility fee was 0.20%. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods for the Revolving A Facility. Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three or six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an applicable margin ranging from 0.85% to 1.10%. 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 initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtDecember 31, 2020 , the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was 0.95% and the facility fee was 0.20%. AtDecember 31, 2020 , we had$236.2 million of outstanding borrowings and$5.6 million of letters of credit outstanding under our Credit Agreement. We had$108.2 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as ofDecember 31, 2020 . The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was$236.2 million atDecember 31, 2020 . There are no compensating balance requirements. The average amount outstanding under our Credit Agreement during the years endedDecember 31, 2020 , 2019 and 2018 was$219.1 million ,$198.3 million and$191.4 million , respectively, with corresponding effective interest rates of 2.4%, 3.7% and 3.5%, respectively, including commitment fees and interest rate swaps/caps. AtDecember 31, 2019 , we had$213.0 million of outstanding borrowings outstanding against our revolving credit agreement and$87.0 million of available borrowing capacity. The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding the Trust's ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants atDecember 31, 2020 and 2019. We also believe that we would remain in compliance if, assuming that the majority of the potential new borrowings will be used to fund investments, the full amount of our commitment was borrowed. 48 -------------------------------------------------------------------------------- The following table includes a summary of the required compliance ratios atDecember 31, 2020 and 2019, giving effect to the covenants contained in the Credit Agreements in effect on the respective dates (dollar amounts in thousands): December 31, 2020 December 31, 2019 Covenant UHT Covenant UHT Tangible net worth$ 125,000 $ 147,263 $ 125,000 $ 167,181 Total leverage < 60 % 44.8 % < 60 % 42.3 % Secured leverage < 30 % 8.6 % < 30 % 9.1 % Unencumbered leverage < 60 % 41.4 % < 60 % 38.5 % Fixed charge coverage > 1.50x 4.7x > 1.50x 4.0x As indicated on the following table, we have various mortgages, all of which are non-recourse to us and are not cross-collateralized, included on our consolidated balance sheet as ofDecember 31, 2020 and 2019 (amounts in thousands): As of 12/31/2020 As of 12/31/2019 Outstanding Outstanding Interest Maturity Balance Balance Facility Name Rate Date (in thousands)(a.) (in thousands)700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 4.54 % June, 2022 5,437 5,654BRB Medical Office Building fixed rate mortgage loan 4.27 % December, 2022 5,505 5,721Desert Valley Medical Center fixed rate mortgage loan 3.62 % January, 2023 4,511 4,6612704 North Tenaya Way fixed rate mortgage loan 4.95 % November, 2023 6,576 6,727 Summerlin Hospital Medical Office Building III fixed rate mortgage loan 4.03 % April, 2024 13,043 13,196Tuscan Professional Building fixed rate mortgage loan 5.56 % June, 2025 2,933 3,492 Phoenix Children's East Valley Care Center fixed rate mortgage loan 3.95 % January, 2030 8,718 8,961Rosenberg Children's Medical Plaza fixed rate mortgage loan 4.42 % September, 2033 12,508 12,732 Total, excluding net debt premium and net financing fees 59,231 61,144 Less net financing fees (477 ) (594 ) Plus net debt premium 141 194 Total mortgage notes payable, non-recourse to us, net $ 58,895 $ 60,744
(a.) All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon
maturity.
The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as ofDecember 31, 2020 had a combined carrying value of approximately$59.2 million and a combined fair value of approximately$62.0 million . AtDecember 31, 2019 , we had various mortgages, all of which were non-recourse to us, included in our consolidated balance sheet. The combined outstanding balance of these various mortgages was$61.1 million and these mortgages had a combined fair value of approximately$63.1 million . The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be "level 2" in the fair value hierarchy as outlined in the authoritative guidance for disclosure in connection with debt instruments. 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. 49
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Contractual Obligations:
The following table summarizes the schedule of maturities of our outstanding
borrowing under our revolving credit facility ("Credit Agreement"), the
outstanding mortgages applicable to our properties recorded on a consolidated
basis and our other contractual obligations as of December 31, 2020 (amounts in
thousands):
Payments Due by Period (dollars in thousands)
Less than More than
Debt and Contractual Obligation Total 1 Year 1-3 years 3-5 years 5 years
Long-term non-recourse debt-fixed
(a) (b) $ 59,231 $ 2,081 $ 24,089 $ 14,489 $ 18,572
Long-term debt-variable (c) 236,200 - 236,200 - -
Estimated future interest payments
on debt outstanding as
of December 31, 2020 (d) 16,779 5,710 4,761 1,835 4,473
Operating leases (e) 27,361 480 960 960 24,961
Construction commitments (f) 12,097 12,097 - - -
Equity and debt financing
commitments (g) 362 362 - - -
Total contractual obligations
(a) The mortgages are secured by the real property of the buildings as well as
property leases and rents. Property-specific debt is detailed above.
(b) Consists of non-recourse debt with an aggregate fair value of approximately
rate debt impacts the fair value of debt, but it has no impact on interest
incurred or cash flow. Excludes
outstanding as of December 31, 2020 , that is non-recourse to us, at the
unconsolidated LLCs in which we hold various non-controlling ownership
interests (see Note 8 to the consolidated financial statements).
(c) Consists of $236.2 million of borrowings outstanding as of
under the terms of our $350 million Credit Agreement which matures on
March 28, 2022 . The amount outstanding approximates fair value as of
December 31, 2020 .
(d) Assumes that all debt outstanding as of
borrowings under the Credit Agreement, and the loans which are non-recourse
to us, remain outstanding until the stated maturity date of the debt
agreements at the same interest rates which were in effect as of
2020. We have the right to repay borrowings under the Credit Agreement at any
time during the term of the agreement, without penalty. Interest payments are
expected to be paid utilizing cash flows from operating activities or
borrowings under our revolving Credit Agreement.
(e) Reflects our future minimum operating lease payment obligations outstanding
as of
statements -Lease Accounting, in connection with ground leases at fourteen of
our consolidated properties.
(f) Consists of the remaining estimated construction costs of two new
construction projects, consisting of a 100-bed behavioral health care
facility located in
located in
late 2020. We are required to build these facilities pursuant to agreements
with third parties.
(g) Consists of equity investment and debt financing commitments remaining in
connection with our investment at Forney Medical
Off Balance Sheet Arrangements
As ofDecember 31, 2020 we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit atDecember 31, 2020 totaled$5.6 million related to Grayson Properties II. As ofDecember 31, 2019 , we did not have any off balance sheet arrangements other than equity and debt financing commitments.
Acquisition and Divestiture Activity
Please see Note 3 to the consolidated financial statements for completed transactions.
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