UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust (UHRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: UHRT is a Maryland real estate investment trust (REIT) investing in healthcare and human service facilities. As of December 31, 2003, the portfolio consisted of 44 real estate investments across 15 states, including eight hospital facilities, 32 medical office buildings (MOBs), and four preschool/childcare centers. A significant portion of the portfolio is leased to subsidiaries of Universal Health Services, Inc. (UHS), which also serves as the Trust's Advisor.

Key Financial Metrics

Note: Total indebtedness excludes $132.7 million of non-recourse third-party debt held by unconsolidated LLCs in which the Trust holds non-controlling interests.

Material Changes vs. Prior Period

• Net Income Growth: Net income increased 13% to $24.4 million, driven primarily by a $3.0 million increase in equity income from limited liability companies (LLCs). This included $1.6 million in additional gains from the sale of real properties by LLCs.
• Revenue Decline: Total revenue decreased slightly by $116,000 (0.4%). This was due to a $205,000 reduction in base rentals from UHS facilities (specifically the Chalmette Medical Center lease renewal at a lower rate) and a $302,000 decrease in non-related party rentals due to vacancies. These were partially offset by a $391,000 increase in bonus rental revenue from UHS facilities.
• Investing Activity: The Trust invested $16.3 million in 2003 in various LLCs, including the acquisition of medical office buildings in Las Vegas and Apache Junction, Arizona. Proceeds from the sale of two California properties ($6.3 million) were held in escrow for potential like-kind exchanges.
• Debt Levels: Consolidated bank borrowings increased to $37.2 million from $30.5 million, reflecting increased borrowing to finance LLC investments.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted the importance of EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent) as a measure of facility viability. The combined EBITDAR coverage ratio for the eight hospital facilities was 8.4x in 2003, up from 8.0x in 2002.

Key Risks and Contingencies:

• Concentration Risk: 61% of consolidated revenues in 2003 were derived from leases with UHS subsidiaries. UHS is also the Trust's Advisor, creating potential conflicts of interest.
• Lease Renewals: Two significant UHS leases (Virtue Street Pavilion and The Bridgeway) expire in December 2004. Management cannot predict if these will be renewed at current rates or if lessees will exercise purchase options.
• Healthcare Regulation: Revenue is sensitive to changes in Medicare/Medicaid reimbursement rates and government regulations affecting hospital operators.
• Accounting Changes: The Trust expects to consolidate three LLCs in the first quarter of 2004 under FASB Interpretation No. 46. This will add approximately $39.9 million in assets and $22.5 million in non-recourse debt to the balance sheet but is not expected to impact net income.

Investor Verification Checklist

• UHS Lease Renewals: Verify the status of the Virtue Street Pavilion and The Bridgeway leases expiring in late 2004 and the potential impact of renewal rates or purchase options.
• LLC Consolidation: Review the impact of the upcoming consolidation of three LLCs (Q1 2004) on the balance sheet leverage ratios and debt covenants.
• HealthSouth Exposure: Assess the financial stability of HealthSouth Corporation, the guarantor for the Tri-State Rehabilitation Hospital lease, given ongoing SEC/DOJ investigations into their financial reporting.
• Like-Kind Exchange: Confirm the status of the $6.3 million in escrowed proceeds from California property sales and the timeline for reinvestment.
• Dividend Sustainability: Monitor the relationship between FFO ($30.1M) and total dividends paid ($23.0M) to ensure continued compliance with REIT distribution requirements.