Why You Shouldn't Look At Universal Health Realty Income Trust's (NYSE:UHT) Bottom Line

Universal Health Realty Income Trust is a US$1.3b small-cap, real estate investment trust (REIT) based in King Of Prussia, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how UHT’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing UHT.

Check out our latest analysis for Universal Health Realty Income Trust

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much UHT actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For UHT, its FFO of US$43m makes up 58% of its gross profit, which means the majority of its earnings are high-quality and recurring.

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for UHT to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take UHT 6.09 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

I also look at UHT's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 4.3x, it’s safe to say UHT is generating an appropriate amount of cash from its borrowings.

In terms of valuing UHT, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In UHT’s case its P/FFO is 30.76x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Universal Health Realty Income Trust can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

1. Future Outlook: What are well-informed industry analysts predicting for UHT’s future growth? Take a look at our free research report of analyst consensus for UHT’s outlook.
2. Valuation: What is UHT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UHT is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.