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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                      

Commission file number 1-9321

 

UNIVERSAL HEALTH REALTY INCOME TRUST

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

23-6858580

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

 

 

 

UNIVERSAL CORPORATE CENTER

367 SOUTH GULPH ROAD

KING OF PRUSSIA, Pennsylvania

 

19406

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (610265-0688

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

 

Trading Symbol(s)

 

Name of each exchange on which registered

Shares of beneficial interest, $0.01 par value

 

UHT

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated Filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of common shares of beneficial interest outstanding at April 30, 2021—13,772,112.

 

 

 

 

 


 

 

UNIVERSAL HEALTH REALTY INCOME TRUST

INDEX

 

 

 

 

 

PAGE NO.

PART I. FINANCIAL INFORMATION (unaudited)

 

 

Item 1.

 

Financial Statements

 

 

 

 

Condensed Consolidated Statements of Income—Three Months Ended March 31, 2021 and 2020

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2021 and 2020

 

5

 

 

Condensed Consolidated Balance Sheets—March 31, 2021 and December 31, 2020

 

6

 

 

Condensed Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2021 and 2020

 

7

 

 

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2021 and 2020

 

8

 

 

Notes to Condensed Consolidated Financial Statements

 

9 through 19

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20 through 31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31 through 32

Item 4.

 

Controls and Procedures

 

32

PART II. OTHER INFORMATION

 

33

Item 1A. Risk Factors

 

33

Item 6.

 

Exhibits

 

33

 

 

 

 

 

SIGNATURES

 

34

 

 

 

This Quarterly Report on Form 10-Q is for the quarter ended March 31, 2021. In this Quarterly Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and its subsidiaries.

As disclosed in this Quarterly Report, including in Note 2 to the condensed consolidated financial statements—Relationship with Universal Health Services, Inc. (“UHS”) and Related Party Transactions, a wholly-owned subsidiary of UHS (UHS of Delaware, Inc.) serves as our Advisor pursuant to the terms of an annually renewable Advisory Agreement dated December 24, 1986, and as amended and restated as of January 1, 2019. Our officers are all employees of UHS through its wholly-owned subsidiary, UHS of Delaware, Inc. In addition, three of our hospital facilities are leased to wholly-owned subsidiaries of UHS, one of our hospital facilities is leased to a joint venture between a wholly-owned subsidiary of UHS and a third party, and subsidiaries of UHS are tenants of eighteen medical office buildings or free-standing emergency departments, that are either wholly or jointly-owned by us. Any reference to “UHS” or “UHS facilities” in this report is referring to Universal Health Services, Inc.’s subsidiaries, including UHS of Delaware, Inc.

In this Quarterly Report, the term “revenues” does not include the revenues of the unconsolidated limited liability companies (“LLCs”) in which we have various non-controlling equity interests ranging from 33% to 95%.  As of March 31, 2021, we had investments in five jointly-owned LLCs/LPs. We currently account for our share of the income/loss from these investments by the equity method (see Note 5 to the condensed consolidated financial statements included herein).

 

 

3


 

 

Part I. Financial Information

Item I. Financial Statements

Universal Health Realty Income Trust

Condensed Consolidated Statements of Income

For the Three Months Ended March 31, 2021 and 2020

(amounts in thousands, except per share information)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

  Lease revenue - UHS facilities (a.)

 

$

7,132

 

 

$

5,881

 

  Lease revenue - Non-related parties

 

 

13,092

 

 

 

12,842

 

  Other revenue - UHS facilities

 

 

226

 

 

 

214

 

  Other revenue - Non-related parties

 

 

249

 

 

 

270

 

 

 

 

20,699

 

 

 

19,207

 

Expenses:

 

 

 

 

 

 

 

 

  Depreciation and amortization

 

 

6,787

 

 

 

6,380

 

  Advisory fees to UHS

 

 

1,062

 

 

 

1,016

 

  Other operating expenses

 

 

5,602

 

 

 

5,383

 

 

 

 

13,451

 

 

 

12,779

 

Income before equity in income of unconsolidated limited liability companies ("LLCs"), interest expense and gains on sales

 

 

7,248

 

 

