UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust (UHRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: UHRT is a Maryland real estate investment trust (REIT) investing in healthcare and human service facilities, including acute care hospitals, behavioral healthcare, rehabilitation hospitals, medical office buildings (MOBs), and childcare centers. As of year-end 2009, the portfolio consisted of 51 investments or commitments across 15 states. The Trust is advised by UHS of Delaware, Inc., a subsidiary of Universal Health Services, Inc. (UHS), which also serves as the primary tenant for the Trust's hospital facilities.

Key Financial Metrics

Note: Total indebtedness excludes $251.4 million of non-recourse debt held by unconsolidated LLCs.

Material Changes vs. Prior Period

• Net Income Increase: Net income rose 59% to $18.6 million, primarily driven by the absence of a $4.6 million asset impairment charge recorded in 2008 related to the Southern Crescent Centers in Georgia.
• Revenue Growth: Total revenue increased 9.4% to $31.9 million, attributed to new MOB openings (Palmdale Medical Plaza and Summerlin Hospital MOB III), increased bonus rentals from UHS facilities, and higher equity income from unconsolidated LLCs.
• Debt Levels: Consolidated indebtedness increased by $12.6 million due to higher borrowings on the revolving credit facility and term loans associated with new construction projects.
• FFO Improvement: Funds From Operations increased 33% to $33.3 million, reflecting the recovery from the prior year's impairment charge and improved operating performance.

Guidance, Outlook, Risks, and Contingencies

Management Commentary & Outlook: Management expects to fund capital expenditures and dividends through internally generated cash flows, equity issuances, and borrowings. The Trust commenced an "at-the-market" equity issuance program in Q4 2009. The advisory fee to UHS was increased to 0.65% of average invested real estate assets effective 2010.

Key Risks and Contingencies:

• Concentration Risk: UHS accounted for 59% of consolidated revenues in 2009. Four major hospital leases with UHS expire in 2011 or 2014, creating renewal uncertainty.
• Regulatory & Compliance: Southwest Healthcare System (Inland Valley Campus) is subject to a CMS quality monitoring agreement and survey; adverse results could impact bonus rents. UHS recently settled a False Claims Act investigation regarding South Texas Health System affiliates for $27.5 million.
• Asset Impairment: The Trust recorded a $4.6 million impairment in 2008 for Georgia MOBs due to master lease expiration and local market conditions. While no impairment was recorded in 2009, the risk of non-renewal remains.
• Insurance: Three LLCs owning California properties could not obtain economically beneficial earthquake insurance.

Investor Verification Checklist

• Lease Renewals: Verify the status of lease renewals for the four UHS hospital facilities expiring in 2011 and 2014, which represent a significant portion of revenue.
• CMS Survey Results: Monitor the outcome of the CMS survey for Southwest Healthcare System (Inland Valley) to assess potential impacts on bonus rental revenue.
• Debt Maturities: Review the refinancing strategy for $32.3 million in consolidated fixed-rate debt maturing in 2010.
• LLC Performance: Assess the financial health of unconsolidated LLCs, which hold $251.4 million in non-recourse debt and represent a significant portion of the portfolio's value.
• Dividend Coverage: Confirm that operating cash flows continue to cover the $2.38 per share dividend requirement to maintain REIT status.