UNIVERSAL HEALTH REALTY INCOME TRUST – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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
facilities, free-standing emergency departments, childcare centers and
medical/office buildings. As of
investments or commitments located in twenty-one states consisting of:
•
six hospital facilities consisting of three acute care hospitals and three
behavioral health care hospitals;
•
four free-standing emergency departments ("FEDs");
•
fifty-nine medical/office buildings, including four owned by unconsolidated
limited liability companies ("LLCs")/limited liability partnerships ("LPs");
•
four preschool and childcare centers;
•
two specialty facilities that are currently vacant, and;
•
one property comprised of vacant land located in
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
our Annual Report on Form 10-K for the year ended
Quarterly Report and in other reports or documents that we file from time to
time with the
Report, we state our beliefs of future events and of our future financial
performance. This Quarterly Report contains "forward-looking statements" that
reflect our current estimates, expectations and projections about our future
results, performance, prospects and opportunities. Words such as "may," "will,"
"should," "could," "would," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates," "appears,"
"projects" and similar expressions, or the negative of those words and
expressions, as well as statements in future tense, identify forward-looking
statements. You should be aware that those statements are only our predictions.
Actual events or results may differ materially. In evaluating those statements,
you should specifically consider various factors, including the risks described
elsewhere herein and in our Annual Report on Form 10-K for the year ended
and Analysis of Financial Condition and Results of Operations-Forward Looking
Statements and in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Forward Looking Statements and Certain Risk
Factors, as included herein. Those factors may cause our actual results to
differ materially from any of our 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, could
be materially impacted by numerous factors and future developments. Such factors
and developments include, but are not limited to, the impact of the COVID-19
pandemic and the volume of COVID-19 patients treated by the operators of our
hospitals and other healthcare facilities; 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, 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 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, including higher sustained rates of unemployment and
underemployment levels and reduced consumer spending and confidence. Although
COVID-19 has not previously had a material adverse impact on our financial
results, we are not able to quantify the impact that these factors could have on
our future financial results and therefore can provide no assurance that
developments related to the COVID-19 pandemic will not have a material adverse
impact on our future financial results as a result of it macroeconomic impact,
including the risks of a global recession or a recession in one or more of our,
or our operators key markets, the impact that may have on us and our tenants and
our assessment of that impact, and any disruptions and inefficiencies in the
supply chain.
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•
The nationwide shortage of nurses and other clinical staff and support personnel
has been a significant operating issues facing our healthcare provider tenants,
including UHS. In some areas, the labor scarcity is putting a strain on the
resources of our tenants and their staff, which has required them to utilize
higher-cost temporary labor and pay premiums above standard compensation for
essential workers. In addition to significantly increasing the labor cost of our
tenants, the healthcare staffing shortage could also require the operators of
our hospital facilities to limit the services provided which would have an
adverse effect on their operating revenues. There may be significant declines in
future bonus rental revenue earned on one acute care hospital leased to a
subsidiary of UHS to the extent that the hospital experiences significant
declines 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.
•
The
Rule ("IFR") effective
applicable staff at all Medicare and Medicaid certified facilities. Under the
IFR, facilities covered by this regulation must establish a policy ensuring all
eligible staff have received the COVID-19 vaccine prior to providing any care,
treatment, or other services by
received the necessary shots to be fully vaccinated. The regulation also
provides for exemptions based on recognized medical conditions or religious
beliefs, observances, or practices. Under the IFR, facilities must develop a
similar process or plan for permitting exemptions in alignment with federal law.
If facilities fail to comply with the IFR by the deadlines established, they are
subject to potential termination from the Medicare and Medicaid program for
non-compliance. While
start the process to end vaccine requirements for CMS-certified healthcare
facilities, we cannot predict at this time the potential viability or impact of
any additional vaccine requirements on us or the operators of our facilities.
Implementation of these rules could have an impact on staffing at the operators
of our facilities for those employees that are not vaccinated in accordance with
IFR requirements, and associated loss of revenues and increased costs resulting
from staffing issues could have a material adverse effect on our financial
results or those of the operators.