 

6,428

 

  Equity in income of unconsolidated LLCs

 

 

471

 

 

 

435

 

Interest expense, net

 

 

(2,133

)

 

 

(2,309

)

Net income

 

$

5,586

 

 

$

4,554

 

Basic earnings per share

 

$

0.41

 

 

$

0.33

 

Diluted earnings per share

 

$

0.41

 

 

$

0.33

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - Basic

 

 

13,750

 

 

 

13,736

 

Weighted average number of shares outstanding - Diluted

 

 

13,771

 

 

 

13,758

 

 

 

 

 

 

 

 

 

 

(a.) Includes bonus rental on UHS hospital facilities of $1,695 and $1,380 for the three-month periods ended March 31, 2021 and 2020, respectively.

 

See accompanying notes to these condensed consolidated financial statements.

 

 

4


 

 

Universal Health Realty Income Trust

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2021 and 2020

(amounts in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net income

 

$

5,586

 

 

$

4,554

 

Other comprehensive gain/(loss):

 

 

 

 

 

 

 

 

Unrealized derivative gains/(losses) on cash flow hedges

 

 

3,348

 

 

 

(4,671

)

Total other comprehensive gain/(loss):

 

 

3,348

 

 

 

(4,671

)

Total comprehensive income/(loss)

 

$

8,934

 

 

$

(117

)

 

See accompanying notes to these condensed consolidated financial statements.

 

 

5


 

 

Universal Health Realty Income Trust

Condensed Consolidated Balance Sheets

(amounts in thousands, except share information)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets:

 

 

 

 

 

 

 

 

Real Estate Investments:

 

 

 

 

 

 

 

 

Buildings and improvements and construction in progress

 

$

608,366

 

 

$

605,292

 

Accumulated depreciation

 

 

(222,521

)

 

 

(216,648

)

 

 

 

385,845

 

 

 

388,644

 

Land

 

 

55,157

 

 

 

55,157

 

               Net Real Estate Investments

 

 

441,002

 

 

 

443,801

 

Investments in limited liability companies ("LLCs")

 

 

9,087

 

 

 

4,278

 

Other Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

6,171

 

 

 

5,742

 

Lease and other receivables from UHS

 

 

3,252

 

 

 

3,199

 

Lease receivable - other

 

 

7,780

 

 

 

7,504

 

Intangible assets (net of accumulated amortization of $19.0 million and

   $19.5 million, respectively)

 

 

11,013

 

 

 

11,742

 

Right-of-use land assets, net

 

 

8,907

 

 

 

8,914

 

Deferred charges and other assets, net

 

 

8,582

 

 

 

8,829

 

               Total Assets

 

$

495,794

 

 

$

494,009

 

Liabilities:

 

 

 

 

 

 

 

 

Line of credit borrowings

 

$

247,650

 

 

$

236,200

 

Mortgage notes payable, non-recourse to us, net

 

 

58,403

 

 

 

58,895

 

Accrued interest

 

 

346

 

 

 

351

 

Accrued expenses and other liabilities

 

 

11,375

 

 

 

19,802

 

Ground lease liabilities, net

 

 

8,907

 

 

 

8,914

 

Tenant reserves, deposits and deferred and prepaid rents

 

 

10,446

 

 

 

10,842

 

               Total Liabilities

 

 

337,127

 

 

 

335,004

 

Equity:

 

 

 

 

 

 

 

 

Preferred shares of beneficial interest,

   $.01 par value; 5,000,000 shares authorized;

   none issued and outstanding

 

 

-

 

 

 

-

 

Common shares, $.01 par value;

   95,000,000 shares authorized; issued and outstanding: 2021 - 13,772,095;

   2020 - 13,771,287

 

 

138

 

 

 

138

 

Capital in excess of par value

 

 

267,667

 

 

 

267,368

 

Cumulative net income

 

 

686,313

 

 

 

680,727

 

Cumulative dividends

 

 

(794,984

)

 

 

(785,413

)

Accumulated other comprehensive (loss)/income

 

 

(467

)

 

 

(3,815

)

     Total Equity

 

 

158,667

 

 

 

159,005

 

               Total Liabilities and Equity

 

