Universal Health Realty me Trust(UHT) - 2024 Q4 - Annual Report

Part I UHT is a REIT specializing in healthcare and human-service facilities, with 76 properties and significant ties to UHS Business Universal Health Realty Income Trust (UHT) is a Real Estate Investment Trust (REIT) specializing in healthcare and human-service facilities, with a portfolio of 76 properties across 21 states and significant business links to Universal Health Services, Inc. (UHS) Overview of Facilities As of February 26, 2025, the Trust's portfolio consists of 76 real estate investments in 21 states, including hospitals, medical office buildings, and preschools - The Trust's portfolio includes seventy-six investments across twenty-one states, comprising six hospitals, sixty medical/office buildings, four free-standing emergency departments, four preschools, one vacant specialty facility, and one parcel of vacant land[17] Relationship with Universal Health Services, Inc. (UHS) UHT has a critical and multifaceted relationship with Universal Health Services, Inc. (UHS), which serves as a major tenant, advisor, and employer of UHT's officers - Aggregate revenues from UHS-related tenants constituted approximately 40% of UHT's consolidated revenue for the year ended December 31, 2024[32][47][96] - A transaction involving the Aiken and Canyon Creek properties was accounted for as a failed sale-leaseback, resulting in a financing receivable from UHS of $82.8 million as of December 31, 2024[33][335] UHS-Related Hospital Lease Summary (as of Jan 1, 2025) | Hospital Name | Annual Minimum Rent | End of Lease Term | Renewal Term (years) | | :--- | :--- | :--- | :--- | | McAllen Medical Center | $5,485,000 | December, 2026 | 5 | | Wellington Regional Medical Center | $6,805,000 | December, 2026 | 5 | | Aiken Regional Medical Center/Aurora Pavilion | $4,164,000 | December, 2033 | 35 | | Canyon Creek Behavioral Health | $1,882,000 | December, 2033 | 35 | | Clive Behavioral Health | $2,851,000 | December, 2040 | 50 | - A subsidiary of UHS serves as the Advisor, receiving a fee computed at 0.70% of average invested real estate assets, amounting to $5.5 million in 2024, $5.3 million in 2023, and $5.1 million in 2022[45][46] - As of December 31, 2024, UHS owned 5.7% of the Trust's outstanding shares of beneficial interest[47][372] Competition The Trust faces significant competition for acquiring, leasing, and financing healthcare facilities from various entities, including other REITs, private investors, and healthcare systems - The Trust competes with other REITs, private investors, banks, and healthcare systems for investment opportunities, which could result in fewer opportunities and lower returns[50] - Facility operators face intense competition for patients and staff from other providers, including non-profit and government-supported entities, which can affect patient volumes and operating costs[51][52] Regulation and Other Factors The Trust's financial performance is indirectly affected by extensive government regulation of the healthcare industry, as its tenants' revenues are heavily dependent on Medicare and Medicaid - Approximately 27% of the Trust's revenues in 2024 were from leases with operators of hospitals and FEDs, whose own revenues are significantly derived from Medicare and Medicaid[54] - Changes in government healthcare programs, including reimbursement limitations and potential repeals or replacements of the ACA, create significant uncertainty and could adversely affect tenants' ability to pay rent[55][56][58] - The financial ability of lessees to make rent payments is affected by their compliance with complex regulations concerning licensure, certification, and reimbursement, which can impact their revenue and operating costs[64] Executive Officers of the Registrant The executive officers of the Trust, including Alan B. Miller as Chairman, CEO, and President, are all employees of a wholly-owned subsidiary of UHS - All executive officers of the Trust are employees of a wholly-owned subsidiary of UHS[44][67] Risk Factors The Trust is exposed to a wide range of risks, including substantial revenue dependency on UHS, healthcare regulatory changes, competition, tenant financial stability, cybersecurity threats, interest rate fluctuations, and maintaining REIT status Risks Related to Healthcare Industry and Regulation The financial health of the Trust's tenants is heavily influenced by government healthcare policy, with reductions in Medicare and Medicaid funding and uncertainty from healthcare reform posing significant risks - Reductions in Medicare and Medicaid funding, including the 2% sequestration cuts extended through 2032 and future DSH allotment reductions, could materially and adversely affect the operators of the Trust's facilities[77][78] - Uncertainty from healthcare reform, including legal challenges to the ACA and potential legislative changes, could materially affect the business and results of facility operators, in turn reducing the Trust's revenues[79][82][85] - The trend toward value-based purchasing by both government and private payers may negatively impact revenues if hospital operators are unable to meet quality and efficiency standards[89][91] - UHS, a key tenant and advisor, is subject to governmental investigations and legal actions, which could have a material adverse effect on its financial condition and, consequently, on the Trust[96][97][99] Risks Related to Business Operations Operational risks are dominated by the Trust's heavy reliance on UHS, potential conflicts of interest, competition for properties, tenant financial deterioration, and cybersecurity incidents - A substantial portion of revenues (approx. 