UHT Downgraded to Neutral Amid Leasing & Rate Pressures

Core Viewpoint - Universal Health Realty Income Trust (UHT) has been downgraded to a "Neutral" rating from "Outperform" due to rising growth headwinds, weakening profitability, and reduced leasing momentum [1] Leasing Performance - UHT's core leasing performance remains steady, with lease revenues declining 2.2% year over year to $22.7 million in Q1 2025, primarily due to lower tenant reimbursements [2] - Base rents remained stable, and bonus rents from McAllen Medical Center increased 4.3% to $817,000 [2] - Universal Health Services (UHS), the largest tenant, accounts for approximately 40% of revenues and has extended leases through 2030, ensuring long-term income stability [2] Dividend Yield - UHT offers a forward dividend yield of about 7.43%, supported by healthy coverage metrics [3] - The company paid a Q1 dividend of $0.735 per share, funded by $11.9 million in Funds from Operations (FFO), covering the $10.2 million distribution at a 1.17 ratio [3] - FFO per share declined 3.9% to $0.86, while operating cash flow remained stable at $11.6 million [3] Interest Rate Management - Interest costs rose 2.7% year over year to $4.7 million in Q1, influenced by higher average borrowing rates [4] - UHT's use of fixed-rate swaps reduced its average effective borrowing rate to 5.935%, down from 6.96% the previous year [4] - The company hedges $165 million in notional debt through 2028, generating $773,000 in swap settlements this quarter [4] Leasing Activity and Risks - Leasing activity was muted in Q1 2025, with no acquisitions and lower occupancy levels, leading to a 2.4% drop in total revenues to $24.5 million [5] - Revenues from UHS facilities decreased 3.9% to $8.3 million, highlighting concentration risk with expiring contracts in 2026 [5] Idle Assets Impact - Two non-revenue-generating assets incurred $170,000 in direct expenses, contributing to capital inefficiency [6] - The Evansville facility has been vacant since 2019, with no near-term leasing prospects [6] Variable Rate Exposure - A significant portion of UHT's debt remains tied to variable SOFR-based rates, with $349.5 million outstanding under its revolving credit facility [8] - Only $165 million is hedged through fixed-rate swaps, leaving nearly $185 million exposed to future interest rate increases [8] Overall Outlook - The downgrade to "Neutral" reflects concerns over earnings compression, constrained financial flexibility, and reliance on a single tenant [9] - UHT remains a stable REIT with a history of dividend payments, but lacks clear growth catalysts under current market conditions [9]