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 limited liability companies ("LLCs")/limited liability
partnerships ("LPs"), and;
• four preschool and childcare centers.
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
this Quarterly Report and in other reports or documents that we file from time
to time with the
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 business activity; 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 or increase
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
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our revenue and cash flow and the value of our properties, and potentially,
our ability to maintain our dividend at current levels.
• Due to COVID-19 restrictions and its impact on the economy, we may
experience 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 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. We are not able to fully quantify the
impact that these factors will have on our financial results during 2021,
but developments related to the COVID-19 pandemic are likely to have a
material adverse impact on our future financial results.
• Recent legislation, including the Coronavirus Aid, Relief, and Economic
Security 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 36% and 32% of our consolidated revenues for
the three-month periods ended March 31, 2021 and 2020, respectively. As
previously disclosed, a wholly-owned subsidiary of UHS has notified us that
it is planning to terminate the existing lease on Southwest Healthcare
System , Inland Valley Campus, upon the scheduled expiration of the current
lease term on December 31, 2021 . As permitted pursuant to the terms of the
lease, UHS has the right to purchase the leased property at its appraised
fair market value at the end of the existing lease term. However, UHS has
proposed exchanging potential substitution properties, with an aggregate
fair market value substantially equal to that of Southwest Healthcare
System , Inland Valley Campus, in return for the real estate assets of the
Inland Valley Campus. The proposed substitution properties consist of one
acute care hospital (including a behavioral health pavilion) and a newly
constructed behavioral health hospital. The Independent Trustees of the
Board have approved the proposed property substitution subject to
satisfactory due diligence and completion of definitive agreements. The
effective date of the property substitution is expected to coincide with the
scheduled lease maturity date of December 31, 2021 . Pursuant to the terms of
the lease on the Inland Valley Campus, we earned $1.1 million of lease
revenue during the three-month period ended March 31, 2021 ($662,000 in base
rental and $454,000 in bonus rental) and $4.4 million of lease revenue
during the year ended December 31, 2020 ($2.6 million in base rental and
$1.8 million in bonus rental).
• In addition, 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 and do not enter
into the substitution arrangement 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 7 to the condensed consolidated financial
statements - Lease Accounting, for additional information related to a
potential transaction with a wholly-owned subsidiary of UHS in connection
with Southwest Healthcare System , Inland 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 and negatively, in
which we do business, as well as the overall investment thesis for REITs.
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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.
• 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 on two hospital
facilities and the notice provide by Kindred Healthcare , lessee of one of
our other specialty hospitals that they do not intend to renew the lease on
its facility which expires on December 31, 2021 .
• 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, 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 36% and 32% of our consolidated revenues during the
three-month periods ended March 31, 2021 and 2020, respectively, and since a
subsidiary of UHS is our Advisor, you are 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
Securities and Exchange Commission . Those 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 worsening of the economic and employment conditions in the United States
would likely materially affect the business of our operators, including UHS,
which would likely unfavorably impact our future bonus rentals (on the UHS
hospital facilities) and may potentially have a negative 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 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.
• Pending limits for most federal agencies and programs aimed at reducing
budget deficits by $917 billion between 2012 and 2021, according to a report
released by the Congressional Budget Office . Among its other provisions, the
law established a bipartisan Congressional committee, known as the Joint
Select Committee on Deficit Reduction (the "Joint Committee "), which was
tasked with making recommendations aimed at reducing future federal budget
deficits by an additional $1.5 trillion over 10 years. The Joint Committee
was unable to reach an agreement by the November 23, 2011 deadline and, as a
result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented on March 1, 2013
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resulting in 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 November 2, 2015 , continued the 2% reductions
to Medicare reimbursement imposed under the Budget Control Act of 2011.
Recent legislation has suspended payment reductions through December 31,
2021 in exchange for extended cuts through 2030. We cannot predict whether
Congress will restructure the implemented Medicare payment reductions or
what other federal budget deficit reduction initiatives may be proposed by
Congress going 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 (the "ACA").
President Biden is expected to undertake executive actions that will
strengthen the ACA and may reverse the policies of the prior
administration. The Trump Administration had directed the issuance of final
rules: (i) enabling the formation of association health plans that would be
exempt from certain ACA 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 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; and (v) incentivizing the use of health
reimbursement arrangements by employers to permit employees to purchase
health insurance in the individual market. The uncertainty resulting from
these Executive Branch policies had led to reduced Exchange enrollment in
2018, 2019 and 2020, 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 ACA have not been
successful to date, a key provision of the ACA was eliminated as part of the
Tax Cuts and Jobs Act and on December 14, 2018 , a federal U.S. District
Court Judge in Texas ruled the entire ACA is unconstitutional. That ruling
was appealed and on December 18, 2019 , the Fifth Circuit Court of Appeals
voted 2-1 to strike down the ACA individual mandate as unconstitutional and
sent the case back to the U.S. District Court in Texas to determine which
ACA provisions should be stricken with the mandate or whether the entire law
is unconstitutional without the individual mandate. On March 2, 2020 , the
U.S. Supreme Court agreed to hear, during the 2020-2021 term, two
consolidated cases, filed by the State of California and the United States
House of Representatives , asking the Supreme Court to review the ruling by
the Fifth Circuit Court of Appeals . Oral argument was heard on November 10,
2020 , and a ruling is expected in 2021. In a February 10, 2021 letter to the
Supreme Court , the Department of Justice reversed its earlier position and
stated its position that the ACA is constitutional. The ACA will remain law
while the case proceeds through the appeals process; however, the case
creates additional uncertainty as to whether any or all of the ACA could be
struck down, which creates operational risk for the health care industry. We
are unable to predict the final outcome of this matter which has caused
greater uncertainty regarding the future status of the ACA. If all or any
parts of the ACA 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.
