When it comes to durable REITs that are also dividend aristocrats, Realty Income (O) often comes to mind. One REIT that flies under the radar for most investors is Universal Health Realty Income Trust (NYSE:UHT), which is a healthcare REIT that also has a 33-year track record of consecutive annual dividend raises.
Such a long dividend-paying track record through a multitude of economic cycles is no easy feat, with well-known healthcare REITs such as Welltower (WELL) and Ventas (VTR) being forced to end their respective histories of uninterrupted dividends with dividend cuts this year. In this article, I evaluate what makes UHT worth owning at the current valuation, so let’s get started.
(Source: Company website)
Universal Health Realty Income Trust is a REIT that specializes in healthcare properties across the U.S. It was formed back in 1986, and as of September 30th, it owns 71 properties located in 22 states, including two that are under construction. Its portfolio mix is primarily comprised of MOBs (medical office building), with MOBs representing 74% of gross asset value. The remainder of the portfolio is comprised of Acute Care Hospitals (17%), Ambulatory Care (4%), Sub-Acute (2%), and Other (3%). As seen below, UHT’s properties are geographically diversified with larger concentrations in Las Vegas, NV, Arizona, Texas, Atlanta, GA, and Pennsylvania.
UHT has a solid track record of outperformance. As seen below, since 1995, UHT has posted a 12.6% CAGR (including dividends), which compares favorably to the 9.4% CAGR of the S&P 500 (SPY) over the same time period. This speaks to the durability of UHT’s business model, and the value of a steadily increasing dividend.
(Source: Dividend Channel)
UHT is performing well in the current environment, with FFO/share improving by 3.6% YoY, from $0.83 in Q3’19, to $0.86 in the latest quarter. Plus, 99% of UHT’s occupied square footage have paid their rent through the end of Q3. Plus, UHT is benefiting from the current low interest rate environment, as it was able to reduce its interest expense in the third quarter by $695K, equating to $0.05 per share. UHT currently has only two vacancies in its entire portfolio, and is actively marketing those properties for lease. Meanwhile, I find the 4.6% dividend yield to be attractive, especially in this low-rate environment. It remains well-covered, at an 80% payout ratio (based on Q3’20 FFO/share).
One item worth noting is that UHT is advised by Universal Health Services (UHS), as the CEO of UHT is also the CEO of UHS. UHT was originally formed through a sale and leaseback of UHS properties. Currently, UHS and its subsidiaries represent $6.6 million of Q3’20 revenue (33% of UHT’s total Q3 revenue).
This could result in a conflict of interest. However, I’m not too concerned about this, given UHT’s strong track record of performance, and the well-diversified portfolio. In addition, UHS is a Fortune 500 company with over $11 billion in annual revenue, and serves as the Guarantor on the three leased hospital properties in which it is the primary tenant (not one of its subsidiaries), as seen below.
(Source: UHT 2019 Annual Report)
Plus, the relationship appears to be working well. As seen below, lease revenue from UHS increased by 9.6% on a YoY basis, from $5.8M in Q3’19, to $6.4M in the latest quarter. As such, I see this relationship as being beneficial for both parties.
(Source: UHT Q3’20 10-Q)
Looking forward, I don’t see UHT slowing down, as it currently has two projects under construction, including a 108-bed behavioral health hospital in Clive, IA, which is triple-net, and has an initial term of 20 years. It also has a MOB under construction in Denison TX, with 75K square feet, and a good amount of pre-leasing activity.
I also see UHT benefiting from the aging U.S. population. According to the U.S. Census Bureau, the age 65+ population is growing faster than the general population, and by 2030, 1 in 5 U.S. residents will be in this age group. As seen below, healthcare spend is expected to rise faster than inflation, at a 5.5% CAGR through at least 2028. At that time, healthcare spend is expected to equate over 21% of the U.S. GDP. UHT’s properties are mostly located in warmer climates, which should see a disproportionate benefit from retirees moving there.
(Source: Centers for Medicare & Medicaid Services)
With daily COVID-19 infection rates surging in the U.S. over the past month, there is potential for another round of lockdowns in states most impacted by the virus. This could negatively impact the number of patient visits to UHT’s properties in the near term. While this is a risk worth monitoring, I’m encouraged by the aforementioned performance of UHT’s operating metrics thus far.
UHT is a durable healthcare REIT with a solid track record of shareholder returns. I see it as weathering the current pandemic rather well, with a 99% rent collection rate from its tenants. Longer term, I see UHT benefiting from the growth of the senior population, with its well-located properties that are generally in warmer climates. The dividend remains well-covered, and I see the dividend growth thesis as being intact.
At the current share price of $60.45, and a P/FFO of 18.4 (based on TTM FFO), the shares are admittedly not cheap. However, I find it to be reasonable, given the strong 33-year track record of dividend increases, the durable business model, and long-term growth potential. Buy for income and growth.
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This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Disclosure: I am/we are long O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.