40% in 2024) are dependent on UHS, and its failure to meet obligations or renew leases could materially reduce the Trust's revenues and net income[108] - The relationship with UHS, where a subsidiary is the advisor and all officers are UHS employees, may create conflicts of interest in business dealings[109][110] - The Trust holds non-controlling interests in four joint ventures, exposing it to potential losses and lack of control over these assets[111] - A cybersecurity incident could lead to HIPAA violations, data breaches, and significant financial and reputational damage, as the Trust relies on IT systems from UHS and third-party managers[133][134] Risks Related to Market Conditions and Liquidity The Trust's financial performance is subject to broader economic conditions, including inflation, economic downturns, and capital market fluctuations, which can impact tenant ability to pay rent and access to funding - Continuing inflationary pressures on personnel and other costs could negatively impact tenants' ability to make rental payments[136][137] - The Trust's growth depends on raising capital, and deterioration of credit markets or increased interest rates may adversely affect access to funding on reasonable terms[139][140] - Rising costs in construction materials and labor could have an adverse effect on the cash flow return on investment for new capital projects[143] Risks Related to REIT Status and Taxation Maintaining REIT status requires adherence to complex IRS provisions, with failure resulting in corporate income taxes and the need to distribute at least 90% of taxable income potentially forcing dilutive actions - Failure to maintain REIT status would subject the Trust to federal income tax at regular corporate rates, significantly reducing cash flow available for distributions[119][121] - To meet the 90% income distribution requirement for REITs, the Trust may need to borrow funds, issue equity, or sell assets, which could adversely affect its financial condition[124] - Dividends paid by the Trust, as a REIT, are generally not eligible for reduced tax rates, potentially making its shares less attractive to individual investors compared to regular corporations[123] Risks Related to Our Securities The market value of the Trust's common stock is sensitive to interest rate changes and overall economic conditions, and anti-takeover provisions may deter transactions beneficial to shareholders - The price of the common stock is sensitive to changes in market interest rates; an increase in rates may lead to a decline in the stock's price[148] - Anti-takeover provisions, including a 9.8% ownership limit and change-of-control purchase options for UHS in its leases, may delay or prevent a change in control, potentially limiting shareholder premiums[149][151] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[153] Cybersecurity The Trust's cybersecurity risk management is closely tied to UHS's programs, with oversight from the Audit Committee, and no material incidents were identified in fiscal year 2024 - The Trust utilizes certain of UHS's IT applications, mainly for financial data, and relies on UHS and third-party property managers for cybersecurity[154] - UHS has implemented a cybersecurity risk management program that includes bi-annual assessments, annual penetration tests, and an incident response process[156][157] - The Audit Committee of the Board of Trustees is responsible for the oversight of risks from cybersecurity threats[161] - During fiscal year 2024, no risks from cybersecurity threats were identified that have materially affected or are reasonably likely to materially affect the company[160] Properties This section provides a detailed overview of the Trust's property portfolio, including hospitals and significant medical office buildings, with data on occupancy rates, lease revenues, and lease terms Hospital Facility Occupancy and Lease Details (2024) | Hospital Facility Name | Type | Beds | 2024 Avg Occupancy | Minimum Lease Revenue (2024) | Lease Term End | | :--- | :--- | :--- | :--- | :--- | :--- | | Aiken Regional / Aurora Pavilion | Acute/Behavioral | 273 | 59% | $4,164,000 | 2033 | | McAllen Medical Center | Acute Care | 370 | 53% | $5,485,000 | 2026 | | Wellington Regional Medical Center | Acute Care | 155 | 74% | $6,643,000 | 2026 | | Canyon Creek Behavioral Health | Behavioral | 102 | 48% | $1,885,000 | 2033 | | Clive Behavioral Health | Behavioral | 100 | 51% | $3,348,000 | 2040 | - In connection with lease renewals executed during 2024, the weighted-average rental rates increased by approximately 3% compared to the expired leases[169][215] - The average effective annual rental per square foot for all occupied properties on a combined basis was $30.03 in 2024, compared to $29.21 in 2023[176] Lease Expirations by Annual Rental Value | Year | Annual Rentals of Expiring Leases | Percentage of Total | | :--- | :--- | :--- | | 2025 | $10,657,323 (Other) + $1,417,832 (Unconsolidated) | 11% | | 2026 | $15,235,518 (Hospital) + $10,916,853 (Other) + $2,789,451 (Unconsolidated) | 27% | | 2027 | $13,125,596 (Other) + $353,637 (Unconsolidated) | 12% | | 2028 | $6,189,677 (Other) + $586,541 (Unconsolidated) | 6% | | 2029 | $10,801,361 (Other) + $633,506 (Unconsolidated) | 11% | | Thereafter | $3,347,556 (Hospital) + ... | 33% | Legal Proceedings The company reports no legal proceedings - None[182] Mine Safety Disclosures This item is not applicable to the company - Not applicable[182] Part II This section details UHT's market performance, financial condition, results of operations, liquidity, capital resources, market risk, and critical accounting policies Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities UHT shares trade on NYSE, with quarterly dividends intended to maintain REIT status, underperforming benchmarks - The Trust's shares are listed on the New York Stock Exchange under the symbol UHT[183] - As of January 31, 2025, there were approximately 234 shareholders of record[184] Cumulative Total Return Comparison (2019-2024) | Company / Index | Dec 2019 (Base) | Dec 2024 (End) | | :--- | :--- | :--- | | Universal Health Realty Income Trust | $100 | $41.47 | | S&P 500 Index | $100 | $197.02 | | Peer Group | $100 | $135.55 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income and FFO increased in 2024, driven by new properties, with liquidity from an upsized credit facility despite higher interest expense Results of Operations For the year ended December 31, 2024, net income rose to $19.2 million and FFO increased to $47.9 million, driven by higher revenues from new properties and reduced expenses, partially offset by increased interest expense Financial Performance Summary (in thousands, except per share data) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Income | $19,234 | $15,400 | | Funds From Operations (FFO) | $47,873 | $44,570 | | FFO per Diluted Share | $3.46 | $3.23 | - The increase in net income was driven by: an increase of $3.5 million from various properties, a $2.0 million reduction in expenses at the Chicago property, and a $232,000 gain from a prior-year loss on divestiture, offset by a $1.9 million increase in interest expense[213] - Revenues increased by $3.4 million (3.6%) in 2024, mainly due to revenues from a newly constructed MOB in Reno and an MOB acquired in McAllen in 2023[209] - Interest expense increased by $1.9 million in 2024, primarily due to higher average borrowing rates (6.78% vs 6.64%) and higher average outstanding borrowings ($336.9 million vs $309.3 million) on the revolving credit facility[217] Liquidity and Capital Resources The Trust's liquidity is primarily sourced from operating activities, which generated $46.9 million in net cash for 2024, and is supported by a recently amended and upsized $425 million credit facility Cash Flow Summary (in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $46.9 | $42.9 | | Net Cash used in Investing Activities | ($13.9) | ($19.1) | | Net Cash used in Financing Activities | ($34.2) | ($23.2) | - In September 2024, the credit agreement was amended to increase borrowing capacity to $425 million (from $375 million) and extend the maturity date to September 2028[233][398] - As of December 31, 2024, the Trust had $348.9 million of outstanding borrowings under its credit facility and $76.1 million of available borrowing capacity[237][402] Contractual Obligations Summary (as of Dec 31, 2024, in thousands) | Obligation | Total | Less than 1 Year | 2-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt-variable | $348,900 | $0 | $0 | $348,900 | $0 | | Long-term non-recourse debt-fixed | $19,512 | $939 | $1,227 | $1,333 | $16,013 | | Operating leases | $38,842 | $704 | $1,408 | $1,408 | $35,322 | | Total Contractual Obligations | $496,635 | $31,198 | $44,335 | $368,236 | $52,866 | Critical Accounting Policies and Estimates Management identifies several accounting policies as critical due to the significant judgments and estimates required, including purchase accounting for real estate acquisitions, asset impairment assessments, and accounting for financing assets - Property acquisitions are accounted for as asset acquisitions, requiring capitalization of costs and allocation of the purchase price to tangible assets (land, building) and intangible assets (in-place leases) based on fair value[202][329] - The company reviews properties for impairment when indicators exist, comparing the carrying value to an estimate of future undiscounted net cash flows, which is highly subjective and based on assumptions about occupancy, rental rates, and capital needs[205][337] - The assessment of the carrying value of net real estate investments was identified as a Critical Audit Matter by the independent auditor due to the high degree of subjective and complex judgment involved[306] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on variable-rate debt, mitigated by $165 million in swaps - The company uses interest rate swaps to hedge against cash flow exposure from variable interest rates on its debt, with active swaps totaling a notional amount of $165 million as of year-end 2024[246][247][248][255] - In October 2024, the company entered into a new $85 million interest rate swap at a fixed rate of 3.2725%, maturing in 2028, to replace two swaps that expired in September 2024[246][411] - Based on variable rate debt outstanding at December 31, 2024, and giving effect to the interest rate swaps, each 1% change in interest rates would impact net income by approximately $1.8 million[257] Financial Statements and Supplementary