UHT - Universal Health Realty: Good Choice With A Growing Dividend

2023-06-30 10:07:49 ET

Summary

• Universal Health Realty Income Trust faces challenges from high interest rates, with interest expenses growing by over 65% compared to Q1 2022.
• Despite financial headwinds, UHT maintains a stable portfolio and continues to reward shareholders with a growing dividend, boasting a 19-year dividend-raising streak.
• The company presents a great buying opportunity for stable income-seeking REIT investors, with a fair valuation and an attractive dividend yield of 6%.

Universal Health Realty Income Trust (UHT) is facing challenges due to the high-interest rate environment, its interest expenses grew by more than 65% compared to Q1 2022. Due to the currently projected interest rate path of the Fed, this challenge will remain the main challenge of the company in 2023 in my opinion. UHT's portfolio is stable with almost 80 quality properties, and the construction of Sierra Medical Plaza I has just been substantially completed. The FFO is stable and the company continues to reward shareholders with a growing dividend.

UHT's Property Portfolio: Navigating Through Changes

In the first quarter of 2023, UHT held its solid ground amidst the dynamic real estate landscape. The trust, known for its diversified portfolio of healthcare and human service-related facilities across 21 states, experienced pivotal changes in its asset pool. The company has investments or commitments in seventy-six properties, a great indicator of its comprehensive involvement in the sector. Among these changes, one of the highlights was the continuing construction of the Sierra Medical Plaza I, a medical office building located in Reno, Nevada. Developed in partnership with a wholly-owned subsidiary of Universal Health Services, Inc. (UHS), the MOB stood as an impressive addition to the trust's portfolio.

While maintaining a diversified and robust portfolio, UHT experienced some financial headwinds during the first quarter of 2023. Net income was reported at $4.5 million, down from $5.4 million during the same period in 2022 which is a 16.6% decline. The dip in net income, down by $946,000, or $0.07 per diluted share, was mainly attributed to an increase in interest expenses due to rising borrowing rates and a larger outstanding borrowing balance. I expect this pressure to remain for the rest of 2023 due to the rate increases in Q2 2023 and the new (a bit unexpected) forecast of 2 other rate hikes in the second half of 2023. Nevertheless, the reduction of UHT's net income was partially offset by an increase in the income generated from various properties and reduced building expenses related to a vacant facility in Chicago, Illinois. Despite these challenges, UHT's funds from operations remained steady at $11.4 million, or $0.82 per diluted share. In the last 10 quarters, it has been ranging between $11.4 - $12.9 million so we can safely say that it is a bit less but constant with the previous years.

Strengthening the Portfolio

In addition, in Q1 2023 UHT was active in new constructions but no acquisitions. Sierra Medical Plaza I, located on the campus of the Northern Nevada Sierra Medical Center, was a significant undertaking. The construction started in January 2022 and was substantially completed by March 2023. The master flex lease agreement for this building, amounting to around 68% of the rentable square feet, commenced in March 2023. On the acquisition front, Q1 2023 was quiet with no new additions. However, it's important to mention for investors the acquisitions from the first quarter of 2022, namely the Beaumont Heart and Vascular Center and the medical office building at 140 Thomas Johnson Drive. These acquisitions, both featuring long-term triple-net leases, further bolstered UHT's portfolio.

Rewarding Shareholders

Despite the small headwinds faced in Q1 2023, UHT continued its commitment to reward shareholders with dividends. The company has an impressive 19-year dividend-raising streak and due to the stability of the business, I expect this dividend policy to continue in the future uninterruptedly. Moreover, demonstrating confidence in the company's long-term strategy and performance, UHT announced that it will increase the quarterly dividend by $0.005 and would pay a dividend of $0.72 per share on June 30, 2023, to shareholders. The company has been maintaining this $0.005 increase for some time but in the past years, they increased the dividend by this figure in every second and fourth quarter. So if the Q4 2023 increase happens the total yearly dividend increase will be around 1.4% for 2023.

Fair Valuation with an Attractive Yield

The company is trading at fair valuation in my view. The price to book value might seem high, as UHT is trading around 3x its book value, however, it is among the lowest figures in the past 5 years and it has barely changed in the last 12 months. It has been ranging between 2.4x and 3.4x. UHT also offers an attractive dividend yield of 6% and in the Health Care REIT sector it is a fairly attractive one but if we take into consideration the stability of its dividend, UHT's dividend yield ranks among the best ones in the Health Care REIT sector in my opinion. In addition, the current 6% dividend yield is much higher than its 4-year average of just around 4.5%. In terms of FFO, it might seem a bit concerning. In Q1 2023 the FFO per share was $0.82 which is an 8.9% decline compared to Q1 2022. Moreover, the FFO per share also declined from Q1 2021 ($0.92) to Q1 2022 ($0.90). However, this was almost exclusively due to interest rate hikes. A reduction of $1.5 million in net income came about as a consequence of heightened interest expenses, predominantly attributed to a rise in UHT's borrowing rate and escalated borrowings.

Risks

The biggest risk factor to UHT is further interest rate increases. The management has already seen massive interest expense increases in 2022 and in Q1 2023 and as I see this trend will continue. Within a year interest expenses more than doubled for the company. In the short-term, it will decrease UHT's profitability and lower its EPS figures. In addition, although UHT has effectively broadened its property portfolio over time, it maintains a significant link with UHS, contributing to approximately 40% of UHT's consolidated revenue.

Summary

The first quarter of 2023 was eventful for Universal Health. While the quarter presented challenges in the form of increased interest expenses and reduced net income, UHT managed to navigate through the difficulties, showcasing its resilience and dedication to strategic growth and shareholder value. I expect that the increased interest expense pressure will remain in the next 3-4 quarters but I am confident that UHT's management is capable of navigating through these challenges. Due to the current valuation, the company presents a great buying opportunity for stable income-seeking REIT investors.

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