UHT: Another REIT ready to crumble

If you haven't read my post on HCN on Seeking Alpha, you should probably read it first, as it will provide you some good background on my thinking towards REITs.  And while you're at it, check out this post from Hester on the dividend bubble as well.

Now that you have a little background, on with the show about Universal Health Realty Income Trust (UHT).  As you now know, there is a subset of REITs that are paying out unsustainably high dividends each quarter (or month, in the case of Realty Income (O)).  UHT is one of these.

I won't rehash the whole argument I made for HCN, because much is the same with regards to UHT.  The company pays out more in dividends than it makes in cash from operations, and has done so every year for at least the last 5 years.  How are they doing this?  They issue debt and stock each year.  In fact, they have gone so far as to start an "at-the-market" equity issuance program, good for up to $50 million in issuance.  Is it a coincidence that the initials of this program are "ATM"?  I think not.  The market cap today is just over $500 million, so this represents something like 10% of their shares outstanding.

As the author of this article (a long) points out, "Overall the FFO payout has increased from 72% in 2000 to 85% [in 2010], which was due to distributions growing faster than funds from operations."  This is also due to the fact that the cash the company makes (cash from operations, CFO) is not growing either.  In 2006 it was $25 million.  In 2010 it was $23 million.  This is not a company that should be increasing its dividend payout.  In this misleading graph (the fact that it doesn't start at zero misleads the eyes to to think there was a significant increase) you can see that the FFO per share has increased, but only by 12% in ten years.  Not good.  Over the same time period, the dividend has increased by 33% over the same time period.

UHT was spun off from UHS, and executed a series of sale-leaseback agreements.  So UHT leases many properties to UHS.  UHS owns a small but significant stake in UHT (about 6%).  So what's significant about this?  Well, among other things, this consolidates UHT's revenue sources in one giant hand.  UHT does lease to others as well, but most of their leasing goes to UHS.  UHS accounts for over half of UHT's revenues (this does not include revenues at the unconsolidated subsidiaries of UHT, about which more later).  The problem with this is that UHS is not a particularly healthy company.  Debt-equity is nearing 300%.  If UHS should have any trouble financially, UHT will take a huge hit.

UHT receives a large amount of income from its unconsolidated partnerships (income from the unconsolidated entities accounted for $3 million out of $16 million total net income last year).  Despite owning as much as 99% of these, all but one are unconsolidated.  Why?  Because the interest is "non-controlling."  Consolidation would also make UHT's balance sheet look much worse.  The unconsolidated subsidiaries have a debt to equity ratio of 6-1 (10% of their debt is to UHT).  Despite having twice the revenues in the unconsolidated subsidiaries, they have over four times as much debt and are much less profitable.  In short, the financial situation of these subsidiaries is murky (and probably not very good) and the fact that some of them are as much as 99% owned by UHT but they are unconsolidated seems like an accounting loophole to make the balance sheet look better.

So we have a company that is growing dividends but not cash flows, is reliant on one company for most of its revenue, and has some strange accounting going on.  Prime area for a short.

Disclosure: I am short UHT.