Data Consolidated financial statements for 2024, with KPMG's unqualified opinion, show increased net income and key notes Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal controls, identifying the assessment of real estate investments as a critical audit matter - The auditor, KPMG LLP, expressed an unqualified opinion, stating the financial statements present fairly, in all material respects, the financial position of the company[300] - KPMG also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2024[267][301] - The assessment of the carrying value of net real estate investments was identified as a critical audit matter, involving complex and subjective auditor judgment regarding impairment indicators and cash flow assumptions[306] Consolidated Financial Statements The consolidated financial statements present the Trust's financial position and performance, showing total assets of $580.9 million, total equity of $179.5 million, total revenues of $99.0 million, and net income of $19.2 million for 2024 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Net Real Estate Investments and Financing receivable | $508,732 | $527,074 | | Total Assets | $580,862 | $596,369 | | Line of credit borrowings | $348,900 | $326,600 | | Total Liabilities | $401,321 | $395,435 | | Total Equity | $179,541 | $200,934 | Consolidated Statement of Income Highlights (in thousands) | Account | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | $99,011 | $95,575 | $90,625 | | Net Income | $19,234 | $15,400 | $21,102 | | Diluted EPS | $1.39 | $1.11 | $1.53 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $46,911 | $42,939 | | Net cash used in investing activities | ($13,876) | ($19,110) | | Net cash used in Financing Activities | ($34,150) | ($23,231) | | Dividends paid | ($40,394) | ($39,765) | Notes to the Consolidated Financial Statements The notes provide essential context to the financial statements, detailing the significant relationship with UHS, lease accounting, debt instruments, and summarized financials for unconsolidated joint ventures - The aggregate revenues from UHS-related tenants comprised approximately 40% of consolidated revenue in 2024, with advisory fees paid to a UHS subsidiary amounting to $5.5 million (Note 2)[359][371] - As of December 31, 2024, minimum future base rents from non-cancelable operating leases total $400.3 million (Note 4)[390] - The credit facility was amended in September 2024 to increase capacity to $425 million and extend maturity to 2028, with $348.9 million outstanding as of year-end (Note 5)[398][402] - The Trust has investments in four unconsolidated LLCs/LPs accounted for via the equity method, with their combined net income being $2.6 million in 2024, and the Trust's share being $1.3 million (Note 8)[427][428] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[259] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2024, with no material changes to internal control over financial reporting, and KPMG LLP issued an unqualified opinion on internal controls - The CEO and CFO concluded that the Trust's disclosure controls and procedures were effective as of December 31, 2024[260] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2024, based on the COSO framework[264] - The independent auditor, KPMG LLP, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2024[267] Other Information The company reports that none of its Trustees or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth quarter of 2024 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by Trustees or officers during the quarter ended December 31, 2024[274] Part III Part III incorporates governance, compensation, and related party information from the 2025 proxy statement Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from its 2025 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2025 Annual Meeting of Shareholders[9][278] Executive Compensation Details concerning executive compensation are incorporated by reference from the company's 2025 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2025 Annual Meeting of Shareholders[9][279] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by certain beneficial owners and management is incorporated by reference from the company's 2025 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2025 Annual Meeting of Shareholders[9][280] Certain Relationships and Related Transactions, and Director Independence Disclosures about certain relationships, related party transactions, and director independence are incorporated by reference from the company's 2025 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2025 Annual Meeting of Shareholders[9][281] Principal Accountant Fees and Services Information regarding fees paid to and services provided by the principal independent registered public accounting firm is incorporated by reference from the company's 2025 proxy statement - Information is incorporated by reference from the registrant's definitive proxy statement for the 2025 Annual Meeting of Shareholders[9][282] Part IV This section lists exhibits, financial statement schedules, and confirms the absence of a Form 10-K summary Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements and various exhibits - The list of exhibits includes key governing documents, material contracts, and required certifications[286][289][291] Form 10-K Summary The company reports no Form 10-K summary - None[292]