UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1997
Business Overview: The Trust invests in healthcare and human service-related facilities, including acute care hospitals, behavioral healthcare facilities, and medical office buildings across 13 states. Approximately 72% of revenues are derived from leases with subsidiaries of Universal Health Services, Inc. (UHS), which unconditionally guarantees these obligations.

Key Financial Metrics

Note: FFO is defined by the Trust as net income plus depreciation and amortization of interest rate cap expense.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $357,000 (6.7%) compared to Q1 1996. This was primarily driven by a $324,000 increase in base rental from non-related parties, resulting from 1996 acquisitions of preschools, child-care centers, and a medical office building.
• Expense Increases:
  • Interest Expense: Rose $178,000 (32%) due to $19.5 million in additional borrowings used to finance 11 new investments in 1996. This was partially offset by a 0.4% decrease in the effective borrowing rate.
  • Other Operating Expenses: Increased $140,000 (72%), largely due to expenses related to new acquisitions and a $40,000 increase in reserves for the Lake Shore Hospital settlement.
  • Depreciation: Increased $45,000 (5%) due to new assets acquired in Q2 1996.
• Equity Income: Income from limited liability corporations increased from $113,000 to $212,000.

Outlook, Risks, and Management Commentary

• Dividends: A quarterly dividend of $0.425 per share ($3.8 million aggregate) was declared and paid on March 31, 1997.
• Liquidity: The Trust maintains a $70 million revolving credit agreement maturing in September 2001, with approximately $25 million of unused capacity as of March 31, 1997. Cash on hand was minimal ($84,000), with operating cash flow primarily used for dividends and construction financing.
• Concentration Risk: A substantial portion of revenue depends on UHS. Management notes that certain UHS facilities have EBITDAR less than 1.5 times the rent payable. Two facilities did not generate sufficient EBITDAR to cover 1996 rent, representing 18% of 1996 rental income.
• Lease Renewal Risk: Management cannot predict if leases with UHS or other tenants will be renewed at current rates upon maturity (some maturing in 2000-2001). Failure to renew could force the Trust to find new operators or accept less favorable terms.
• Subsequent Events: Post-period, the Trust invested $1.9 million for a 75% equity interest in a limited liability company purchasing the Thunderbird Paseo Medical Plaza in Arizona.

Investor Verification Checklist

• UHS Financial Health: Verify the financial stability of Universal Health Services, Inc., given that 72% of the Trust's revenue is tied to its subsidiaries.
• Lease Expirations: Review the specific lease terms and renewal options for the UHS facilities maturing in 2000 and 2001, particularly those with low EBITDAR coverage.
• Debt Maturity: Confirm the status of the $70 million revolving credit facility maturing in September 2001 and the Trust's refinancing strategy.
• Acquisition Performance: Assess the cash flow performance of the preschools, child-care centers, and medical office buildings acquired in 1996 to ensure they meet projected returns.
• Reserve Adequacy: Evaluate the sufficiency of the reserve established for the Lake Shore Hospital settlement.