$

495,794

 

 

$

494,009

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 


 

6


 

 

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended March 31, 2021

(amounts in thousands)

(unaudited)

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

excess of

 

 

Cumulative

 

 

Cumulative

 

 

comprehensive

 

 

Total

 

 

 

of Shares

 

 

Amount

 

 

par value

 

 

net income

 

 

dividends

 

 

income/(loss)

 

 

Equity

 

January 1, 2021

 

 

13,771

 

 

$

138

 

 

$

267,368

 

 

$

680,727

 

 

$

(785,413

)

 

$

(3,815

)

 

$

159,005

 

Shares of Beneficial Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued

 

 

1

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

 

57

 

Restricted stock-based compensation expense

 

 

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

 

 

 

242

 

Dividends ($.695/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,571

)

 

 

 

 

 

(9,571

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,586

 

 

 

 

 

 

 

 

 

5,586

 

Unrealized net gain on cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,348

 

 

 

3,348

 

Subtotal - comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,586

 

 

 

 

 

 

 

3,348

 

 

 

8,934

 

March 31, 2021

 

 

13,772

 

 

$

138

 

 

$

267,667

 

 

$

686,313

 

 

$

(794,984

)

 

$

(467

)

 

$

158,667

 

 

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended March 31, 2020

(amounts in thousands)

(unaudited)

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

excess of

 

 

Cumulative

 

 

Cumulative

 

 

comprehensive

 

 

Total

 

 

 

of Shares

 

 

Amount

 

 

par value

 

 

net income

 

 

dividends

 

 

income/(loss)

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

 

13,757

 

 

$

138

 

 

$

266,723

 

 

$

661,280

 

 

$

(747,417

)

 

$

1,010

 

 

$

181,734

 

Shares of Beneficial Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued

 

 

1

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

50

 

Restricted stock-based compensation expense

 

 

 

 

 

 

 

 

197

 

 

 

 

 

 

 

 

 

 

 

 

197

 

Dividends ($.685/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,424

)

 

 

 

 

 

(9,424

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,554

 

 

 

 

 

 

 

 

 

4,554

 

Unrealized loss on cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,671

)

 

 

(4,671

)

Subtotal - comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,554

 

 

 

 

 

 

 

(4,671

)

 

 

(117

)

March 31, 2020

 

 

13,758

 

 

$

138

 

 

$

266,970

 

 

$

665,834

 

 

$

(756,841

)

 

$

(3,661

)

 

$

172,440

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

7


 

 

Universal Health Realty Income Trust

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

5,586

 

 

$

4,554

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,787

 

 

 

6,380

 

Amortization related to above/below market leases, net

 

 

(45

)

 

 

(46

)

Amortization of debt premium

 

 

(12

)

 

 

(13

)

Amortization of deferred financing costs

 

 

216

 

 

 

157

 

Stock-based compensation expense

 

 

242

 

 

 

197

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease receivable

 

 

(329

)

 

 

181

 

Accrued expenses and other liabilities

 

 

(633

)

 

 

(867

)

Tenant reserves, deposits and deferred and prepaid rents

 

 

(396

)

 

 

65

 

Accrued interest

 

 

(5

)

 

 

(25

)

Leasing costs paid

 

 

(365

)

 

 

(182

)

Other, net

 

 

204

 

 

 

(264

)

Net cash provided by operating activities

 

 

11,250

 

 

 

10,137

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investments in LLCs

 

 

(1,544

)

 

 

(1,468

)

Advance made to LLC

 

 

(3,500

)

 

 

-

 

Additions to real estate investments, net

 

 

(6,974

)

 

 

(5,521

)

Deposit on real estate assets

 

 

(200

)

 

 

-

 

Net cash used in investing activities

 

 

(12,218

)

 

 

(6,989

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net borrowings on line of credit

 

 

11,450

 

 

 

6,250

 

Repayments of mortgage notes payable

 

 

(510

)

 

 

(432

)

Financing costs paid

 

 

(35

)

 

 

(35

)

Dividends paid

 

 

(9,564

)

 

 

(9,424

)

Issuance of shares of beneficial interest, net

 

 

56

 

 

 

50

 

Net cash provided by/(used in) financing activities

 

 

1,397

 

 

 

(3,591

)

Increase/(decrease) in cash and cash equivalents

 

 

429

 

 

 

(443

)

Cash and cash equivalents, beginning of period

 

 

5,742

 

 

 

6,110

 

Cash and cash equivalents, end of period

 

$

6,171

 

 

$

5,667

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,935

 

 

$

2,190

 

Invoices accrued for construction and improvements

 

$

468

 

 

$

3,151

 

 

See accompanying notes to these condensed consolidated financial statements.