•
Recent legislation, including the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act"), the Paycheck Protection Program and Health Care
Enhancement Act ("PPPHCE Act") and the American Rescue Plan Act of 2021
("ARPA"), 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, the PPPHCE Act and
ARPA, 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, the PPPHCE Act and the ARPA, 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. There can be no assurance as to whether our tenants
would be required to repay any previously granted funding, due to noncompliance
with grant terms or otherwise. 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, the PPPHCE Act and the ARPA. The
Department of Health and Human Services
reimbursement policies and regulatory flexibilities favorable to providers
during the Public Health Emergency ("PHE") declared in response to the COVID-19
pandemic. HHS has published guidance indicating its intent for the PHE to expire
on
measures allowing for flexibility in delivery of care and various financial
supports for healthcare providers are available only for the duration of the
PHE. Most states have ended their state-level emergency declarations. The end of
the PHE status will result in the conclusion of those policies over various
designated timeframes. We cannot predict whether the loss of any such favorable
conditions available to providers during the declared PHE will ultimately have a
negative financial impact on our tenants (and in turn, us).
•
A substantial portion of our revenues are dependent upon one operator, UHS,
which comprised approximately 40% and 41% of our consolidated revenues for the
three-month periods ended
disclosed, on
real estate assets of Inland Valley Campus of
us and in exchange, transferred the real estate assets of
Center and Canyon Creek Behavioral Health
approved by the Independent Trustees of our Board, as well as the UHS Board of
Directors. The aggregate annual rental rate during 2023 pursuant to the leases,
as amended, for the two facilities transferred to us is approximately
million
Please see Note 7 to the condensed consolidated financial statements - Lease
Accounting, for additional information related to this asset purchase and sale
transaction between us and UHS.
•
We cannot assure you that subsidiaries of UHS will renew the leases on the
hospital facilities and free-standing emergency departments, upon the scheduled
expirations of the existing lease terms. In addition, if subsidiaries of UHS
exercise their options to purchase the respective leased hospital facilities and
FEDs, and do not enter into a substitution arrangement upon
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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 2 to the consolidated financial
statements - Relationship with Universal Health Services, Inc. ("UHS") and
Related Party Transactions, for additional information related to a lease
renewal between us and
subsidiary of UHS.
•
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
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.
•
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 and the fourth quarter of 2021 on three specialty
hospital facilities, one of which is in the process of being demolished).
•
Potential unfavorable tax consequences and reduced income resulting from an
inability to complete, within the statutory timeframes, anticipated tax deferred
like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue
Code, if, and as, applicable from time-to-time.
•
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 40% of our
consolidated revenues during the three months ended
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
Exchange Commission
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
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 deterioration in general economic conditions which may result in increases in
the number of people unemployed and/or insured and likely increase the number of
individuals without health insurance. Under these circumstances, 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
likely materially affect the business of our operators, including UHS, which
would likely unfavorably impact our future bonus rental revenue (on one UHS
hospital facility) and may potentially have a negative impact on the future
lease renewal terms and the underlying value of the hospital properties.
•
In 2021, the rate of inflation in
since risen to levels not experienced in over 40 years. Our tenants are
experiencing inflationary pressures, primarily in personnel costs, and we
anticipate impacts on other cost areas within the next twelve months. The extent
of any future impacts from inflation on our tenants' businesses and
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results of operations will be dependent upon how long the elevated inflation
levels persist and the extent to which the rate of inflation further increases,
if at all, neither of which we are able to predict. If elevated levels of
inflation were to persist or if the rate of inflation were to accelerate,
expenses of our tenants, and our direct operating expenses that are not passed
on to our tenants, could increase faster than anticipated and may require
utilization of our and our tenants' capital resources sooner than expected.
