Universal Health Realty Income Trust (UHT) specializes in the healthcare sector. The trust’s property portfolio includes acute care hospitals, medical office buildings, rehabilitation hospitals, behavioral healthcare facilities, childcare centers, and sub-acute care facilities. Universal Health was founded in 1986 and has a current market capitalization of $588 million, writes Ben Reynolds, editor of Top 10 REITs.
On July 24, Universal Health announced second-quarter results. Funds from operations (FFO) for the period was $12.4 million, or $0.90 per diluted share, compared to $10.6 million, or $0.77 per diluted share, in the prior year. Universal Health is projected to generate FFO of $3.67 per share for 2024.
Universal Health Realty Income Trust (UHT)
On June 5, Universal Health announced that it was raising its quarterly dividend by 0.7% to $0.73. The stock has an attractive dividend yield of 7%. While such a high yield can be a warning sign, we believe the trust’s dividend is likely safe.
First, Universal Health has grown its dividend for 40 consecutive years, which is the second-longest dividend growth streak among REITs in our coverage universe. The payout ratio has often been high. For example, the expected payout ratio for 2024 is 80%. This is an elevated level, but it is below the 10-year average payout ratio of 84%.
Second, FFO growth is projected to outpace dividend growth, providing a larger margin of safety over time. While we do not believe that Universal Health has significant competitive advantages relative to its peers due to its size, the REIT healthcare space should see tailwinds from an aging demographic. There are more than 70 million Baby Boomers in the US, which should provide ample growth opportunities for this industry.
Shares of the trust are trading at 11.4 times expected FFO for 2024. We believe fair value is closer to 12 times FFO, implying a tailwind from multiple expansion. Reaching our target price-to-FFO ratio by 2029 could add 1% to annual returns over this period.
In total, we forecast that Universal Health can offer a total annual return of 9% through 2029. This projection stems from FFO growth of 2.5%, a starting dividend yield of 7%, and a low single-digit tailwind from multiple expansion.
Recommended Action: Buy UHT.