 

8


 

 

UNIVERSAL HEALTH REALTY INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(unaudited)

 

(1) General

This Quarterly Report on Form 10-Q is for the quarter ended March 31, 2021. In this Quarterly Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and its subsidiaries.

In this Quarterly Report on Form 10-Q, the term “revenues” does not include the revenues of the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%.  As of March 31, 2021, we had investments in five jointly-owned LLCs/LPs. We currently account for our share of the income/loss from these investments by the equity method (see Note 5). These LLCs are included in our consolidated financial statements for all periods presented on an unconsolidated basis since they are not variable interest entities for which we are the primary beneficiary, nor do we hold a controlling voting interest.    

The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the SEC and reflect all normal and recurring adjustments which, in our opinion, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements, the notes thereto and accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2020.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.

 

(2) Relationship with Universal Health Services, Inc. (“UHS”) and Related Party Transactions

Leases: We commenced operations in 1986 by purchasing properties from certain subsidiaries of UHS and immediately leasing the properties back to the respective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. The current base rentals and lease and renewal terms for each of the three hospital facilities leased to wholly-owned subsidiaries of UHS are provided below. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital leases with wholly-owned subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another.

The combined revenues generated from the leases on the three acute care hospital facilities leased to wholly-owned subsidiaries of UHS accounted for approximately 22% of our consolidated revenues for each of the three months ended March 31, 2021 and 2020. In addition to these three UHS hospital facilities, one of our hospital facilities is leased to a joint venture between a subsidiary of UHS and a third party, and we have eighteen medical office buildings (“MOBs”) or free-standing emergency departments (“FEDs”), that are either wholly or jointly-owned by us that include tenants which are subsidiaries or joint ventures of UHS. The aggregate revenues generated from UHS-related tenants comprised approximately 36% and 32% of our consolidated revenues during the three-month periods ended March 31, 2021 and 2020, respectively.

Pursuant to the Master Lease Document by and among us and certain subsidiaries of UHS, dated December 24, 1986 (the “Master Lease”), which governs the leases of the three acute care hospitals with wholly-owned subsidiaries of UHS, as reflected below, UHS has the option, among other things, to renew the leases at the lease terms described below by providing notice to us at least 90 days prior to the termination of the then current term. UHS also has the right to purchase the respective leased facilities from us at their appraised fair market value upon any of the following:  (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that UHS provides notice to us of their intent to offer a substitution property/properties in exchange for one (or more) of the three hospital facilities leased from us, should we be unable to reach an agreement with UHS on the properties to be substituted. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer.

9


 

The table below details the existing lease terms and renewal options for our three acute care hospitals operated by wholly-owned subsidiaries of UHS:

 

Hospital Name

 

Annual

Minimum

Rent

 

 

End of

Lease Term

 

Renewal

Term

(years)

 

 

McAllen Medical Center

 

$

5,485,000

 

 

December, 2026

 

 

5

 

(a.)

Wellington Regional Medical Center

 

$

3,030,000

 

 

December, 2021

 

 

10

 

(b.)

Southwest Healthcare System, Inland Valley Campus

 

$

2,648,000

 

 

December, 2021

 

 

10

 

(b.)

 

(a.)

UHS has one 5-year renewal option at the existing lease rate (through 2031).  

(b.)

UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031).