Further, given the complexities of the reimbursement landscape in which our
tenants operate, their payers may be unwilling or unable to increase
reimbursement rates to compensate for inflationary impacts. This may impact
their ability and willingness to make rental payments. In addition, the
increased interest rates on our borrowings and increased construction costs
could affect our ability to make additional attractive investments. As such, the
effects of inflation may unfavorably impact our future expenses and rental
revenue and may potentially have a negative impact on the future lease renewal
terms, the underlying value of our properties, our ability to access the capital
markets on favorable terms and to grow our portfolio and the value of our common
shares.
•
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 payers 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.
•
The Budget Control Act of 2011 imposed annual spending limits for most federal
agencies and programs aimed at reducing budget deficits by
2012 and 2021, according to a report released by the
Office
Congressional committee, known as the
Reduction
aimed at reducing future federal budget deficits by an additional
over 10 years.
discretionary, national defense and Medicare spending were implemented on
1, 2013
with a uniform percentage reduction across all Medicare programs. The Bipartisan
Budget Act of 2015, enacted on
Medicare reimbursement imposed under the Budget Control Act of 2011. Recent
legislation suspended payment reductions through
for extended cuts through 2030. Subsequent legislation extended the payment
reduction suspension through
then until
recent legislation extended these reductions through 2032. We cannot predict
whether
what other federal budget deficit reduction initiatives may be proposed by
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").
undertaken and is expected to undertake executive actions that will strengthen
the ACA and may reverse the policies of the prior administration. To date, the
Biden administration has issued executive orders implementing a special
enrollment period permitting individuals to enroll in health plans outside of
the annual open enrollment period and reexamining policies that may undermine
the ACA or the Medicaid program. The ARPA's expansion of subsidies to purchase
coverage through an exchange, which the Inflation Reduction Act of 2022, passed
on
enrollment. 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
federal
unconstitutional. That ruling was ultimately appealed to the
Supreme Court
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California v. Texas that the plaintiffs in the matter lacked standing to bring
their constitutionality claims. On
most recent challenge when a
Braidwood Management v. Becerra, ruled that certain Legislation provisions
violate the Appointments Clause of the
Freedom Restoration Act. The government has appealed the decision to the
Circuit Court of Appeals for the Fifth Circuit
replace or replace the Legislation or expand or substantially amend its
provision is unknown.
•
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,
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.
•
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 four 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. Please see
Note 5 to the condensed consolidated financial statements - Summarized Financial
Information of Equity Affiliates for additional disclosure related to a fourth
quarter, 2021 transaction between us and the minority partner in
Properties, LP
•
Fluctuations in the value of our common stock, which, among other things could
be affected by the current increasing interest rate environment..
•
Other factors referenced herein or in our other filings with the
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
There have been no significant changes to our critical accounting policies or
estimates from those disclosed in our 2022 Annual Report on Form 10-K.
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Results of Operations
During the three-month period ended
as compared to
decrease was attributable to:
•
a decrease of
primarily due to an increase in our borrowing rate and increased borrowings;
•
a decrease of
to a vacant facility located in
condensed consolidated financial statements, and;
•
an increase of
income generated at various properties, including a reduction of
building expenses related to the property located in
Revenues increased
three-month period ended
three-month period ended
of 2023, as compared to the first quarter of 2022, was primarily due to an
aggregate net increase generated at various properties, including the impact of
acquisitions and a newly constructed MOB.
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 or 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 lease
revenue in our condensed consolidated statements of income.
Included in our other operating expenses (excluding ground lease expenses) are
expenses related to the consolidated medical office buildings and three vacant
specialty facilities (one of which is in the process of being demolished)
amounting to
of demolition expenses incurred during the first quarter of 2023) and
million
operating expenses related to these facilities during the first quarter of 2023,
as compared to the first quarter of 2022, was due to net increases experienced
at various properties, including the impact of acquisitions and a newly
constructed MOB.
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
Trusts
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 certain items, such as gains on transactions that
occurred during the periods presented. To the extent a REIT recognizes a gain or
loss with respect to the sale of incidental assets, 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.
