PART I. FINANCIAL INFORMATION (unaudited) Presents the unaudited condensed consolidated financial statements and related notes for the specified periods Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including income, comprehensive income, balance sheets, equity, cash flows, and explanatory notes Condensed Consolidated Statements of Income Provides a summary of the company's revenues, expenses, net income, and earnings per share for the specified periods Condensed Consolidated Statements of Income (amounts in thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Revenues | $21,205 | $19,692 | $62,780 | $58,180 | | Total Expenses | $13,914 | $13,052 | $41,308 | $38,815 | | Net Income | $5,344 | $5,193 | $17,551 | $14,447 | | Basic Earnings Per Share | $0.39 | $0.38 | $1.28 | $1.05 | | Diluted Earnings Per Share | $0.39 | $0.38 | $1.27 | $1.05 | Condensed Consolidated Statements of Comprehensive Income Details the company's net income and other comprehensive income components, such as unrealized derivative gains/losses Condensed Consolidated Statements of Comprehensive Income (amounts in thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income | $5,344 | $5,193 | $17,551 | $14,447 | | Unrealized derivative gains/(loss) on cash flow hedges | $471 | $234 | $3,259 | $(5,709) | | Total Comprehensive Income | $5,815 | $5,427 | $20,810 | $8,738 | Condensed Consolidated Balance Sheets Presents a snapshot of the company's assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (amounts in thousands) | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Net Real Estate Investments | $436,458 | $443,801 | | Investments in and advances to LLCs | $23,123 | $4,278 | | Cash and cash equivalents | $9,347 | $5,742 | | Total Assets | $517,681 | $494,009 | | Line of credit borrowings | $276,800 | $236,200 | | Mortgage notes payable, non-recourse to us, net | $57,397 | $58,895 | | Total Liabilities | $365,870 | $335,004 | | Total Equity | $151,811 | $159,005 | Condensed Consolidated Statements of Changes in Equity Outlines the changes in the company's total equity, including net income, dividends, and other comprehensive income Condensed Consolidated Statements of Changes in Equity (amounts in thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Total Equity (Beginning of Period) | $159,005 | $181,734 | | Net Income | $17,551 | $14,447 | | Cumulative Dividends | $(28,868) | $(28,426) | | Unrealized net gain/(loss) on cash flow hedges | $3,259 | $(5,709) | | Total Equity (End of Period) | $151,811 | $162,394 | Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (amounts in thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $36,194 | $32,775 | | Net cash used in investing activities | $(41,155) | $(16,792) | | Net cash provided by/(used in) financing activities | $8,566 | $(15,773) | | Increase in cash and cash equivalents | $3,605 | $210 | | Cash and cash equivalents, end of period | $9,347 | $6,320 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures regarding the company's accounting policies and financial statement items (1) General Describes the Trust's identity, revenue recognition, and the unaudited nature of the financial statements - The Trust refers to Universal Health Realty Income Trust and its subsidiaries28 - Revenues do not include unconsolidated LLCs, which are accounted for by the equity method29 - Financial statements are unaudited and condensed, prepared in conformity with U.S. GAAP30 (2) Relationship with Universal Health Services, Inc. ("UHS") and Related Party Transactions Details the company's relationship with UHS, including tenant revenue, advisory fees, and specific property transactions UHS-Related Tenant Revenue Contribution | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | 37% | 34% | | Nine Months Ended Sep 30 | 36% | 33% | - UHS of Delaware, Inc., a wholly-owned subsidiary of UHS, serves as the Trust's Advisor under an annually renewable Advisory Agreement744 Advisory Fees to UHS (amounts in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $1,121 | $1,039 | | Nine Months Ended Sep 30 | $3,272 | $3,082 | - UHS owned 5.7% of the Trust's outstanding shares of beneficial interest as of September 30, 2021, and December 31, 202046 - UHS plans to terminate the existing lease on Southwest Healthcare System, Inland Valley Campus, by December 31, 2021, and has agreed to exchange it for substitution properties of substantially equal fair market value363981 - In May 2021, the Trust acquired the Fire Mesa office building in Las Vegas, Nevada, for approximately $12.9 million, which is 100% leased