 

As previously disclosed, a wholly-owned subsidiary of UHS has notified us that it is planning to terminate the existing lease on Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current lease term on December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased property at its appraised fair market value at the end of the existing lease term. However, UHS has proposed exchanging potential substitution properties, with an aggregate fair market value substantially equal to that of Southwest Healthcare System, Inland Valley Campus, in return for the real estate assets of the Inland Valley Campus.  The proposed substitution properties consist of one acute care hospital (including a behavioral health pavilion) and a newly constructed behavioral health hospital. The Independent Trustees of the Board have approved the proposed property substitution subject to satisfactory due diligence and completion of definitive agreements. The effective date of the property substitution is expected to coincide with the scheduled lease maturity date of December 31, 2021. Pursuant to the terms of the lease on the Inland Valley Campus, we earned $1.1 million of lease revenue during the three-month period ended March 31, 2021 ($662,000 in base rental and $454,000 in bonus rental) and $4.4 million of lease revenue during the year ended December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental).  

In September 2019, we entered into an agreement whereby we own a 95% non-controlling ownership interest in Grayson Properties II L.P., which developed, constructed, owns and operates the Texoma Medical Plaza II, an MOB located in Denison, Texas.  This MOB, which was substantially completed in December 2020, is located on the campus of Texoma Medical Center, a hospital that is owned and operated by a wholly-owned subsidiary of UHS.  A 10-year master flex lease was executed with the wholly-owned subsidiary of UHS for over 50% of the rentable square feet of the MOB and commenced in December 2020 upon the issuance of the certificate of occupancy. We account for this LP on an unconsolidated basis pursuant to the equity method since it is not a variable interest entity and we do not have a controlling voting interest.    

In late July 2019, Des Moines Medical Properties, LLC, a wholly-owned subsidiary of ours, entered into an agreement to build and lease a newly constructed UHS-related behavioral health care hospital located in Clive, Iowa.  The lease on this facility, which is triple net and has an initial term of 20 years with five 10-year renewal options, was executed with Clive Behavioral Health, LLC, a joint venture between a wholly-owned subsidiary of UHS and Catholic Health Initiatives - Iowa, Corp (“JV”). Construction of this hospital, for which we engaged a wholly-owned subsidiary of UHS to act as project manager for an aggregate fee of approximately $750,000, was substantially completed in December 2020 and the property received a temporary certificate of occupancy on December 31, 2020.  The hospital lease commenced upon the issuance of the temporary certificate of occupancy.  Pursuant to the lease on this facility, the JV has the option to, among other things, renew the lease at the terms specified in the lease agreement by providing notice to us at least 270 days prior to the termination of the then current term. The JV also has the right to purchase the leased facility from us at its appraised fair market value upon either of the following: (i) by providing notice at least 270 days prior to the end of the lease terms or any renewal terms, or; (ii) upon 30 days’ notice anytime within 12 months of a change of control of the Trust (UHS also has this right should the JV decline to exercise its purchase right). Additionally, the JV has rights of first offer to purchase the facility prior to any third-party sale.

Management cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates or fair market value lease rates, or any of our other leases, will be renewed at the end of their lease term. If the leases are not renewed at their current rates or the fair market value lease rates, we would be required to find other operators for those facilities and/or enter into leases on terms potentially less favorable to us than the current leases. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital or FED facilities upon expiration of the lease terms, our future revenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the lease revenue currently earned pursuant to these leases.  

 

We are the lessee on twelve ground leases with subsidiaries of UHS (for consolidated and unconsolidated investments). The remaining lease terms on the ground leases with subsidiaries of UHS range from approximately 28 years to approximately 78 years.  The annual aggregate lease payments on these properties are approximately $508,000 for the year ended 2021 and $508,000 for each

10


 

of the years ended 2022, 2023, 2024 and 2025, and an aggregate of $29.0 million thereafter. See Note 7 for further disclosure around our lease accounting.

 

Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of March 31, 2021 we had no salaried employees, our officers do typically receive annual stock-based compensation awards in the form of restricted stock. In special circumstances, if warranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may also receive one-time special compensation awards in the form of restricted stock and/or cash bonuses.

 

Advisory Agreement:   UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an advisory agreement dated December 24, 1986, and as amended and restated as of January 1, 2019 (the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees, that the Advisor’s performance has been satisfactory.

