1 Highly Profitable REIT Rising High

As a REIT engaged in the stable and lucrative medical property business, Universal Health Realty Income Trust (NYSE:UHT) is a naturally appealing stock for conservative income investors.

With a high dividend yield and a solid underlying business, UHT may appear to be a good buy for income-focused investors.

However, there are also concerns stemming from the company’s falling earnings. Is UHT stock a buy?

Highly Profitable REIT 

UHT has posted modest revenue growth over the past year. In Q1, the company reported total revenues of $23.2 million, up from $22.2 million in 2022. Lease revenue from the company’s facilities increased from $7.4 million to $7.8 million, while unrelated party lease revenue rose from $12.9 million to $13.4 million.

The Q1 report also highlighted the challenge UHT faces from shrinking earnings. The company reported EPS of $0.32 per share for the quarter, compared to $0.39 a year earlier.

While part of this drop was attributable to the cost of demolishing a vacant property to reduce ongoing expenses, much of it was related to rising interest expenses. Over the last 12 months, UHT has reported total earnings per share of $1.46.

Free Hospital Ward Hospital photo and picture

Source: Pixabay

This dichotomy of rising revenues and shrinking earnings raises questions for long-term UHT investors. While lower interest rates could help to bolster earnings in the future, there’s little reason to believe that earnings will grow much organically for the time being.

One huge positive for UHT, however, is its margin. With a net margin of nearly 22 percent, UHT operates as a highly profitable business. The company also boasts an 8.7 percent return on equity, which is more than respectable when compared to other leading REITs.

6.15% Dividend Yield Is Enticing

As a real estate investment trust, UHT is primarily an income investment. The stock currently pays $2.88 annually, making for a yield of 6.15 percent. Encouragingly for investors, UHT has raised its dividend for 38 consecutive years.

One red flag regarding UHT’s dividend sustainability is the fact that the dividend payout ratio is nearly 200 percent. This concern is, however, somewhat mitigated when looking at the company’s cash flow.

Over the past 12 months, UHT has generated $3.48 in cash flow per share. This is well above the company’s reported earnings and offers ample coverage for its dividend.

Despite its high yield, investors likely should not expect rapid dividend growth from UHT. Over the past three years, the dividend has increased at an anemic rate averaging just 1.45 percent annually.

Given that earnings could remain flat over the next few years, there does not seem to be any foreseeable catalyst for more rapid dividend growth. Investors should likely expect UHT’s slow dividend growth rate to persist for the foreseeable future.

Analysts Price Target

UHT currently suffers from a lack of analyst coverage. Only one analyst has offered a price target for the company. That price target is $33, reflecting a drop of over 30 percent from the current price of $47.45.

While this target seems to accurately reflect UHT’s lack of near-term upside, it’s important for investors to remember not to put too much emphasis on a single analyst’s price prediction.

UHT’s valuation looks fairly reasonable when compared to other benchmark REITs. For example, let’s consider UHT’s valuation metrics against Realty Income (NYSE:O), which currently yields 5.12 percent.

UHT trades at 13.5 times cash flow, compared to 15.1 for Realty Income. UHT also holds a much lower price-to-sales ratio at 7.1 compared to 11.6.

While it should be noted that Realty Income’s premiums may be justified due to its monthly distributions and higher potential for dividend growth, the comparison between the two makes it seem unlikely that UHT is substantially overvalued.

UHT Risk Factors

The rising cost of higher interest rates is a concern for UHT shareholders. With the cost of financing going up, the company’s already high debt-to-equity ratio of 1.57 becomes a major stumbling block.

Given that rates are expected to remain elevated throughout 2023 and into 2024, the company could continue to lag over the course of multiple years.

Speaking of interest, income investors must also weigh an investment in UHT against the income they could receive from treasuries and high-yield savings accounts.

With many savings accounts now paying rates of 5 percent or more at extremely low risk levels, the 6 percent offered by UHT looks much less attractive. While higher potential for dividend growth could offset the added risk, UHT’s slow rate of probable payout increases could weigh on its appeal to investors.

Following the demolition of a vacant facility last quarter, UHT also still has two vacant facilities that are dragging down its bottom line. Total vacant property expenses this year are projected to be $1.3 million, a small but still significant amount for a company of UHT’s size.

A final risk investors should be aware of is the fact that UHT may still be coming down from its pandemic-era highs.

As demand for healthcare services surged during the pandemic, UHT’s share prices skyrocketed to briefly exceed $100 per share. Since then, the stock has been moving steadily lower. While the stock may be approaching the end of this correction, it’s difficult to say whether it has bottomed out or has room left to fall.

Is UHT Stock a Buy?

At the end of the day, UHT is an extremely solid REIT with a long, stable history of dividend increases. While there’s little doubt about the quality of the underlying business, the stock does not appear to be a particularly attractive investment in today’s market.

With limited upside potential and slow expected dividend growth, UHT’s only outstanding feature for investors is its high current yield. While this would be a sufficient argument under other market conditions, the yields investors can find in bonds and even savings accounts largely undermine UHT. Without a catalyst for higher future growth, UHT does not appear to be a buy at the moment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.