Is Universal Health Realty Income Trust (NYSE:UHT) A Healthy REIT?

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Universal Health Realty Income Trust is a US$1.1b 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. Below, I’ll look at a few important metrics to keep in mind as part of your research on UHT.

See 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$46m makes up 65% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:UHT Historical Debt, February 25th 2019
NYSE:UHT Historical Debt, February 25th 2019

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 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take UHT 5.57 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.

Next, interest coverage ratio shows how many times UHT’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.57x, it’s safe to say UHT is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at UHT’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. UHT’s price-to-FFO is 22.89x, 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.