UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust (a Maryland REIT)

Filing Type: Form 10-Q (Unaudited Quarterly Report)

Reporting Period: Quarter and nine months ended September 30, 2003

Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, medical office buildings, and rehabilitation centers. Approximately 61% of consolidated revenues for the quarter were derived from leases with subsidiaries of Universal Health Services, Inc. (UHS), which also serves as the Trust's Advisor.

Key Financial Metrics

Note: Amounts in millions unless otherwise noted. FFO is a non-GAAP measure reconciled to Net Income.

Material Changes vs. Prior Period

• Revenue: Total revenues decreased slightly by $34,000 (0.5%) for the quarter and $113,000 (0.5%) for the nine-month period compared to 2002. This was driven by a decrease in base rentals from UHS facilities and non-related parties, partially offset by a $399,000 increase in bonus rental revenue from UHS facilities over the nine-month period.
• Net Income: Net income increased by $243,000 (4.8%) for the quarter but decreased by $229,000 (1.4%) for the nine-month period. The nine-month decline included a reduction in gains from the sale of real property by unconsolidated LLCs ($365,000 in 2003 vs. $1.18 million in 2002).
• Interest Expense: Increased by 14% ($81,000) for the quarter and 1% ($20,000) for the nine-month period, primarily due to higher average outstanding borrowings.
• Debt: Bank borrowings increased from $30.49 million at year-end 2002 to $40.22 million at September 30, 2003, reflecting net borrowings of $9.8 million during the nine-month period to fund investments.

Outlook, Risks, and Management Commentary

• Investment Activity: In Q3 2003, the Trust invested $8.9 million for a 98% interest in an LLC owning three medical office buildings in Las Vegas. Additionally, it committed $9.4 million for a 75% interest in an LLC constructing a facility in Reno, Nevada (completion expected Q1 2005).
• Lease Expirations: Significant leases with UHS subsidiaries at the Virtue Street Pavilion and The Bridgeway facilities expire in December 2004. A lease with Tri-State Rehabilitation Hospital expires in June 2004, with a potential renewal rate reduction of approximately $325,000 annually based on current Treasury rates. Management cannot predict if these will be renewed at current rates.
• Accounting Changes: The Trust will begin consolidating three LLCs in Q4 2003 under FASB Interpretation No. 46. This will increase reported assets and liabilities but will have no impact on Net Income.
• Liquidity: The Trust maintains an $80 million revolving credit facility. As of September 30, 2003, approximately $42.7 million was available for borrowing. Dividends paid totaled $17.15 million for the nine-month period.
• Risks: Key risks include dependence on UHS for a majority of revenues, changes in healthcare reimbursement (Medicare/Medicaid), and the ability to renew leases at favorable terms upon expiration.

Investor Verification Checklist

• Lease Renewals: Verify the status of negotiations for the Virtue Street Pavilion, The Bridgeway, and Tri-State Rehabilitation Hospital leases expiring in 2004.
• UHS Dependency: Assess the financial health of Universal Health Services, Inc., given that ~61% of revenues are tied to its subsidiaries.
• Debt Capacity: Review the terms of the $80 million revolving credit facility and the impact of increased leverage on future interest expenses.
• FFO vs. Net Income: Analyze the reconciliation between Net Income and Funds from Operations (FFO) to understand the impact of depreciation and one-time gains/losses on operational performance.
• Consolidation Impact: Monitor Q4 2003 filings for the impact of consolidating the three variable interest entities (LLCs) on the balance sheet.