by a wholly-owned subsidiary of UHS3854 (3) Dividends and Equity Issuance Program Reports on dividends declared and paid, along with activity under the at-the-market equity issuance program Dividends Declared and Paid (amounts in thousands, except per share) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $9,649 ($0.70/share) | $9,501 ($0.69/share) | | Nine Months Ended Sep 30 | $28,868 ($2.095/share) | $28,426 ($2.065/share) | - No shares were issued under the at-the-market (ATM) equity issuance program during the first nine months of 202151139 - Since its commencement in Q2 2020, the ATM program has issued 2,704 shares, generating approximately $270 thousand in net proceeds51139 (4) Acquisitions and Divestitures Summarizes recent property acquisitions and divestitures, including their financial impact - In May 2021, the Fire Mesa office building in Las Vegas, Nevada, was acquired for approximately $12.9 million as part of tax-deferred like-kind exchange transactions54 - In June 2021, the Children's Clinic at Springdale, AR, was sold for approximately $3.2 million, resulting in a gain of $1.3 million55 - Subsequent to September 30, 2021 (November 1, 2021), the Auburn Medical Office Building II was sold for approximately $25.1 million53 (5) Summarized Financial Information of Equity Affiliates Provides financial details for the company's unconsolidated equity investments in jointly-owned LLCs/LPs - As of September 30, 2021, the Trust had non-controlling equity investments in five jointly-owned LLCs/LPs, accounted for under the equity method, with ownership interests ranging from 33% to 95%2961 Our Share of Net Income from Unconsolidated LLCs (amounts in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $303 | $517 | | Nine Months Ended Sep 30 | $1,341 | $1,371 | - Subsequent to September 30, 2021, the Trust purchased the remaining 5% minority ownership interest in Grayson Properties, LP for approximately $3.1 million, resulting in 100% ownership and future consolidation376271 Mortgage Notes Payable by Unconsolidated LLCs/LPs (non-recourse to Trust, amounts in thousands) | Date | Balance | | :-------------------------------- | :------ | | September 30, 2021 | $22,133 | | December 31, 2020 | $39,735 | (6) Recent Accounting Pronouncements Discusses the impact of new FASB guidance on COVID-19 lease concessions and reference rate reform - The FASB issued guidance providing accounting relief for COVID-19 related lease concessions, allowing entities to account for them as if part of existing lease contracts under certain conditions72 - The COVID-19 pandemic did not materially affect the Trust's operations or financial results during the three and nine months ended September 30, 2021, or the year ended December 31, 202073 - The FASB issued ASC Topic 848, "Reference Rate Reform," offering optional practical expedients for reference rate reform activities impacting debt, leases, and derivatives74 (7) Lease Accounting Explains the company's adoption of ASC 842, disaggregated lease revenue, and significant lease events - The Trust adopted the new lease standard (ASC 842) on January 1, 2019, applying it to leases as both a lessor and lessee76 Lease Revenue Disaggregation (amounts in thousands) | Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Lease revenue - UHS facilities | $7,574 | $6,381 | $21,971 | $18,243 | | Lease revenue - Non-related parties | $13,115 | $12,841 | $39,324 | $38,526 | - UHS has indicated its intent to renew the lease on Wellington Regional Medical Center, which expires December 31, 2021, at fair market value lease rates80 - The lease on Kindred Hospital Chicago Central is scheduled to expire on December 31, 2021, and the tenant does not intend to renew, leading to marketing efforts for new tenants83 - Two hospital facilities in Evansville, Indiana, and Corpus Christi, Texas, have remained vacant since May/June 201984 (8) Debt and Financial Instruments Details the company's revolving credit agreement, mortgage notes, interest rate swaps, and debt covenants - On July 2, 2021, the Trust entered into an amended and restated revolving credit agreement, increasing its aggregate revolving credit commitment to $375 million from $350 million, maturing on July 2, 202588148 - As of September 30, 2021, the Trust had $276.8 million of outstanding borrowings and $94.6 million of available borrowing capacity under its credit agreement91151 Mortgage Notes Payable, Non-Recourse (amounts in thousands) | Date | Balance | | :-------------------------------- | :------ | | September 30, 2021 | $57,397 | | December 31, 2020 | $58,895 | - The Trust has three interest rate swap agreements with a combined notional amount of $140 million, designated as cash flow hedges, to manage interest rate risk959697164 - At September 30, 2021, the fair value of the interest rate swaps was a net liability of $556 thousand98161 - A 1% change in interest rates would impact net income by approximately $1.4 million, based on variable rate debt outstanding and interest rate swaps165 Compliance Ratios (as of September 30, 2021) | Covenant | Requirement | Actual | | :-------------------------------- | :---------- | :----- | | Tangible net worth | >=$125,000 | $141,419 | | Total leverage | <60% | 45.6% | | Secured leverage | <30% | 8.1% | | Unencumbered leverage | <60% | 47.2% | | Fixed charge coverage | >1.50x | 4.8x | (9) Segment Reporting Explains the company's single reportable segment structure for its healthcare and human service facilities - The Trust's primary business is investing in and leasing healthcare and human service facilities through direct ownership or joint ventures99 - The Trust operates as a single reportable segment, aggregating individual properties due to similarities in nature, economics, tenants, and operational processes99100 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial condition, operating results, liquidity, capital resources, and off-balance sheet arrangements Overview Introduces Universal Health Realty Income Trust as a REIT investing in healthcare and human service facilities - Universal Health Realty Income Trust is a REIT that invests in healthcare and human service related facilities102 - As of November 1, 2021, the portfolio includes 71 real estate investments across 20 states, comprising hospitals, free-standing emergency departments, medical/office buildings, and childcare centers102 Forward Looking Statements and Certain Risk Factors Discusses potential future impacts from COVID-19, reliance on UHS, regulatory changes, and competition - Future operations and financial results are subject to material impact from COVID-19 related factors, including patient volumes, government regulations, and economic conditions104105 - A substantial portion of revenues (37% for Q3 2021, 36% for 9M 2021) is dependent on one operator, Universal Health Services, Inc. (UHS)106 - New CMS and OSHA mandates for COVID-19 vaccinations for healthcare staff by January 4, 2022, could adversely affect staffing, patient volumes, and labor costs for operators106 - Risks include potential inability to complete tax-deferred like-kind exchange transactions under Section 1031, leading to unfavorable tax consequences108 - Competition for properties and tenants, changes in healthcare regulations, and reimbursement levels (Medicare/Medicaid) are significant risk factors109112 Critical Accounting Policies and Estimates Explains the company's accounting for real estate acquisitions and its qualification as a REIT - The Trust applies purchase accounting for real estate acquisitions, allocating fair value to tangible assets (land, building, tenant improvements) and identified intangible assets and liabilities (above/below-market leases, acquired ground leases)113116 - The Trust qualifies as a REIT under Sections 856 to 860 of the Internal Revenue Code, generally exempting it from federal income tax on distributed income118119 - The Trust is subject to a 4% federal excise tax if 85% of ordinary income plus 95% of capital gain income for the calendar year exceeds cash distributions120 Results of Operations Analyzes the company's net income, total revenues, Funds From Operations (FFO), and interest expense Net Income (amounts in thousands) | Period | 2021 | 2020 | Change | | :-------------------------------- | :----- | :----- | :----- | | Three Months Ended Sep 30 | $5,344 | $5,193 | +$151 | | Nine Months Ended Sep 30 | $17,551 | $14,447 | +$3,104 | Total Revenues (amounts in thousands) | Period | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Three Months Ended Sep 30 | $21,205 | $19,692 | +$1,513 | +7.7% | | Nine Months Ended Sep 30 | $62,780 | $58,180 | +$4,600 | +7.9% | - Revenue increases were primarily driven by the Clive Behavioral Health facility (completed Dec 2020) and increased bonus rentals from UHS hospital facilities122 Funds From Operations (FFO) (amounts in thousands, except per share) | Period | 2021 | 2020 | Change | | :-------------------------------- | :----- | :----- | :----- | | Three Months Ended Sep 30 | $12,617 ($0.92/diluted share) | $11,882 ($0.86/diluted share) | +$735 (+$0.06/diluted share) | | Nine Months Ended Sep 30 | $37,994 ($2.76/diluted share) | $34,476 ($2.50/diluted share) | +$3,518 (+$0.26/diluted share) | Interest Expense, Net (amounts in thousands) | Period | 2021 | 2020 | Change | | :-------------------------------- | :----- | :----- | :----- | | Three Months Ended Sep 30 | $2,250 | $1,964 | +$286 | | Nine Months Ended Sep 30 | $6,566 | $6,289 | +$277 | - The increase in interest expense was primarily due to higher average outstanding borrowings on the revolving credit agreement and increased interest rate swap expenses, partially offset by a decrease in the average cost of borrowings for the nine-month period129131 Liquidity and Capital Resources Examines the company's cash flows, borrowing capacity, and strategies for funding operations and investments Net Cash Flows (amounts in thousands) | Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating Activities | $36,194 | $32,775 | | Investing Activities | $(41,155) | $(16,792) | | Financing Activities | $8,566 | $(15,773) | - Net cash used in investing activities increased significantly in 2021 due to the acquisition of the Fire Mesa office building ($13.0 million), additions to real estate investments ($11.5 million), and equity investments in unconsolidated LLCs ($16.1 million)134 - The amended revolving credit agreement increased the commitment to $375 million, with $94.6 million of available borrowing capacity as of September 30, 2021144148151 - Operating cash flows have been sufficient to fund dividend payments, and the Trust expects to finance capital expenditures and acquisitions using internal and additional funds143144 - The Trust is in compliance with all covenants in its Credit Agreement as of September 30, 202192152 Off Balance Sheet Arrangements Discloses the company's off-balance sheet commitments, including outstanding standby letters of credit - As of September 30, 2021, off-balance sheet arrangements included $3.6 million in outstanding standby letters of credit related to Grayson Properties II155 Acquisition and Divestiture Activity Refers to detailed information on property acquisitions and divestitures provided in the financial notes - Refer to Note 4 for details on completed acquisition and divestiture transactions156 Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses the company's exposure to interest rate risk and its management through financial instruments and sensitivity analysis - The Trust uses interest rate swap agreements with a total notional amount of $140 million as cash flow hedges to manage interest rate risk158159160164 - At September 30, 2021, the fair value of the interest rate swaps was a net liability of $556 thousand161 - A 1% change in interest rates would impact the Trust's net income by approximately $1.4 million, based on variable rate debt and interest rate swaps165 Long-term Debt and Interest Rate Swaps (amounts in thousands, as of Sep 30, 2021) | Category | Total | Average Interest Rate | | :-------------------------------- | :------ | :-------------------- | | Fixed rate debt | $57,681 | 4.3% | | Variable rate debt | $276,800 | 1.3% | | Interest rate swaps (notional amount) | $140,000 | 1.070% | Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - The CEO and CFO concluded that the disclosure controls and procedures were effective as of September 30, 2021167 - There have been no material changes in internal control over financial reporting during the first nine months of 2021168 PART II. OTHER INFORMATION Presents additional information not included in the financial statements, such as risk factors and exhibits Item 1A. Risk Factors States that there are no material changes to the risk factors previously disclosed in the annual report - No material changes in risk factors from those set forth in the Annual Report on Form 10-K for the year ended December 31, 2020171 Item 6. Exhibits Lists the documents filed as exhibits, including credit agreements and certifications - Includes the Amended and Restated Credit Agreement dated July 2, 2021172 - Contains certifications from the Chief Executive Officer and Chief Financial Officer pursuant to SEC rules and the Sarbanes-Oxley Act172 - Includes Inline XBRL Instance Document and Taxonomy Extension Documents172 SIGNATURES Contains the official signatures of the registrant's authorized officers, confirming the report's submission - The report was signed on November 8, 2021, by Alan B. Miller (Chairman of the Board, President and Chief Executive Officer) and Charles F. Boyle (Vice President and Chief Financial Officer)174
Universal Health Realty me Trust(UHT) - 2021 Q3 - Quarterly Report