Our advisory fee for the three months ended March 31, 2021 and 2020, was computed at 0.70% of our average invested real estate assets, as derived from our condensed consolidated balance sheets.  Based upon a review of our advisory fee and other general and administrative expenses, as compared to an industry peer group, the advisory fee computation remained unchanged for 2021, as compared to the last three years. The average real estate assets for advisory fee calculation purposes exclude certain items from our condensed consolidated balance sheet such as, among other things, accumulated depreciation, cash and cash equivalents, lease receivables, deferred charges and other assets. The advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financial statements. Advisory fees incurred and paid (or payable) to UHS amounted to approximately $1.1 million and $1.0 million for the three months ended March 31, 2021 and 2020, and were based upon average invested real estate assets of $607 million and $581 million, respectively.    

 

Share Ownership: As of March 31, 2021 and December 31, 2020, UHS owned 5.7% of our outstanding shares of beneficial interest.

SEC reporting requirements of UHS: UHS is subject to the reporting requirements of the SEC and is required to file annual reports containing audited financial information and quarterly reports containing unaudited financial information. Since the aggregate revenues generated from the UHS-related tenants comprised 36% and 32% of our consolidated revenues during the three-month periods ended March 31, 2021 and 2020, respectively, and since a subsidiary of UHS is our Advisor, you are encouraged to obtain the publicly available filings for Universal Health Services, Inc. from the SEC’s website. These filings are the sole responsibility of UHS and are not incorporated by reference herein.

(3) Dividends and Equity Issuance Program

Dividends and dividend equivalents:

During the first quarter of 2021, we declared and paid dividends of approximately $9.6 million, or $.695 per share. We declared and paid dividends of approximately $9.4 million, or $.685 per share, during the first quarter of 2020.  Dividend equivalents, which were applicable to shares of unvested restricted stock, were accrued during the first quarter of 2021 and will be paid upon vesting of the restricted stock.

Equity Issuance Program:

During the second quarter of 2020, we commenced an at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we may sell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of $100 million to or through our agent banks. The common shares will be offered pursuant to the Registration Statement filed with the Securities and Exchange Commission, which became effective in June 2020.

No shares were issued pursuant to this ATM equity program during the first quarter of 2021.  Pursuant to this ATM program, since the program commenced in the second quarter of 2020, we have issued 2,704 shares at an average price of $101.30 per share, which generated approximately $270,000 of net proceeds (net of approximately $4,000, consisting of compensation to BofA Securities, Inc.). Additionally, as of March 31, 2021, we have paid or incurred approximately $507,000 in various fees and expenses related to the commencement of our ATM program.

11


 

(4) Acquisitions and Dispositions

Three Months Ended March 31, 2021:

Acquisitions:

There were no acquisitions during the first three months of 2021.

Dispositions:

There were no dispositions during the first three months of 2021.

 

Three Months Ended March 31, 2020:    

Acquisitions:

There were no acquisitions during the first three months of 2020.  

Dispositions:    

There were no dispositions during the first three months of 2020.

(5) Summarized Financial Information of Equity Affiliates

In accordance with U.S. GAAP and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity method of accounting.  The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.

Distributions received from equity method investees in the consolidated statements of cash flows are classified based upon the nature of the distribution. Returns on investments are presented net of equity in income from unconsolidated investments as cash flows from operating activities.  Returns of investments are classified as cash flows from investing activities.

At March 31, 2021, we have non-controlling equity investments or commitments in five jointly-owned LLCs/LPs which own MOBs. We account for these LLCs/LPs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities which we are the primary beneficiary nor do we have a controlling voting interest. The majority of these entities are joint-ventures between us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash funding is typically advanced as equity or member loans. These entities maintain property insurance on the properties.

The following property table represents the five LLCs/LPs in which we own a non-controlling interest and were accounted for under the equity method as of March 31, 2021:

 

 

 

 

 

 

 

 

Name of LLC/LP

 

Ownership

 

 

Property Owned by LLC/LP

Suburban Properties

 

 

33

%

 

St. Matthews Medical Plaza II

Brunswick Associates (a.)(e.)

 

 

74

%

 

Mid Coast Hospital MOB

Grayson Properties (b.)(f.)