Universal Health Realty Income Trust Just Filed Its Quarterly Report: (5) Summarized Fin...


(5) Summarized Financial Information of Equity Affiliates

Our condensed consolidated financial statements include the consolidated accounts of our controlled investments and those investments that meet the criteria of a variable interest entity where we are or were the primary beneficiary. In accordance with the Financial Accounting Standards Board’s (“FASB”) standards and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs which we do not control using the equity method of acc ounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.

At June 30, 2014, we have non-controlling equity investments or commitments in eleven jointly-owned LLCs which own MOBs. As of June 30, 2014, we accounted for these LLCs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities. The majority of these LLCs are joint-ventures between us and a non-related party that manages and holds minority ownership interests in the entities. Each LLC is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash fundings are typically advanced as equity or member loans.

Effective January 1, 2014, we purchased the 5% minority ownership interests held by third-party members in two LLCs in which we previously held noncontrolling majority ownership interests (Palmdale Medical Properties and Sparks Medical Properties). As a result of these minority ownership purchases, we now own 100% of each of these LLCs and account for them on a consolidated basis. Prior to January 1, 2014, these LLCs were accounted for on an unconsolidated basis pursuant to the equity method. Previously, Palmdale Medical Properties (“Palmdale”) was included in our financial statements on a consolidated basis through June 30, 2013 as a result of a master lease arrangement with a wholly-owned subsidiary of UHS, which expired on July 1, 2013.

At June 30, 2014, the LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to consolidation. As a result of master lease arrangements between UHS and various LLCs in which we hold majority non-controlling ownership interests, we have consolidated or deconsolidated these LLCs as required in accordance with the FASB’s standards and guidance.

Effective August 1, 2014, we agreed to purchase the minority ownership interests held by third-party members in six LLCs, as mentioned above, in which we previously held noncontrolling majority ownership interests. The aggregate purchase price in connection with the purchase of these minority ownership interests is approximately $6.8 million, a portion of which is in the form of a note payable to the previous third-party member. Please see Note (4) Acquisitions, Dispositions and New Construction for additional information.

Rental income is recorded by our consolidated and unconsolidated MOBs relating to leases in excess of one year in length using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rent adjustments is dependent on many factors, including the nature and amount of any rental concessions granted to new tenants, scheduled rent increases under existing leases, as well as the acquisition and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-line adjustments to rental revenue may vary from period-to-period.

The following property table represents the eleven LLCs in which we own a noncontrolling interest and were accounted for under the equity method as of June 30, 2014:

 

Name of LLC/LP

  Ownership    

Property Owned by LLC

DVMC Properties (e.)

    90   Desert Valley Medical Center

Suburban Properties

    33   Suburban Medical Plaza II

Santa Fe Scottsdale (e.)

    90   Santa Fe Professional Plaza

Brunswick Associates

    74   Mid Coast Hospital MOB

PCH Medical Properties (e.)

    85   Rosenberg Children’s Medical Plaza

Arlington Medical Properties (b.)

    75   Saint Mary’s Professional Office Building

Sierra Medical Properties (e.)

    95   Sierra San Antonio Medical Plaza

PCH Southern Properties (e.)

    95   Phoenix Children’s East Valley Care Center

Grayson Properties (a.)(c.)

    95   Texoma Medical Plaza

3811 Bell Medical Properties (e.)

    95   3811 E. Bell Medical BuildingMedical Plaza

FTX MOB Phase II (d.)

    95   Forney Medical Plaza II

 

(a.) Tenants of this medical office building include subsidiaries of UHS.
(b.) We have funded $5.2 million in equity as of June 30, 2014 and are committed to invest an additional $1.2 million. This LLC has a third-party term loan of $23.7 million, which is non-recourse to us, outstanding as of June 30, 2014.
(c.) We have funded $2.3 million in equity as of June 30, 2014, and are committed to fund an additional $2.1 million. This building, which is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS. This LLC has a third-party term loan of $12.4 million, which is non-recourse to us, outstanding as of June 30, 2014.
(d.) During the third quarter of 2012, this limited partnership entered into an agreement to develop, construct, own and operate the Forney Medical Plaza II, which opened on April 1, 2013. We have committed to invest up to $2.5 million in equity and debt financing, of which $1.2 million has been funded as of June 30, 2014. This LLC has a third-party construction loan of $5.6 million, which is non-recourse to us, outstanding as of June 30, 2014.
(e.) Effective August 1, 2014, we agreed to purchase the third-party minority ownership interest (ranging from 5% to 15%) in this LLC. As a result of our purchase of the minority ownership interest, as of August 1, 2014, we hold 100% of the ownership interest in the LLC and will being accounting for it on a consolidated basis effective August 1, 2014.