Below is a reconciliation of our reported net income to FFO for the three-month
periods ended
Three Months Ended
March 31,
2023 2022
Net income $ 4,459 $ 5,405
Depreciation and amortization expense on consolidated
investments 6,618 6,709
Depreciation and amortization expense on unconsolidated
affiliates 293 295 Funds From Operations$ 11,370 $ 12,409
Weighted average number of shares outstanding - Diluted 13,803 13,785
Funds From Operations per diluted share
$ 0.82 $ 0.90
Our FFO decreased
the first quarter of 2022. The net decrease was primarily due to: (i) a decrease
in net income of
depreciation and amortization expense incurred on our consolidated and
unconsolidated affiliates.
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Other Operating Results Interest Expense:
As reflected in the schedule below, interest expense was
million
respectively (amounts in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2023 2022
Revolving credit agreement $ 4,495 $ 1,168
Mortgage interest 438 612
Interest rate swaps (income)/expense, net (a.) (1,227 ) 287
Amortization of financing fees 171 178
Amortization of fair value of debt (12 ) (13 )
Capitalized interest on major projects (149 ) (21 )
Other interest (19 ) 11
Interest expense, net $ 3,697 $ 2,222
(a.)
Represents interest paid (to us)/by us to the counterparties pursuant to three
interest rate SWAPs with a combined notional amount of
Interest expense increased by
(i) a
agreement primarily resulting from an increase in our average cost of borrowings
(6.06% average effective rate during the first quarter of 2023, as compared to
1.76% average effective rate during the comparable quarter of 2022) as well as
an increase in our average outstanding borrowings (
three months ended
comparable quarter of 2022), partially offset by; (ii) a
change in interest rate swap income/expense; (iii) a
mortgage interest expense; (iv) a
capitalized interest on a major project, and; (v) a
interest expense.
Disclosures Related to Certain Facilities
Please refer to Note 7 to the consolidated financial statements - Lease
Accounting, for additional information regarding certain of our vacant specialty
hospital facilities consisting of
and;
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was
three-month period ended
comparable period of 2022. The
•
an unfavorable change of
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
•
an unfavorable change of
primarily due to accrued construction costs during the fourth quarter of 2022
that were paid in the first quarter of 2023;
•
a favorable change of
•
other combined net favorable change of
Net cash used in investing activities
Net cash used in investing activities was
months of 2023 as compared to
2022.
During the three-month period ended
in additions to real estate investments including construction costs related to
the Sierra Medical
was substantially completed during the first quarter of 2023, as well as tenant
improvements at various MOBs; (ii)
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unconsolidated LLCs, and; (iii)
addition, during the three months ended
of cash in excess of income from LLCs, and; (ii)
an advance we provided to an unconsolidated LLC during 2021.
During the three-month period ended
including transaction costs, on the acquisitions of the Beaumont Heart and
Vascular Center in March, 2022, and; the
building in January, 2022, as discussed in Note 4 to the consolidated financial
statements-Acquisitions and Divestitures; (ii)
estate investments including construction costs related to the Sierra Medical
improvements at various MOBs, and; (iii)
purchase and sale agreement with UHS. In addition, during the three-months ended
Net cash used in financing activities
Net cash used in financing activities was
ended
activities during the three months ended
During the three-month period ended
mortgage notes payable that are non-recourse to us, including a
repayment of a fixed rate mortgage loan that matured during the first quarter of
2023; (ii)
and; (iii)
ended
revolving credit agreement, and; (ii)
shares of beneficial interest.
During the three-month period ended
mortgage notes payable that are non-recourse to us; (ii)
costs related to the revolving credit agreement, and; (iii)
dividends. Additionally, during the three months ended
received: (i)
and; (ii)
interest.
During 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
through our agent banks. No shares were issued pursuant to this ATM equity
program during the first three months of 2023 and no shares were issued pursuant
to this ATM equity program during the year ended
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
during the three-month periods ended
also indicated on our statement 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 and stock-based compensation expense, as well as changes in certain assets
and liabilities, are the primary differences between our net income and net cash
provided by operating activities during each period.