• 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.
• 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, McAllen, Texas , the site of our
McAllen Medical Center , a 370-bed acute care hospital, and Riverside County,
California , the site of our Southwest Healthcare System-Inland Valley
Campus, a 130-bed acute care hospital.
• 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.
• 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 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.
• 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 in
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.
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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: 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.
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.
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.
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.
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Results of Operations
During the three-month period ended
• $315,000 increase in bonus rentals earned on the three hospital
facilities leased to subsidiaries of UHS;
• $176,000 increase resulting from a decrease in interest expense,
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, and;
• $541,000 of other combined net increases including an aggregate net
increase in income generated at various properties, including the income
recorded in connection with the newly constructed and recently completed
Clive Behavioral Health facility.
Total revenues increased
Included in our other operating expenses are expenses related to the
consolidated medical office buildings and two vacant hospital facilities, which
totaled
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,
2021 2020
Net income $ 5,586 $ 4,554 Depreciation and amortization expense on consolidated
investments 6,787 6,380
Depreciation and amortization expense on unconsolidated
affiliates 362 286 Funds From Operations$ 12,735 $ 11,220
Weighted average number of shares outstanding - Diluted 13,771 13,758 Funds From Operations per diluted share
$ 0.92 $ 0.82
Our FFO increased
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diluted share, resulting from a decrease in interest expense, resulting
primarily from a decrease in our average cost of borrowings pursuant to our
revolving credit agreement, partially offset by an increase in our average
outstanding borrowings, and; (iii) other combined net increases of
Other Operating Results Interest Expense:
As reflected in the schedule below, interest expense was
Three Months Three Months
Ended Ended
March 31, March 31,
2021 2020
Revolving credit agreement $ 967 $ 1,623
Mortgage interest 635 658
Interest rate swaps expense/(income), net (a.) 309 (51 )
Amortization of financing fees 216 157
Amortization of fair value of debt (13 ) (13 )
Capitalized interest on major projects - (65 )
Other interest 19 -
Interest expense, net $ 2,133 $ 2,309
(a.) Represents net interest paid by us / (to us) by the counterparties
pursuant to three interest rate SWAPs with a combined notional amount of
$140 million .
Interest expense decreased by
Disclosures Related to Certain Hospital Facilities
Please refer to Note 7 to the condensed consolidated financial statements -
Lease Accounting, for additional information regarding certain of our hospital
facilities including
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was
• A favorable change of $1.5 million due to an increase in net income
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 and stock-based compensation),
as discussed above;
• an unfavorable change of $510,000 in lease receivable;
• a favorable change of $234,000 in accrued expenses;
• an unfavorable change of $461,000 in tenant reserves, deposits and
deferred and prepaid rents, and;
• other combined net favorable changes of $305,000 , resulting primarily
from the timing of prepaid expense payments.
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Net cash used in investing activities
Net cash used in investing activities was
During the three-month period ended
During the three-month period ended
Net cash provided by/(used in) financing activities
Net cash provided by financing activities was
During the three-month period ended
During the three-month period ended
During the second quarter of 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
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In determining and monitoring our dividend level on a quarterly basis, our
management and
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
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
In
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. At
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.
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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 outstanding under the Credit Agreement. We
are in compliance with all of the covenants at
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 2021 2020
Tangible net worth > =$125,000 $ 147,654 $ 147,263
Total leverage < 60% 45.3 % 44.8 %
Secured leverage < 30% 8.5 % 8.6 %
Unencumbered leverage < 60% 43.3 % 41.4 %
Fixed charge coverage > 1.50x 4.8x 4.7x
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 Interest Maturity
Facility Name (in thousands) (a.) Rate Date
700 Shadow Lane and Goldring MOBs fixed
rate
mortgage loan $ 5,381 4.54 % June, 2022
BRB Medical Office Building fixed rate
mortgage loan 5,449 4.27 % December, 2022
Desert Valley Medical Center fixed rate
mortgage loan 4,474 3.62 % January, 2023
2704 North Tenaya Way fixed rate
mortgage loan 6,538 4.95 % November, 2023
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan 12,984 4.03 % April, 2024
Tuscan Professional Building fixed rate
mortgage loan 2,789 5.56 % June, 2025
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 8,656 3.95 % January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan 12,450 4.42 % September, 2033
Total, excluding net debt premium and
net financing fees 58,721
Less net financing fees (447 )
Plus net debt premium 129
Total mortgages notes payable,
non-recourse to us, net $ 58,403
(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 of
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.
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Off Balance Sheet Arrangements
As of
Acquisition and Divestiture Activity
There were no acquisitions or divestitures during the three-month periods ended
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