Below are the condensed combined statements of income (unaudited) for the LLCs accounted for under the equity method at June 30, 2014 and 2013.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013 (b.)      2014      2013 (b.)  
     (amounts in thousands)  

Revenues

   $ 5,014       $ 5,206       $ 9,923       $ 10,246   

Operating expenses

     2,164         2,398         4,135         4,400   

Depreciation and amortization

     879         1,069         1,775         2,093   

Interest, net

     1,361         1,635         2,679         2,889   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 610       $ 104       $ 1,334       $ 864   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our share of net income (a.)

   $ 679       $ 461       $ 1,272       $ 1,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a.) Our share of net income includes interest income earned by us on various advances made to LLCs of approximately $360,000 and $620,000 for the three months ended June 30, 2014 and 2013, respectively, and $712,000 and $877,000 for the six months ended June 30, 2014 and 2013, respectively.
(b.) As mentioned above, we began to account for Sparks Medical Properties on a consolidated basis as of January 1, 2014. Prior to January 1, 2014, the financial results of this entity were accounted for under the equity method on an unconsolidated basis. These amounts include the financial results for Sparks Medical Properties for the three and six months ended June 30, 2013. As also mentioned above, we began to account for Palmdale Medical Properties on a consolidated basis as of January 1, 2014. Prior thereto, as a result of a master lease commitment with a wholly-owned subsidiary of UHS which expired effective as of July 1, 2013, Palmdale Medical Properties was accounted for on a consolidated basis during the three and six-month periods ended June 30, 2013 and are therefore not reflected in the table above.

Below are the condensed combined balance sheets (unaudited) for the LLCs accounted for under the equity method:

 

     June 30,
2014
     December 31,
2013(a.)
 
     (amounts in thousands)  

Net property, including CIP

   $ 96,338       $ 119,547   

Other assets

     8,630         9,479   
  

 

 

    

 

 

 

Total assets

   $ 104,968       $ 129,026   
  

 

 

    

 

 

 

Liabilities

   $ 4,328       $ 5,336   

Mortgage notes payable, non-recourse to us

     68,538         80,112   

Advances payable to us

     15,504         22,911   

Equity

     16,598         20,667   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 104,968       $ 129,026   
  

 

 

    

 

 

 

Our share of equity and advances to LLCs

   $ 27,952       $ 39,201   
  

 

 

    

 

 

 

 

(a.) As mentioned above, we began to account for Palmdale Medical Properties and Sparks Medical Properties on a consolidated basis effective January 1, 2014. The amounts reflected for December 31, 2013, include the balance sheet amounts for each of these entities since they were accounted for on an unconsolidated basis pursuant to the equity method as of December 31, 2013.

As of June 30, 2014, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands):

 

2014

   $ 13,085   

2015

     35,353   

2016

     443   

2017

     11,689   

2018

     7,968   
  

 

 

 

Total

   $ 68,538   
  

 

 

 

 

Name of LLC

   Mortgage/
Construction
Loan
Balance (a.)
     Maturity Date  

Grayson Properties (b.)

   $ 12,381         2014   

Brunswick Associates

     7,863         2015   

Arlington Medical Properties

     23,674         2015   

DVMC Properties

     3,916         2015   

FTX MOB Phase II (c.)

     5,596         2017   

PCH Southern Properties

     6,551         2017   

PCH Medical Properties

     8,557         2018   
  

 

 

    
   $ 68,538      
  

 

 

    

 

(a.) All mortgage loans, other than construction loans, require monthly principal payments through maturity and include a balloon principal payment upon maturity.
(b.) We believe the terms of this loan are within current market underwriting criteria. At this time, we expect to refinance this loan during 2014 (this loan was extended through October 1, 2014) for a three to ten year term at the then current market interest rate. In the unexpected event that we are unable to refinance this loan on reasonable terms, we will explore other financing alternatives, including, among other things, potentially increasing our equity investment in the property utilizing funds borrowed under our revolving credit facility.
(c.) Construction loan.

Pursuant to the operating agreements of the LLCs, the third-party member and the Trust, at any time, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member (“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 days of the acceptance by the Non-Offering Member.

The LLCs in which we have invested maintain property insurance on all properties. Although we believe that generally our properties are adequately insured, two of the LLCs (one in which we own a non-controlling equity interest), own properties in California that are located in earthquake zones. These properties are not covered by earthquake insurance since earthquake insurance is no longer available at rates which are economical in relation to the risks covered.

The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here.

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