We declared and paid dividends of
three-month periods ended
first three months of 2023, the
activities was
the first three months of 2023. During the first three months of 2022, the
million
million
months of 2022.
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
2023
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 and
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 the
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.
28
--------------------------------------------------------------------------------
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
agreement (which had
outstanding borrowings and letters of credit as of
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 ATM 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.
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 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.
On
agreement ("Credit Agreement") to amend and restate the previously existing
million
Agreement"). Among other things, under the Credit Agreement, our aggregate
revolving credit commitment was increased to
Credit Agreement, which is scheduled to mature on
revolving credit facility in an aggregate principal amount of
including a
sublimit for swingline/short-term loans. Under the terms of the Credit
Agreement, we may request that the revolving line of credit be increased by up
to an additional
by certain subsidiaries of the Trust. In addition, borrowings under the new
facility are secured by first priority security interests in and liens on all
equity interests in most of the Trust's wholly-owned subsidiaries.
Borrowings under the Credit Agreement will bear interest annually at a rate
equal to, at our option, at either LIBOR (for one, three, or six months) or the
Base Rate, plus in either case, a specified margin depending on our ratio of
debt to total capital, as determined by the formula set forth in the Credit
Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and
0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for
LIBOR loans and 0.25% for Base Rate loans. 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
Trust will also pay a quarterly revolving facility fee ranging from 0.15% to
0.35% (depending on the Trust's ratio of debt to asset value) on the revolving
committed amount of the Credit Agreement. The Credit Agreement also provides for
options to extend the maturity date and borrowing availability for two
additional six-month periods.
The margins over LIBOR, Base Rate and the facility fee are based upon our total
leverage ratio. At
1.20%, the margin over the Base Rate was 0.20% and the facility fee was 0.20%.
At
million
and letters of credit outstanding as of
compensating balance requirements. At
of outstanding borrowings,
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 then outstanding under the Credit Agreement.
We are in compliance with all of the covenants in the Credit Agreement at
31, 2023
Agreement at
compliance if, based on the assumption that the majority of the potential new
borrowings will be used to fund investments, the full amount of our commitment
was borrowed.
29
--------------------------------------------------------------------------------
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 2023 2022
Tangible net worth $ 125,000 $ 213,293 $ 219,654
Total leverage < 60% 43.4 % 42.9 %
Secured leverage < 30% 5.0 % 5.6 %
Unencumbered leverage < 60% 42.7 % 41.8 %
Fixed charge coverage > 1.50x 4.0x 4.3x
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
(in thousands) Interest Maturity
Facility Name (a.) Rate Date
2704 North Tenaya Way fixed rate
mortgage loan (b.) $ 6,209 4.95 % November, 2023
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan (b.) 12,474 4.03 % April, 2024
Tuscan Professional Building fixed rate
mortgage loan 1,558 5.56 % June, 2025
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 8,136 3.95 % January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan 11,964 4.42 % September, 2033
Total, excluding net debt premium and
net financing fees 40,341
Less net financing fees (250 )
Plus net debt premium 28
Total mortgages notes payable,
non-recourse to us, net $ 40,119
(a.)
All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon maturity.
(b.)
This loan is scheduled to mature within the next twelve months at which time we
will either refinance pursuant to a new mortgage loan or repay the mortgage
balance in full utilizing borrowings under our Credit Agreement.
On
Medical Center
At
were non-recourse to us, included in our condensed consolidated balance sheet.
The mortgages are secured by the real property of the buildings as well as
property leases and rents. The mortgages outstanding as of
combined carrying value of approximately
of approximately
2022
combined fair value of approximately
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.
Off Balance Sheet Arrangements
As of
consisting of standby letters of credit and equity and debt financing
commitments. Our outstanding letters of credit at
million
balance sheet arrangements consisting of standby letters of credit and equity
and debt financing commitments. Our outstanding letters of credit at
31, 2022
Acquisition and Divestiture Activity
Please see Note 4 to the consolidated financial statements.
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